Calculating liquidity — instructions, formulas and examples

Definition of liquidity — a brief overview

liquidity describes the ability of a company to to meet financial obligations on time at any time. It states how quickly and easily assets can be converted into liquid assets to cover short-term liabilities. High liquidity is important in order to avoid financial bottlenecks and to be able to react flexibly to unexpected outflows of payments.

Companies with a high level of liquidity are able to make investments, take advantage of growth opportunities and assert themselves in crisis situations. Liquidity is measured in various degreesto look at financial stability from different perspectives, such as cash, receivables, or inventories.

Calculation of liquidity — a guide

Liquidity in a company is usually calculated using the so-called liquidity levels. A liquidity ratio indicates how quickly a company is able to pay its short-term liabilities. In order to look at this in a more differentiated way, in practice we use three levels of liquidity. They differ in which assets are included and therefore offer a staggered overview of a company's financial position.

We'll explain to you how to calculate these key figures and what they mean — with simple examples so you can get started right away.

First-degree liquidity formula (cash liquidity)

First-degree liquidity, also known as cash liquidity, shows whether a company's short-term liabilities can cover exclusively with its liquid substances. Liquid assets include cash, bank deposits and liquid securities or checks that are available at any time. This key figure is particularly important because it shows a company's immediate potential to meet short-term payment obligations — without relying on other assets.

Calculate 1st degree liquidity

The formula is: First-degree liquidity = cash equivalents: current liabilities

Sample calculation: Your company has 50,000 euros in liquid assets (e.g. bank deposits). Current liabilities amount to 80,000 euros. First-degree liquidity is 0.625 or 62.5 percent.

Interpretation: A liquidity ratio of 62.5 percent means that the company can cover 62.5 percent of its short-term liabilities with liquid assets (such as bank deposits). First-degree liquidity is therefore outside the recommended target value of 20 to 50 percent in order to avoid an inefficient capital commitment. This is because excessive first-degree liquidity means that a company holds large sums of unproductive liquid assets that are not invested or interest-bearing.

2nd degree liquidity formula (withdraw-related liquidity)

Level 2 liquidity extends the calculation by In addition, short-term claims are taken into account. This key figure shows how well a company can pay off its debts, even though payments from customers that are due soon are taken into account.

Calculate second-degree liquidity

The formula is: Level 2 liquidity = (cash equivalents + receivables): current liabilities

Sample calculation: In addition to cash equivalents (50,000 euros), your company also has short-term receivables of 40,000 euros. As in the previous example, current liabilities amount to 80,000 euros. Level 2 liquidity is 112.5 percent.

Interpretation: A figure of 112.5 percent shows that your company is well positioned and can cover its liabilities, provided that customers pay on time. A value of at least 1 or 100 percent is considered healthy. With tools such as Tidely You can simply monitor this key figure in real time so that you always have a transparent overview.

3rd degree liquidity formula (comprehensive liquidity)

The third-degree liquidity is In addition to cash and receivables, inventories with a. These include, for example, raw materials, unfinished and finished products or down payments made. This is the most comprehensive key figure, but it is less accurate for short-term planning because inventories cannot be immediately converted into liquid assets.

Calculate third-degree liquidity

The formula is: Level 3 liquidity = (cash equivalents + current receivables + inventories): current liabilities

Sample calculation: In addition to cash equivalents (50,000 euros) and receivables (40,000 euros), your company has inventories worth 30,000 euros. Here, too, short-term liabilities amount to 80,000 euros. The third-degree liquidity is 150 percent.

Interpretation: A value between 1.5 and 2.0 (150% to 200%) shows a healthy financial basis for third-degree liquidity; but only if inventories can be liquidated quickly. At Tidely, we consciously focus on 1st and 2nd degree liquidity because they represent the key cash flows with which you can work directly.

Calculate liquidity with Excel

Excel is an easy way to calculate liquidity in the company. With a well-structured Excel template, you can quickly record the most important liquidity figures and carry out initial analyses. This is ideal for getting an overview and regularly checking whether your company is financially well positioned.

Download our free Excel template for liquidity planning Download and use them to keep an eye on your financial flows. This gives you control over your liquidity at all times and can identify potential bottlenecks early on — perfect for getting started. But if you really want to make your liquidity planning efficient and time-saving or if your company is growing, you can find a professional Cash flow management software Like Tidely, a more comprehensive solution.

[Picture idea: Mockup with liquidity calculation in Excel or Tidely]

Calculate 1st, 2nd, 3rd degree liquidity — how do I correctly arrange the values?

