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Bankers will often make financial ratios a part of your business loan agreement.For instance, you may have to keep your equity above a certain percentage of your debt, or your current assets above a certain percentage of your current liabilities.As a result, small amounts of money continuously come in and go out, and in a worst-case scenario liquidation is relatively simple.
Businesses like these need carefully planned payment terms with customers; the current ratio should be much higher to allow for coverage of short-term liabilities.
A higher ratio may mean that your capital is being underutilized and could prompt you to invest more of your capital in projects that drive growth, such as innovation, product or service development, R&D or international marketing.
But what constitutes a healthy ratio varies from industry to industry.
But ratios should not be evaluated only when visiting your banker.
Ideally, you should review your ratios on a monthly basis to keep on top of changing trends in your company.