Liquidity & efficiency ratios: can you pay the bills?

Revenue and profit margins tell you whether a business makes money. They don't tell you whether it can pay its suppliers on Friday. A profitable business can — and regularly does — run out of cash. The gap between earning revenue on paper and receiving it as cash is what working capital is designed to bridge. Liquidity and efficiency ratios measure the width of that bridge, and whether it is strong enough to carry the load you are placing on it.

The gap between profit and cash

Suppose your business wins a contract worth £80,000. You deliver the work and invoice the client immediately. That £80,000 appears as revenue in your profit and loss account. But if the client pays in 90 days, you do not hold that cash for three months. Meanwhile, your suppliers expect payment in 30 days. Your team's salaries are due at month end.

This is the working-capital gap — and it grows larger as the business grows faster, because more contracts mean more money tied up in outstanding invoices at any given moment. For a deeper look at how profit and cash diverge, the cash flow statement explained covers the mechanics in full. The balance sheet explained shows where receivables, payables, and cash sit at any point in time.

Understanding the working-capital gap is not optional for a UK Innovator Founder Visa applicant. An endorsing body that reviews a financial model showing aggressive revenue growth but ignores the cash timing implications will question the plan's credibility. For context on how liquidity ratios fit within the full set of financial ratios, see financial ratios 101.

The two core liquidity ratios

The current ratio and the quick ratio both ask the same question — can the business cover its short-term liabilities from its short-term assets? — but at different levels of caution.

Current assets include cash, trade receivables (money owed by customers), short-term investments, and inventory. Current liabilities include trade payables (money owed to suppliers), short-term borrowings, accruals, and any other amounts due within twelve months.

A current ratio above 1.0 means current assets exceed current liabilities — the baseline safe position. A ratio below 1.0 signals that the business would struggle to cover its short-term bills from current resources alone. In practice, many financial commentators cite 1.5–2.0 as comfortable for a product-based business, though service and SaaS companies with minimal inventory can operate safely at lower ratios because their liquid assets (cash, receivables) dominate.

The quick ratio applies a stricter test by removing inventory before dividing. The rationale is that inventory may not convert to cash quickly — especially if demand slows, the product is seasonal, or items become obsolete. For a technology business where inventory is negligible, the quick ratio and current ratio are nearly identical. For a product business, the gap between them is a meaningful signal: a large gap suggests a significant portion of current assets is locked in stock that has not yet sold.

Efficiency ratios: how fast does cash move?

Efficiency ratios reveal the speed of the working-capital cycle — how quickly sales convert to cash and how long the business holds obligations before paying them.

Debtor days (days sales outstanding) measures the average number of days customers take to pay after invoicing.

Debtor days = (Trade receivables ÷ Revenue) × 365

A lower number is generally better: faster collection means less capital tied up in outstanding invoices. A rising debtor days figure over successive periods is often the first visible signal of a cash flow problem in the making.

Creditor days measures the average number of days you take to pay your own suppliers.

Creditor days = (Trade payables ÷ Cost of sales) × 365

A higher creditor days figure is not automatically bad — it can reflect favourable payment terms negotiated with suppliers, which preserves cash. But if creditor days are rising because you cannot pay on time, you risk supplier relationships, credit terms, and ultimately supply continuity. UK law gives suppliers the right to claim statutory interest on late payments under the Late Payment of Commercial Debts (Interest) Act 1998, which adds cost if you habitually pay late.

Stock days (inventory days) measures how long goods sit in stock before being sold.

Stock days = (Inventory ÷ Cost of sales) × 365

A higher stock days figure means capital is tied up longer in unsold goods. For service and software businesses with negligible physical inventory, this ratio is less relevant. For product businesses, reducing stock days releases working capital that can be deployed elsewhere.

Worked example: BrightStack Ltd

Using the same company introduced in the profitability ratios guide, BrightStack Ltd's year-end position shows:

Current assets:

• Inventory: £60,000
• Trade receivables (debtors): £100,000
• Cash: £40,000
• Total current assets: £200,000

Current liabilities:

• Trade payables: £80,000
• Other current liabilities (accruals and short-term obligations): £40,000
• Total current liabilities: £120,000

BrightStack's annual revenue is £600,000 and cost of sales is £360,000.

What the ratios say: BrightStack's current ratio of 1.67 is comfortable — it holds £1.67 of short-term assets for every pound of short-term liability. The quick ratio of 1.17 confirms the position holds even without inventory. Debtor days of 61 — roughly two months — is an area worth attention; if customers can be moved to shorter payment terms, cash flow would improve. Creditor days of 81 means BrightStack pays suppliers slightly later than it collects from customers, which provides a modest working-capital cushion. Stock days of 61 indicates inventory is turning over every two months; if any stock lines are slower-moving, that could be pulling the average up.

What efficiency ratios mean for a visa financial model

A UK Innovator Founder Visa business plan needs to demonstrate viability — the capacity to sustain the business long enough to achieve its stated projections. A plan that shows strong revenue growth but ignores working-capital dynamics will look incomplete to a financial assessor.

The practical implication: for every year of your three-year projection, you can derive the implied receivables balance from your debtor days assumption. Suppose your model projects £1,000,000 of Year 2 revenue and assumes 60-day debtor days. That implies trade receivables of approximately £164,000 on the balance sheet at year end. That capital needs to come from somewhere — cash raised, a credit facility, or an improvement in creditor terms. If it is not accounted for, your cash flow forecast will not balance.

See the balance sheet explained for how to build this across the three statements, and the financial planning and budgeting guide for how to incorporate working-capital assumptions into a rolling forecast.

Companies House publishes filed accounts for UK companies — a useful benchmark for debtor and creditor day norms in your sector, drawn from real businesses operating in the same environment you are projecting into.

Test your business plan's financial credibility with a free TorlyAI assessment — five runs, no card required.

Key takeaways

• The current ratio and quick ratio measure solvency at a point in time; a ratio above 1.0 is the baseline, but context, trend, and sector norms matter as much as the absolute number.
• The quick ratio strips out inventory for a more conservative liquidity read — the gap between the two ratios signals how much of the business's short-term position depends on selling stock.
• Debtor days, creditor days, and stock days reveal the pace of the working-capital cycle — and the points where cash can be freed or where it is being trapped.
• A profitable business can run out of cash if it collects revenue slowly and pays costs quickly; liquidity ratios make this risk visible before it becomes a crisis.
• For a UK Innovator Founder Visa financial model, projecting debtor and creditor days alongside revenue demonstrates that your growth assumptions are backed by realistic working-capital planning.

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• liquidity
• working-capital
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