2.3 Managing Finance

Question 1

What is a balance sheet?

Answer 1

A snapshot of the businesses assets and liabilities on a particular day

Question 2

What is the point of liquidity ratios?

Answer 2

To assess whether a business has sufficient cash or equivalent current assets to be able to pay its debts

Question 3

How do you find current ratio?

Answer 3

Question 4

What is a low current ratio?

Answer 4

Below 1, indicates cash problems

Question 5

What is a good current ratio?

Answer 5

Between 1.5-2, suggests efficient management of working capital

Question 6

How do you find the acid test ratio?

Answer 6

Acid test ratio = current assets - stock/liabilities

Question 7

What is a bad acid test ratio score?

Answer 7

If it is significantly lower than 1

Question 8

What are the main causes of cash flow problems?

Answer 8

• Low profits
• To much production capacity
• Excess inventory held

Question 9

How do you manage cash flow problems?

Answer 9

• Make a reliable cash flow forecast
• Manage working capital effectively
• Choose the right sources of finance

Question 10

How do you improve cash position in the short term?

Answer 10

• Reduce current assets
• Increase current liabilities (delaying payment)
• Sell surplus fixed assets

Question 11

How do you improve cash position in the long term?

Answer 11

• Increase equity finance
• Increase long term liabilities
• Reduce net outflow on fixed assets

Question 12

What are two internal causes of business failure?

Answer 12

• Poor management of cash flow
• Marketing failure, failing to understand changes in the marketplace, leads to a shortage of revenue

Question 13

What are 3 external causes of business failure?

Answer 13

• New competitors, that are able to operate far more efficiently
• Economic change, like a long recession
• Major tech advancement from other firms, can make it hard to compete with them