Wednesday, August 20, 2008

The Current Ratio: Final Thought (I Hope!)

I am now a participant in the Accelerator program from Entrepreneurs' Organization. Excellent program.

A key part of the program is the quarterly all day sessions. Yesterday was my second session since joining. Both have been moderated by Jim Ryerson of Sales Octane, and he is outstanding. Yesterday's session was "Money Day" and focused on helping entrepreneurs better understand their financial statements, what to look at, what to track, etc. Being a CPA I was kind of familiar with the material, but I did get to share my expertise with the group.

Anyway, time was spent on the importance of the current ratio. It was also suggested that you track it over time.

Readers of this blog know my feelings on the current ratio. And then my additional feelings on it. I was biting my tongue the whole time, as I didn't want to mess with the curriculum.

So I will say this: The current ratio is easily manipulated. If you aren't going to manipulate it, and you do things on a consistent basis from month to month, it can be a good yardstick to measure how you are doing.

But I still don't like the current ratio.


Kirk Ward said...

Hi Joel,

Just found your blog. good job.

Read your comments on the current ratio and have to say that after what seemed like a gazillion years auditing collateralized loans in the Asset Based Lending field, I came to the conclusion that working capital and cash flow were the most important subjects most asset based lenders took into consideration. (At least they were until the banks entered the field in the 90's.)

So, if I read you correctly, I would have to agree that in general the working capital is the most important factor in the ratio.

But I would add that in my personal opinion, all of it is immaterial if there is no cash flow, so then what become the most important ratio to analyze?

Kirk Ward

PS - I've been retired from the field since the late 90's, so please forgive any idiocies I may exhibit.

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