Healthy liquidity depends heavily on the business model and the industry. However, as a rule of thumb, the following applies:

• Values above 1 (100%): This shows that your company can safely cover its short-term liabilities. However, too high a value, particularly in the case of first-degree liquidity, can be inefficient because unused liquid assets are tied up that could be used productively. However, a target range of 1.5 to 2.0 is a good guideline for third-degree liquidity.
• Values below 1 (100%): This is usually a warning sign. Your company could have trouble making payments on time. In this case, it is important to take measures, such as speeding up the collection of outstanding receivables or increasing cash. However, in the case of first-degree liquidity, a value of between 0.2 and 0.5 is considered healthy so as not to have too much unused liquidity.
• Comparison of liquidity levels: Compare 1st and 2nd degree liquidity to get a complete estimate. Third degree liquidity can be considered in addition, but is often less meaningful for short-term decisions.

How can you improve liquidity if it is outside the target value?

If your company's liquidity is below or above the recommended benchmark, there are several targeted measures to increase financial stability:

• Optimize receivables management: Shorten payment terms and automate reminders.
• Reduce costs: Check fixed costs and negotiate with suppliers.
• Minimize inventory: Use just-in-time strategies and sell off excess inventory.
• Take advantage of financing options: Set current account loans or factoring one.

• Improve planning: Monitor your liquidity with tools like Tidely — so you can react early and Avoid liquidity bottlenecks.

Why liquidity does not equal profit

If my company is profitable, the liquidity must also be right — this idea comes up often, but it is a mistake. Profit and liquidity are two different things:

• The profit shows How much did a company earn after deducting all costs.
• Liquidity, on the other hand, gives Information about short-term solvency, i.e. how much cash is immediately available to a company to pay bills on time.

A company can therefore make a profit but still run into liquidity difficulties — for example when customers pay their bills late or large inventories tie up capital that is not immediately available. In the worst case scenario, a lack of liquidity may mean that the company can no longer meet its obligations, even if it is profitable.

It is therefore important not only to look at the winning numbers, but also to keep an eye on liquidity. With Liquidity management software Like Tidely, you have the advantage of monitoring your liquidity in real time and thus identifying bottlenecks early on and taking targeted countermeasures — so that you are always on the safe side and your company is not threatened with insolvency.

The weaknesses of traditional liquidity figures

Traditional liquidity figures, which are often derived from business evaluation (BWA), have one decisive disadvantage: They only offer one Snapshot of the financial situation of a company on a specific reporting date. These static figures are based on historical data. This means that they only provide information about the company's liquidity at a past point in time was ordered without taking current or future developments into account.

Here is the rub: Such indicators do not take into account how liquidity is developing. They neglect important factors such as outstanding payments, new liabilities or future cash flows, which are decisive for effective Liquidity management are. This limitation makes it difficult to make dynamic decisions or react to bottlenecks at an early stage.

Calculate liquidity easily with Tidely

This is where she sets dynamic liquidity formula , which integrates ongoing incoming and outgoing payments as well as expected data instead of fixed balance sheet data. In contrast to traditional methods, Tidely offers a dynamic solution: Our software is based on actual deposits and withdrawals, which are recorded directly via your bank accounts and connected accounting systems. This gives you not only a current, but also a future-oriented perspective on your liquidity.

Another advantage is the Using dynamic expectation data instead of purely static billing data. By integrating due and expectation data, Tidely can make precise forecasts and thus help you identify your payment flows and potential bottlenecks at an early stage and act accordingly. Traditional liquidity figures do not offer this flexibility, as they are limited exclusively to the date of the balance sheet date and often ignore short-term changes in payment transactions.

Overall, it is clear that anyone who relies exclusively on gut feeling or the BWA risks overlooking crucial information for liquidity planning. With Tidely On the other hand, you always have a full overview and control of your financial flows — in real time.

FAQ

How do you calculate liquidity?

Liquidity is calculated using liquidity levels 1, 2, and 3, which show whether a company can cover its short-term solvency with available funds, receivables, or inventories.

What are the three levels of liquidity?

• 1st degree liquidity: measures the ability to cover short-term liabilities exclusively with liquid assets (e.g. bank deposits). Formula: cash equivalents: current liabilities
• 2nd degree liquidity: also takes into account short-term receivables and assesses the coverage of short-term liabilities. Formula: (liquid assets + current receivables): current liabilities
• Grade 3 liquidity: also includes inventories and provides a more comprehensive overview of short-term solvency. Formula: (cash equivalents + receivables + inventories): current liabilities

How much liquidity should you have?

A value of at least 1 (100%) shows that sufficient funds are available to cover all short-term liabilities. However, efficiency should also be considered when interpreting the values: Too high values, particularly in the case of first-degree liquidity, can mean untapped potential, as excess liquid assets are not used productively. A target range of 0.2 to 0.5 is considered efficient for first-degree liquidity, while a value of 1.5 to 2.0 is optimal for third-degree liquidity.

Can you calculate liquidity using the balance sheet or BWA?

The balance sheet or BWA alone is not ideal for reliably evaluating a company's liquidity. These only provide a snapshot and are based on historical data, which cannot make any statement about current or future cash flows. It therefore makes sense to use additional tools such as Tidely to ensure real-time liquidity management and to have an up-to-date overview at all times.

‍