Liquidity Flashcards
What are the three financial statements of a business?
- statement of comprehensive income
- statement of financial position
- cash flow statement
What is the statement of finacial position?
snapshot of the businesses assets and its liabilities on a particular day ?
What is the statement of comprehensive income?
measures a business’ performance over a given period. compares income of a business against costs and expenses
What os tje cash flow statement?
- shows cash inflows and outflows and liquid funds over a certain time
what are current assets?
items that the business ownes that are in the form of cash or can be easily turned into cash without major loss in value
Examples of current assets?
cash, money owed by customers (recievables / debtors) and stock (inventory)
what are non current assets?
considered long term where their full value wont be recognised until at yeast a year
Examples of non current assets?
- land, property and various intangible assets
WHat are intangible assets?
assets a business holds but not in the tangible form
Examples of intangible assets?
goodwill, brand recognition, copyrights, paytents, trademarks
What are current liabilities?
- debts owned by the business that are due to be paid in the next 12 months
Examples of current liabilities?
trade creditors and overdrafts
WHat are non current liabilities?
- financial obligations that are not due within a year
Examples of non current liabilities?
loans and mortgages
How do you calculate net current assets?
current assets - current liabilites
How do you calculate net assets employed?
non- current assets + net current assets
How do you calculate net capital employed?
- non current liabilities + total share holders equity
WHat does liquidity asses?
whether a business has sufficient cash or equivalent current assets to be able to pay its shortterm debts as they fall due
What ratios can be used to asses the liquidity?
current ratio, acid test ratio
current ratio formula?
- current assets / current liabilities
How do you calculate acid test ratio?
current assets - stock / current liabilities
What is the acid test ratio?
doesnt take stock into account as not all stock will be sold/ turned to cash
What does it mean if if current ratio is favourable and acid test ratio is unfavourable?
- lots of money is tied up in stocks
What are the 6 most common cash flow problems?
- low profits/ losses
- too much production capacity ( spending too much on fixed assets)
- Excess inventories held (excess stocks tied up in cash )
- allowing customers too much credit ( late payments, not enough cash)
- overtrading ( expands too quickly)
- seasonal demand ( not having enough for times of low sales)
What are the three key ways to managing cash flow?
- regular and reliable cash flow forecasting
- managing and working capital
- having sufficient and suitable sources of finance
What are debtors?
amounts owed by customers
WHat are creditors?
amounts owed to suppliers
WHat is working capital>
amount of money a business has that is redily availbale for the day to day runnings of a business
How can you improve cash flow from debtors?
- effective credit control (policies on credit, credit checking)
- could use debt factoring (sell debts to third party, generates cash)
How can you improve cash flwo from creditors?
- trade credit
- delayed payments means business holds onto cash for longer
- How do you improve cash flow from inventory?
- keep small balances
- computerise ordering to improve efficieny
- improve stock control
