Assume that you are a newly hired treasury analyst that istasked with improving the liquidity position and overall financialmanagement of Firm Y. Firm Y was incorporated 10 years ago andoperates in the manufacturing industry. To begin your new position,you have been tasked with benchmarking Firm Y’s liquidity position.In terms of the key performance indicators to benchmark, yourtreasurer states that the “Current and quick ratios provide thebest measures of our firm’s overall state of liquidity. In general,higher values for both indicate that our firm is more liquid. Infact, our recent current and quick ratios have been lower than ourindustry peers, so we need to increase them.”

Based on your understanding of liquidity management, you notethat the cash conversion cycle and its components are critical. Forthis reason you have collected the information that appears inTable 2 (for your firm (Firm Y), Firm A (the market leader in themanufacturing industry), and the industry average for allmanufacturers. In terms of the comparison reference groups, atwo-way comparison will be utilized: Firm Y against Firm A and FirmY against the industry average.

Table 2

	DSO	DIO	DPO	CCC
Firm Y	95	40	30	105
Firm A	59	15	35	39
Industry Average	90	50	30	110

, Part A: Assess the treasurer’s statement on using the currentand quick ratios to evaluate firm liquidity. Do you agree ordisagree and why?

                                                                                                

Part B: Evaluate and comment on Firm Y’s liquidity positionbased on the given metrics relative to those for Firm A and theIndustry Average.