If your current ratio is less than 1:1, you may not be able to pay your bills on time. Your company may be in trouble. Some of the more common reasons for low current ratios are: poor sales; low profit margins; delivery or service problems; a sudden build-up of short-term bank debt or an inability to obtain long-term financing.
Who's Watching:
See the Definition for a discussion of other parties that are interested in your current ratio.
Actions:
You should first consider ways to make sure that you convert current assets to cash fast enough, and second, ways to increase your assets without also increasing liabilities.
To convert assets to cash faster, consider speeding up collection of bills due you from your customers; stretching out payments to suppliers; reducing inventory by reducing purchasing and not replacing inventory as quickly as it is sold; or renegotiating short-term loans to make them long-term. Talk to your suppliers, especially your most important ones, and try to work out a payment schedule with them. If you have to, pay your largest bills first.
You should also work to make permanent improvements in your current assets. Consider: raising prices to increase profit margins thus generating more sales, receivables, and eventually, cash; reducing product and overhead costs; increasing sales volumes.
