What is the best way to assess the liquidity of an organization?

Constructing a cash budget is considered the best way to assess the liquidity of an organization because it directly focuses on the inflow and outflow of cash over a specific period. A cash budget provides a detailed plan that outlines expected revenues and expenses, enabling the organization to project its cash position. This proactive approach to financial management helps identify potential shortfalls in cash availability before they occur, allowing the organization to take corrective action if necessary.

In addition, a cash budget gives a clearer picture of how well the organization can meet its short-term obligations, providing crucial insights into its liquid assets. It emphasizes the timing of cash flows, ensuring that the organization maintains enough liquidity to cover immediate liabilities. Consequently, managers and stakeholders can make informed decisions based on real-time data regarding the organization's cash status.

Additionally, while considering industry standards, ratios, or past financial statements can provide useful benchmarks or historical context, they do not offer the same immediate and actionable insight into cash flow management that a cash budget does. Thus, constructing a cash budget emerges as the most effective method for assessing an organization's liquidity.