Top Liquidity Metrics for Business to Business (B2B) Businesses

For B2B businesses, cash flow management is critical. With longer accounts receivable cycles, unpredictable payment schedules, and ongoing operational expenses, understanding key liquidity metrics helps businesses stay financially stable and avoid cash shortages. 

By tracking these five ready cash metrics, B2B companies can evaluate their financial health, optimize working capital, and improve liquidity. 

1. Current Ratio 

Definition 

The Current Ratio measures a business’s ability to pay off short-term liabilities using its short-term assets. 

Why It Matters

A ratio above 1.5 indicates a healthy financial position, meaning the company has enough assets to cover short-term obligations. A ratio below 1.0 suggests the business may struggle to meet obligations without securing additional financing. 

Formula 

Where to Find It 

• Balance sheet under Current Assets and Current Liabilities sections.

Example Calculation 

A business has: 

• $150,000 in current assets 
• $75,000 in current liabilities

Interpretation: A Current Ratio of 2.0 means the business has $2 in current assets for every $1 in current liabilities, indicating strong liquidity.

2. Quick Ratio (Acid-Test Ratio) 

Definition 

The Quick Ratio is a stricter liquidity measure that evaluates a company’s ability to pay off short-term liabilities without relying on inventory sales. It focuses only on highly liquid assets. 

Why It Matters 

Since B2B businesses often have longer accounts receivable cycles, this metric ensures they can cover obligations quickly, even if inventory cannot be liquidated immediately. If you have a ratio of 1 or greater means you have healthy liquid assets that would cover your current liabilities.

Formula 

Where to Find It 

• Balance sheet under Cash, Marketable Securities, Accounts Receivable, and Current Liabilities sections. 

Example Calculation 

A business has: 

• $50,000 in cash & cash equivalents 
• $20,000 in marketable securities 
• $80,000 in accounts receivable 
• $100,000 in current liabilities 

Interpretation: A Quick Ratio of 1.5 means the business has $1.50 in highly liquid assets for every $1 in current liabilities, indicating strong liquidity. 

3. Accounts Receivable Turnover (ART)

Definition

The Accounts Receivable Turnover Ratio (ART) measures how efficiently a B2B business collects payments from clients over a given period. 

Why It Matters 

• A higher ART indicates faster collections and better cash flow. 
• A lower ART suggests slow-paying customers or poor collections processes, which can create cash flow problems. 

ART varies by industry, but a ratio of 7.8 or higher is generally considered to be a good ratio.

Formula 

Where to Find It 

• Net Credit Sales (Income Statement) = Invoiced amounts - Returns - Discounts 
• Average Accounts Receivable (Balance Sheet) = the average of the starting accounts receivable balance and ending accounts receivable balance

Example Calculation 

In 2024, a business has: 

• $500,000 in net credit sales 
• $100,000 in average accounts receivable 

Interpretation: An ART of 5.0 means the company collects its entire accounts receivable balance 5 times per year, based on an average of 7.8, there is room for improvement. A 5.0 would mean that the company has invoices outstanding for about 75 days on average. 

4. Cash Conversion Cycle (CCC) 

Definition 

The Cash Conversion Cycle (CCC) measures how quickly a company converts inventory into cash by tracking the time it takes to: 

1. Sell inventory 
2. Collect payments 
3. Pay suppliers 

Why It Matters 

• A shorter CCC means faster cash turnover and better liquidity. 
• A longer CCC indicates slower-moving cash flow, requiring external financing.

A good CCC varies by industry, but ideally under 30 days.

Formula 

Where to Find It 

• Days Inventory Outstanding (DIO) Inventory records = (Average inventory / COGS) x Number of days
• Days Sales Outstanding (DSO) Accounts receivable records = (Average accounts receivable / Total Credit Sales) x Number of days
• Days Payables Outstanding (DPO) Accounts payable records = (Average accounts payable / COGS) x Number of days

Example Calculation 

A business has: 

• DIO = 30 days 
• DSO = 45 days 
• DPO = 40 days 

Interpretation: A CCC of 35 days means it takes the company 35 days to turn an investment in inventory into cash, indicating moderate liquidity efficiency. 

5. Operating Cash Flow Ratio 

Definition 

The Operating Cash Flow Ratio indicates whether a business generates enough cash from operations to cover short-term liabilities. 

Why It Matters 

• A ratio above 1 means the company generates sufficient cash flow to pay off short-term obligations. 
• A ratio below 1 indicates potential liquidity issues, requiring external financing. 

Formula

Where to Find It 

• Operating Cash Flow (Cash Flow Statement) 
• Current Liabilities (Balance Sheet)

Example Calculation 

A business has: 

• $200,000 in operating cash flow 
• $150,000 in current liabilities 

Interpretation: An Operating Cash Flow Ratio of 1.33 means the company generates $1.33 in cash flow for every $1 in current liabilities, ensuring stable liquidity. 

Bottom Line: Why Ready Cash Metrics Matter for B2B Businesses 

B2B companies face longer payment cycles and unpredictable cash flow, making liquidity management essential. Tracking these five cash flow metrics helps businesses: 

• Ensure they have enough cash to cover short-term obligations 
• Identify cash flow inefficiencies and improve collections 
• Reduce reliance on external financing 
• Optimize working capital for growth 

Want expert financial guidance? LedgerFi specializes in helping B2B businesses improve cash flow, optimize working capital, and ensure financial stability. Contact us today to maximize your liquidity!