Informing & Supporting
Conditioning Air Professionals & the Industry
Tampa, US
1:30 am, April 17, 2024
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Pay Attention to Current Ratio Trends – Part 2 by Ruth King

An increasing current ratio because of a cash infusion (think PPP loans) inflates your current ratio. It is not increasing because your company is becoming more profitable.

A decreasing current ratio is the first indication of lessening profitability. If the current ratio is decreasing, 90 times out of 100 that means your profitability is decreasing. You are likely to have a higher percentage of expenses as compared to revenues which means higher current liabilities as compared to current assets. 

 The major other reason you might have a decreasing current ratio is you bought a long term asset. For example, if you paid cash for a vehicle, then you’ve decreased cash which is a current asset item and you created a long term asset, i.e. a vehicle. So your cash decreased and your long term assets increased. When your cash decreases and your current liabilities stay the same, your current ratio decreases. The same thing would happen if you purchased a lot of equipment, office furniture, or a building using cash rather than borrowing money to purchase the assets. You are converting current assets into long-term assets, which reduces your current ratio. 

 On a positive note, if your current ratio is increasing then you are becoming more profitable and you have more ability to pay your bills. If your ratio is decreasing, then determine why. For example, look at profitability and determine what has to be done to turn profits around. If your current ratio is staying about the same your profitability is probably staying about the same. Another reason current ratio might increase might be a sale of assets. If you sold a truck you are transferring a long-term asset, i.e. a truck, to a current asset, i.e. cash.  Your current ratio would increase in this situation. However, the main reason, most of the time, that current ratio increases is that profitability is increasing.

 Did you check your bank accounts on line today? This is the first step in protecting your hard earned cash.

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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve. 

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