Analyzing Your Financial Statements with Ratios
Here are links to the two posts:
Net Worth Statement
Cash Flow Statement
When an asset is "liquid" it means it can be turned into cash quickly. Cash is the most liquid asset. Real estate, on the other hand, is illiquid.
Basic Liquidity Ratio (BLR)
From the Net Worth Statement, the liquid monetary assets would be:
- Cash - $200
- Checking - $3,000
- Money Market Accounts - $7,000
- Savings - $6,000
From the Cash Flow Statement, the average montly expenses would be the sum of the fixed and variable expenses:
- Total Fixed Expenses - $30,500
- Total Variable Expenses - $31,700
The sum of the fixed and variable expenses is $62,200.
Here's what the BLR would look like:
BLR = $16,200 ÷ $5,183
BLR = 3.1 months
This ratio tells us that this couple could live on their liquid assets for 3.1 months based on the average monthly expenses and their liquid assets. Since it is common knowledge that a person should have 3 to 6 months worth of living expenses in liquid assets, the ratio of 3.1 months is on the lower end of acceptability.
With my next post, I'll go into more detail regarding liquid ratios.