The best approach to liquidity assessment.

• A. The days cash on hand ratio alone fully measures liquidity
• B. The current ratio alone fully measures liquidity
• C. The days cash on hand ratio and current ratio are rough measures; a cash budget provides the best liquidity assessment
• D. Liquidity assessment is not possible with historical data

Answer: (C)

Liquidity is about having enough cash when it’s needed, not just how much cash sits in the bank at a single moment. The days cash on hand and the current ratio give rough, static pictures: they show how much cash or liquid assets you have and whether current assets cover current liabilities. But they don’t reveal the timing of cash inflows and outflows, seasonal flows, or potential gaps between when cash is received and when bills must be paid. That’s why relying on either ratio alone can miss looming shortfalls.

A cash budget takes those timing issues into account by forecasting expected cash receipts and disbursements over a period (weekly or monthly). It shows the net cash position, flags anticipated deficits or surpluses, and helps you plan financing or cost-control steps in advance. Historical data helps build the forecast, but the real advantage is forward-looking planning. So, while the two ratios are useful rough gauges, a cash budget provides the best liquidity assessment.