Question

Quick Ratio (QR) = Liquid Assets/Current Liabilities. Why is it more important to
manage quick ratio, in a time of recession, for the survival of a company?

Answer 1

Quick ratio is the ratio ratios which measures the ability of company to use its cash or other liquid asset to payoff it's liabilities. The ideal quick ratio is 1:1 Liquid assets consists of cash, marketable securities, Accounts receivable etc. Current liabilities basically consist of accounts payable which provides short term credit to the company.

In a time of recession, it is very important to manage quick ratio. Company should have better quick ratio because it denotes that company has more quick assets than its current or immediate liabilities. If the company does not have quick assets say cash in the time of recession to pay its accounts payable then supplier of goods may not provide raw material or goods to the company or deny to provide any credit. In this situation, it's become difficult for the management to run the company.

Current liabilities such as salary payable, accounts payable plays a very dominant role in the functioning of business and company should always have quick assets to pay off it for smooth functioning.