An organization can easily depict its financial status by use of financial ratios. The most common are the Liquidity ratios which entail current ratio and the quick ratio. The current assets and current liabilities ratio is known as the current ratio. The quick ratio is similar to the current ratio only it doesnt involve the firms inventory in the calculation of total current assets. High liquidity ratios show that a firm has the capability to pay off all its debtors with the current assets and still have money to spare for the business operations. Low liquidity ratios however show that the firm, if asked to, cannot, or would struggle to pay off their debts and still have funds for operation. The higher the liquidity ratio, the better the chances for a firm to get loans and the lower the liquidity ratio, the slimmer the chances of the firm to be funded through loans. Funds can be used for development of projects of the firm. This means that with a high liquidity ratio, the owners can plan on development projects as they can be assured of a source of funding. If the liquidity ratio is low, the planners can adjust accordingly to increase their ratio by, for instance, pausing some development projects. This doesnt always hold true since some lenders dont consider the liquidity ratio when funding firms. A firm can hence prepare for development projects and never see their implementation due to less funds. (Net MBA, 2010)

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