finance exam- solvency Flashcards
what are the different names for the solvency ratios
-gearing ratio
-debt-equity ratio
-solvency ratio
what does this ratio show
the relo between total liabilities and level of equity put in by the owners. the ratio measures the level of debt in comparison to the money invested by owners/shareholders
what is the solvency ratio 4 2018
2.4:1
what is the solvency ratio for 2019
2.74:1
the lower the solvency ratioo……
the better it is for the business
comment on the 2018 solvency ratio?
for every $1 in owner’s equity, there is $2.41 in total liabilities/borrowed funds
comment on the 2019 solvency ratio
for every $1 in owner’s equity, there is $2.74 in total liabilities/borrowed funds.
what is the comparative ratio?
0.34% went up, which is a negative aspect for the business
what is the role of cash flow statements (as an effective strat)
Matching the level of cash coming in and cash coming out of business is the basis of sustainable cash management – breaking even effect – all costs able to be paid for
cash flow statement
why is it important for a business break even ?
A business will experience temporary downfall if more money goes out than comes in or if money is paid out before payments received -> can lead to overdue fees -> overdraft needed -> higher interest rates -> potential business failure
if a business can effectively implicate their cash flow statements then it allows them to..
it allows them to eliminate the need for late fees and higher interest charges if money has to suddenly be sourced
what does the cash flow statement allow a business to realise
- It compares the statements over time to allow a business to identify cash shortages and surpluses
what are the three strategies utilised to make sure cash is always available and maintained
1) distribution of payments
2) discounts for early payment
3) factoring
what is the distribution of payments?
changing large bills to a monthly payment system so there are less dramatic outflows. Or negotiating the movement of some large bills to other months so they don’t all occur simultaneously
what are discounts for early payments
offering debtor accounts a small discount if they pay early. Additionally, some creditors may offer a discount if the business make their payment on time. Both of these can improve the cash flow of a business.
