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Spotlight on defensive interval in measuring liquidity

Cash was and still is king. It will now be a king taken more seriously.

Spotlight on defensive interval in measuring liquidity

The current crisis will come to pass, like others before it. It will be remembered for a long time and it will change the way people do business. Two things we knew before the crisis, hold true even more in light of it: Cash is king and governments are slow.

It pays to build businesses on a strong financial foundation. Financial metrics that were long overlooked, will take their right place again, which brings us to this inaugural Buxlens blog article focusing on one of the more important liquidity measures.

We are adding defensive ratio analysis to Buxlens this week enabling QuickBooks Online businesses to get more complete overview into their liquidity.

What is the defensive interval ratio?

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The defensive interval ratio shows how long a business can operate and meet its operating expenditures without needing to reach out to additional funding, borrowing or sell its fixed assets. As is the case with all other financial performance indicators, it is not to be read in isolation. The defensive interval ratio should be evaluated in its trend, rather than its value at any given time. A positive trend is generally preferred. We say "generally" as sitting on cash can hinder potential company growth. That said, there needs to be a lot of cash before sitting on it can be uncomfortable for a company, especially small and medium size businesses.

What to look out for?

An uncontrolled downward trend. There can be reasons behind, but usually trend changes in the defensive interval need to be the result of deliberate actions rather than surprising results.

Gotchas

Expenses can fluctuate and receivables replenish from new sales. As with all metrics, evaluating in context is required. An understanding of the business model, related metrics like current ratio as well performance of similar companies needs to be taken into consideration.

Business importance

If it was not clear before, the coronavirus crisis made sure to remind every business that liquidity matters a lot and waiting on external help can mean a long wait. Building businesses on strong liquidity can delay the adverse effects of crisis and make it easier to get back on track once the it's is over.

What analytics cannot tell you

Businesses and their accountants/financial advisors should use analytics as a conversation starter and guide, but it is not a replacement for the more than ever important relationship between them. We have seen advisors be fierce advocates for small businesses, while many of them struggling themselves in uncertain times.

We built Buxlens so businesses and their advisors could focus on the conversations that matter, cutting the time it requires to prepare data.