SHORT TERM LIQUIDITY Importance of shortterm Liquidity Definition

SHORT TERM LIQUIDITY

Importance of short-term Liquidity • Definition: The ability to cover shortterm debt • Interests shareholders & creditors • Taking advantage of market opportunities • Static vs. dynamic view • Reverse relation to Return

LIQUIDITY RATIOS Α) CURRENT RATIO

Current Ratio value • Normal spread 1 -2 • average 1, 5 • Current ratio relates to: Øsector ØBusiness life cycle ØBusiness organization ØAccounting methods

Issues in current ratio use • • Wide usage Assumption of business closure Mix of historical & current prices Affected from assets valuation

Accounts that require attention • Securities: Øvaluation ØMarket value (day of analysis) • Accounts receivables: ØBad debts – provisions • Inventories: ØValuation (LIFO v. FIFO) Ødevalued – slow moving

Ways of analyzing the Current Ratio • Times-series • Cross sectional – related to sector • Common size statement for the Current Ratio’s components

Matters arising • Use of LIFO with inflation • Effects of economic cycle • Tampering the ratio: Øpostponement or acceleration of transactions that affect on the ratio

ØCurrent assets over-valued ØDevaluation of liabilities ØDisposal of fixed assets ØSubstitution of short-term debt with long-term debt

Β) QUICK RATIO • More conservative measure of liquidity • spread 0, 7 – 1, 2 • average 0, 9

Quick ratio: Does not include • Inventories ØDifficulties in liquidation ØSubjectivity in valuation (market price vs. purchase value) • Receivables & liabilities that do not require cash inflow/outflow ØPrepaid expenses & advances to suppliers ØAdvances from customers & deferred income

C) ACID RATIO • The most strict liquidity measure

D) Defensive Interval Daily Expenses: (Yearly expenses-depreciation) / 365

Ε) CF(OA) / Current Liabilities • Dynamic liquidity test • Shows financial strength • average 0, 40

TURNOVER RATIOS (Activity Measures) • Calculate the time period for the liquidation of an account • Turnover ratios: Ø linked to liquidity ØAffect return

1) Inventory Turnover Ratio

Operational target: • Increase of Inventory Turnover • Reduce inventory held (δέσμευση πόρων) Attention: • Seasonal inventories • valuation (LIFO under inflation) • Increase of IT by reducing inventory

2) Receivables Turnover Ratio Receivables from commercial activities only (customers, notes receivables, etc)

Operational target: • Increase of RT, with increase in sales Attention: • Sales on cash or on credit • Seasonal receivables • Provision for bad debts • Add discounted notes receivables • In relation to credit policy

Days accounts receivables due Amount due in days client total 1 -30 31 -60 61 -90 > 90 Χ 120 10 20 30 50 Ψ 150 - 30 50 70

3) Accounts Payable Turnover Ratio Attention: suppliers plus notes payable from commercial activities

Operational target: • Low PTR – increase in days accounts payable due (without price increase) Attention: • Calculating purchases: ØCost of sales + inventory beginning – inventory end • Seasonality of Accounts Payable

Inventory & Cash conversion cycle • Operating cycle or Inventory conversion cycle = (Days in Inventory + Days in Accounts Receivable) • Trading cycle or Net cash conversion cycle = (Days in Inventory + Days in Accounts Receivable – Days in accounts payable)

Operational Target: • Decrease in Inventory conversion cycle • Increase in accounts payable credit period • Decrease in Net cash conversion cycle