A survey report: how hospitals measure liquidity

Liquidity is an important financial concept that is widely understood although not authoritatively defined. In many situations the actual assessment of liquidity is based on the relationship of current assets and current liabilities. Nationally, a decline in traditional measures of liquidity such as current and quick ratios has occurred for both general industry and the hospital industry. There are a variety of possible explanations for this trend, but one of special interest in this article was the effect of financial reporting practices. A recent Principles & Practices Board survey of Financial Analysis Service subscribers indicated that there is a potential for underreporting working capital, (current assets less current liabilities), in the hospital industry. However, this does not necessarily imply that the recent decline in liquidity measures is in any way due to reporting practices. No information about changes in reporting practices was obtained in this study. Finally, the results of the study do suggest that examination of more than one liquidity indicator is useful. Specifically, restricting attention to just the current ratio could be misleading. In this vein, it is interesting to note that six measures of liquidity are used in the FAS. All may provide insight into an accurate assessment of liquidity.