the liquidity of a business firm

Procedure would you adopt to study the liquidity of a business firm.
- Liquidity is the ability of the firm to convert assets into cash. It is
also called marketability or short-term solvency. In other words, it is the
ability of the firm to meet its day-to-day obligations.
In order to study the liquidity of the firm, we need to thoroughly examine its
asset structure, mainly the current assets. The current assets, viz: stock,
debtors, bank balance and other current assets need to be seen to
determine at what rate a firm can convert these into cash. A business that
collects its accounts receivable in an average of 20 days generally has more
cash on hand than a business that requires 45 days. Similarly, a business
that turns over its inventory 15 times a year has more cash on hand than a
company that turns its inventory only 10 times a year. A business which
keeps surplus cash or an idle bank balance may be readily able to meet its
short-term or daily obligations but it is not effectively utilizing its cash flow.
Another factor to determine the liquidity is to see the profitability of the firm.
The more profitable the firm is, the more cash resources it shall have.
Last, but not the least, we use make use of certain financial ratios like
current ratio, quick or acid-test ratio, net working capital to determine the
liquidity of the firm.