Flash Report » Liquidity Section

The Purpose Of The Liquidity Section

The purpose of the liquidity section is to measure the change in working capital of the company. In so doing, the client will have a rough estimate of whether or not they can pay the bills and how much money they will have left over.

Monitoring the company’s working capital over time will allow the firm to see:

  • How cash increases/decreases
  • Any effects of seasonality
  • Effects of management decisions

If a company is making a profit, then the Working Capital should increase over time!

Frequency & Time Period

How Often Should The Liquidity Section Be Produced?

As part of the overall Flash Report, the Liquidity section ought to be monitored and reported on a periodic basis. What is that period? It is recommended that the entire Flash Report at a minimum be reviewed on a weekly basis. The more management reviews the information, the faster they can respond to crises.

The frequency of monitoring depends on several factors:

  • Availability & commitment of the management team to review the information
  • Frequency of certain cash inflows/outflows (i.e. payroll)
  • Ease of access and/or generation of information
  • Timeliness of data entry of information pertaining to this section

(i.e. are all A/R and Inventory entered into the system on a timely basis?)

How to Do This

How Is The Liquidity Section Produced?

Information for the liquidity section can be found in the Balance Sheet section of the company’s financial statements (so long as it is updated). If the firm uses a software program (i.e. PeachTree, QuickBooks, Great Plains, etc) to manage its books, then the information can be easily retrieved.

NOTE: Make sure that the ending period on the Balance Sheet matches that of the Flash Report. Both are snapshots of the company in time. Make sure we are talking about the same time period!


  1. Look in the check register to see how much cash is there. Do not use the bank balance because there may still be outstanding checks. Be leery of using the cash position off of the balance sheet. The information is good only if it is updated. This may not always be the case. This is why the check register is best.
  2. Plug into the template.

Accounts Receivable:

  1. Look at the A/R detail report for total accounts receivable. Deduct any bad debts reserved.
  2. Plug into the template.


  1. Look at the inventory detail report for total inventory on hand.
  2. Plug into the template.

Accounts Payable:

  1. Look at the A/P detail report for total accounts payable
  2. Plug into the template

Working Capital:

  1. Sum up the values for Cash, Accounts Receivable, and Inventory
  2. Subtract the value of Accounts Payable
  3. This will give you the value for Working Capital

Review and monitor your results. Graphing the results may also be a very effective method to see what is going on in your company’s process.

Variations Of The Liquidity Section

In the spirit of flexibility, the Flash Report can and ought to be customized to fit each company’s needs.

The basic format is just that….a basic platform to help get you started.

For the Liquidity Section, some companies have also added the following items:

  • Cash Receipts ($) – This gives a feel for the cash that has come in during the period of concern.
  • Cash Disbursements ($) – This gives a feel for the cash that has gone out during the period of concern.

Taken together, The Cash Receipts and Cash Disbursements give an indication of whether the cash flow for the firm is positive or negative.

  • Days Sales Outstanding (DSO)

DSO= 365 x [Avg. A/R]/ [Total Credit Sales]

DSO tells you how many days it takes on average to collect on A/P.

  • Days Payable Outstanding (DPO)

DPO= 365 x [Avg A/P]/ [Total Annual Purchases]]

DPO tells you how many days it takes on average to pay your liabilities.

  • Days Inventory Outstanding (DIO)

DIO= 365 x [Avg Inventory]/ [Cost of Goods Sold]

DIO or Inventory Turnover tells you how many days it takes on average it takes to turnover your inventory.

  • Cash Conversion Cycle (CCC)


This tells you how many days it takes to convert raw material to cash.


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