2.3.2 - Liquidity Flashcards
Def liquidity
The ability of a business to find the cash it needs to pay its bills. The cash must be readily available either in bank account or form of payment from customer due very soon
What companies are required to send a statement of financial position to companies house
All limited companies
Def statement of comprehensive income
A financial document that summarises the net worth of a business: records, assets and liabilities and how business raised and spends capital
Where do u look on balance sheet to measure liquidity
Just above half way up. Current assets and current liabilities
The two ways measuring liquidity can be done
Current ratio and acid test ratio
Def current assets
Items the business owns that are in the form of cash or can be easily turned into cash easily without a major loss in their value
Def current liabilities
Are debts owed by the business that are due to be paid within the next 12nmonths
3 examples of non current assets
- land and building
- plants and machinery
- goodwill
3 examples current assets
- cash balances
- trade debtors
- inventories
2 examples current liabilities
- trade creditors
- short term borrowing overdrafts
2 examples non-current liabilities
Long-term borrowing
Other long term liabilities
Which liquidity ratio counts inventories
Current ratio
Ideal current ratio
1.5:1
Current ratio formula
Current assets / current liabilities
Why is acid test a ‘tougher test of liquidyt’
Doesn’t count inventories/ stock as a liquid asset
Acid test ratio formula
(Total current assets - inventories) / current liabilities
What is the ideal value for acid test ratio
1:1
4 ways to improve liquidity
- selling under-used fixed assets such as equipment or machinery
- raising more share capital
- increasing long term borrowing through loans
- postponing planned investments
Def fixed assets
Items owned by the business which it intends to use over and over to generate orifit
Def working capital
Is the money that is available for the day to day running of the business
2 ways to actively manage the working capital cycle
- ensuring there is enough money in the system all together
- making sure dash moves through the cycle as quickly as possible
Working capital cycle 4 stages
Capital injected into business Sell to customers on credit Debtors lay up Buy materials Produce goods
Is there is distractions to working capital cycle a business should
- control cash used, keeping cash as low as possible eg reducing stock levels and controlling credit periods
- minimise spending on fixed assets
- plan ahead to estimate carefully the amount of cash that will be needed in the next few months
Why working capital is important to business
Produce goods, pay suppliers on time, purchase equipment/ raw materials
