2.3.2 liquidity Flashcards
liquidity
a measure of extent to which a business has cash to meet immediate and short term obligations or assets that converted to do this
current assets examples
- stock
- debtors
- cash
- bank
non current assets
- land
- tools
- vehicles
- brand names
current liabilities
- overdraft
- creditors
- short term loan
non current liabilities
- long term loans
- mortgage
liquidity ratios
assesses whether a business has sufficient cash or equivalent current assets to be able to pay it’s debts as they fall due
current ratio formula
current assets / current liabilities : 1
1.5-2 current ratio
suggests the business has the ability to repay it’s debts within 12 months
low ratio below 1 current ratio
indicates there is not enough cash held by the business to repay it’s short term debts
high ratio over 2 current ratio
suggests the business has too much cash tied up in working capital
acid test ratio formula
(current assets - stock) / current liabilities x100
ideal figure of acid test ratio
1
less than 1
business is keeping too much stock for too long
trade debtors
amounts owed by a business’ cutomers who have purchased goods but not yet paid for them
trade creditors
money owed by the business to suppliers for raw materials/stocks recived but not yet paid for
stocks
cash tied up in raw mateiral, work in progress and finished goods waiting to be sold
working capital cycle
the period of time between the point where cash is first spent on the production of a product and the collection of cash from the customer
working capital formula
current assests - current liabilities
main causes of cash flow problems
- low profits
- too much soent on production capacity
- excess stock held
- overtrading - growing the business too fast
- seasonal demand
bank loans
long term finance - loan provided over a fixed period
bank loans advantages
- generally offered at a lower interest rate
- you do not need to give the lender % profits or share of the company
bank loans disadvantages
- no flexibility
- could cause cash flow problems if customers don’t pay promptly- requires security
bank overdraft
short term finance, loan facility
bank overdraft advantages
- you can borrow what you need to
- flexbility when paying it back
bank overdraft disadvantages
- likely to be charged interest when paying it back
- going over arranged limit will negatively affect credit score
