Liquidity (liquiditeit)
The ability to meet payment obligations in the short term. The liquidity ratios are the key figures for this: the current ratio, the quick ratio and the cash ratio.
What does liquidity mean?
The ability to meet payment obligations in the short term. The liquidity ratios are the key figures for this: the current ratio, the quick ratio and the cash ratio.
Liquidity looks at timely payment of short-term obligations. A company can be profitable and still short of cash because customers pay late or inventories build up. Compare ratios with expected cash flows.
How does it work?
The law requires that the annual accounts, as far as their nature permits, allow a judgement on the entity's liquidity (art. 2:362(1) DCC). It prescribes no standard or ratio. In practice two key figures are used. The current ratio sets current assets against current liabilities. The quick ratio leaves out inventories, because they first have to be sold.
Both are snapshots. They say nothing about the rhythm of cash flows during the year or about unused credit facilities. Medium-sized and large entities discuss their liquidity and cash flow risks in the management report (art. 2:391(3) DCC).
Example
A wholesaler (BV) has on 31 December: inventory € 70.000, receivables € 55.000, cash and cash equivalents € 15.000 and current liabilities € 100.000. Current ratio: 140.000 / 100.000 = 1,4. Quick ratio: 70.000 / 100.000 = 0,7. But € 60.000 of the liabilities fall due in January (trade payables, VAT, payroll tax), while € 30.000 of the receivables is expected in that month. Available is 15.000 + 30.000 = € 45.000: without credit facility a shortfall of € 15.000.
In the annual accounts
Derived from the balance sheet and possibly the cash flow statement; not a mandatory balance sheet item.
Difference from solvency
Liquidity is about the short term: is there money in time for the bills of the coming months? Solvency is about the long term: is there enough equity to carry all debts? A company with a lot of equity tied up in a business premises is solvent and can still fail to pay its wages.
Common mistakes
- Seeing inventory as directly available cash
- Assessing only the year-end balance
What to watch for
- Recalculate the ratios with the ratio calculator and compare them with last year, not with a fixed standard.
- Make a forecast per month; the board also needs it to be able to approve a dividend decision (art. 2:216(2) DCC).
- Micro: from the filed balance sheet only the current ratio can be derived, because inventories and cash are not shown separately (art. 2:395a(4) DCC). From small upwards the balance sheet splits out current assets (art. 2:364(3) DCC).
Legal basis and source
no separate statutory ratio
Frequently asked questions
What is a good current ratio?
There is no statutory standard. A result below 1 means current liabilities exceed current assets and calls for explanation. What is sufficient depends on how quickly inventory and receivables turn into cash in your industry.
Does a long-term loan improve liquidity?
At the balance sheet date, yes: the money goes into cash and cash equivalents and the debt is largely non-current. Interest and repayment then weigh on cash flow each year.
What is the liquidity ratio and how do I calculate it?
Liquidity ratio refers to the key figures that set current liabilities against what is available for them. There are three: the current ratio (current assets divided by current liabilities), the quick ratio (current assets minus inventories, divided by current liabilities) and the cash ratio (cash and cash equivalents divided by current liabilities). In the wholesaler example this is 1,4, 0,7 and 15.000 / 100.000 = 0,15. If someone mentions only the liquidity ratio, ask which of the three is meant.
Why does my bank report a different liquidity ratio than I do?
Because the denominator is not the same everywhere. The KVK in its formulas uses only current-account credit and trade payables in the denominator; if you count all current liabilities, such as VAT, payroll tax and the part of a loan repaid within a year, you end up with a lower ratio. For a credit facility, record which items the agreement counts.
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Preparing Dutch annual accounts?
Your first set of annual accounts is free, for every size class. Create an account and prepare the annual accounts of your Dutch company under Title 9 of Book 2 of the Dutch Civil Code.
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