2.3.2. Liquidity

Question 1

What is liquidity

Answer 1

Ability of a business to find cash it needs to pay its bills. Cash must be readily available ether in bank account or in the form of payment from a customer that is due very soon

Question 2

Measuring liquidity

Answer 2

-Current ratio gives simple judgement about firms liquidity. In a ratio ie.1.5:1, £1.60 current assets for each £1 short term debt they have.
Current ratio= Current assets/Current liabilities

-Acid test ratio doesn’t include stock as a liquid assets. The ideal value is 1:1, meaning firm has £1 of cash owed by customers for everybody£1 of debt
Acid test ratio=(tot. Current assets-Stock)/Current liabilities

Question 3

Improving liquidity

Answer 3

-Selling under used fixed assets like machinery or equipment
-Raising more share capital
-Increasing long term burrowing through loans
-Postponing planned investments

Question 4

Managing working capital

Answer 4

Working capital is the money available for day-to-day running of business
Working capital=Current assets-Current liabilities

Capital injected into business to:
Produce goods-Sell to customers on credit- Customers(debtors) pay up, buy materials

Managing this cycle to ensure there’s enough working capital in system to prevent delays is crucial to successful financial management. Actively ensuring there’s:
-Enough money in system altogether
-Making sure cash moves through cycle as quickly as possible.
If met financial mangers likely to consider following actions:
-Control cash used
-Minimising spending on fixed assets
-Plan ahead to estimate