2.3.2 - LIQUIDITY Flashcards
What is Liquidity?
The ABILITY of a business to TURN its ASSETS INTO CASH to pay its current liabilities
What is a Balance Sheet?
a document that provides SUMMARY of it’s ASSETS, LIABILITIES and CAPITAL
What is the Formula to Calculate Assets?
Assets = Capital + Liabilities
ACL
What are Liabilities?
the DEBTS of the business, what it OWES to others
What is Capital?
the MONEY put into the business by the OWNERS
What is the difference between CURRENT and NON CURRENT ASSETS?
2 examples of each
Current Assets - assets that will be CHANGED INTO CASH WITHIN 12 MONTHS
e.g. stock, debtors
Non-Current Assets - LONG TERM resources
e.g. building, machines, vans
What is the difference between a CURRENT and NON-CURRENT LIABILITY?
2 examples
Current Liability - any MONEY OWED by a business that MUST be REPAID WITHIN ONE YEAR
e.g. overdrafts, debtors
Non Current Liabilities - LONG TERM LOANS and any other money owed by the business that DOESN’T have to be REPAID for AT LEAST ONE YEAR
e.g. loan term loans, mortgages
What are the 2 ratios used to measure liquidity?
and meanings
Current Ratio - assess WHETHER OR NOT a business HAS ENOUGH RESOURCES to MEET any DEBTS that ARISE in the NEXT 12 MONTHS
Acid Test Ratio - similar to current ratio but EXCLUDES STOCK FROM CURRENT ASSETS. A more severe test of liquidity
What is the Formula for Current Ratio?
and what does the current ratio or 2.9 : 1 mean?
Current Ratio = CURRENT ASSETS / CURRENT LIABILITIES
means for every £1 of debts they have £2.90 of assets that they can quickly turn into cash
What is the formula for Acid Test Ratio?
Acid Test Ratio = ( CURRENT ASSETS - INVENTORY ) / CURRENT LIABILITIES
What is Working Capital?
formula
the FUNDS LEFT OVER to MEET day to day to expenses after CURRENT DEBTS have BEEN PAID
Working Capital = CURRENT ASSETS - CURRENT LIABILITIES
How does the SIZE OF A BUSINESS and STOCK LEVELS affect WORKING CAPITAL NEEDS?
The LARGER the BUSINESS, the larger the amount of WORKING CAPITAL there’s likely to be
The MORE STOCK a business NEEDS, the HIGHER will be its WORKING CAPITAL
Why might a business not want too much working capital?
- STOCKS are COSTLY TO KEEP - the more stock, the higher cost of physically storing and handling it
- Cash is sitting idle INSTEAD OF being INVESTED to BENEFIT BUSINESS
What are 3 Ways that LIQUIDITY can be IMPROVED?
- REDUCE the amount of STOCK that IT HOLDS , goods dispatched faster to customers, FEWER STOCK can INCREASE CASH.
- EXTEND CREDIT with selected SUPPLIERS - saved cash by delaying payments
- REDUCING CREDIT OFFERED to customers, e.g. insisting customers pay in 30 days not 90
