2.3.2 Liquidity Flashcards
What is a fixed asset?
1
- Something the business owns and will own for 12+ months
What is a current asset?
1
- Something the business owns and will own for less than 12 months
- ST
What are receivables/trade receivables and an example?
1
- Cash we expect to receive within 12 months (trade credit)
What are less current liabilities?
1
- Something business owns and has to pay back within 12 months
What is a non-current liability?
1
- Something the business owes and has to pay back in more than 12 months
How do you calculate current ratio?
1
- Current assets
Current liabilities = x:1
What are the interpretations of current ratio?
4
- Accounts ideal = 1.5:1
- Large businesses = lower figure
- Too low = miss payments
- Too high = Keeping too much cash/holding too much stock
How do you calculate acid test ratio?
1
- (Current assets - inventories) / current liabilities = x:1
What are the interpretations of acid test ratio?
5
- Accounts ideal = 1:1
- Large businesses = lower figure
- Too low = miss payments (debt)
- Too high = keeping too much cash
- Big difference between current and acid = ^inventory (stock) lvls
How do you calculate capital employed?
1
- Equity + non current liabilities
How do you calculate gearing?
1
- Non current liabilities x 100
Capital employed
What are the interpretations of gearing?
4
- 50%+ = highly geared (over reliant on borrowed money)
- ^Interest charges
- Bank may call in debts of companies if think they’ll fail
- Low% = Bad, not borrowing/investing enough into future
How do you calculate ROCE?
1
- Operating profit
Capital employed x 100 = %
What does ROCE show and what % is very satisfactory?
2
- Return on investment of shareholders funds and borrowing
- 20% (depends on economy)
In what ways can you improve liquidity?
4
- Sell non used fixed assets
- ^Share capital
- ^LT borrowing (loans)
- Postpone planned investments
What is working capital?
1
- Money available for day to day running of business
How can a business manage it’s working capital?
1
- Control cash used
How can a business control cash used (managing working capital)?
4
- > Stock lvls
- Customer credit low
- Get lots credit from suppliers
- Get goods to market ASAP
What needs to be ensured, in terms of a businesses working capital?
2
- Enough money in system
- Cash move through cycle ASAP
What is the key to healthy liquidity?
1
- Successful working capital
What does liquidity measure?
1
- Availability of cash to meet ST debts
