Liquidity Flashcards
Liquidity Definition
the ease which assets can be converted into cash
Assets definition
resources that belong to a business
Acid test ratio
similar to the current ratio but excludes stocks from current assets. A more severe test of liquidity
Current ratio
assess whether or not a business has enough resources to meet any debts that arise in the next 12 months
Non - current assets
long-term resources that will be used by the business repeatedly over a period of time
Three examples of non-current assets
Land, property, equipment
Three examples of current assets
Inventories, trade and other receivables, cash or cash equivalents
Three examples of current liabilities
Loans, trade/other payables, tax liabilities
Two examples of non-current liabilities
Long term bank loans, mortgages
Current ratio formula
current assets / current liabilities
Acid test ratio formula
(current assets - inventories) - current liabilities
Working Capital Definition
The amount of money needed to pay for the day to day trading of the business like wages and electricty. Money left over from all current debts once paid is the working capital of the business.
Working capital formula
current assets - current liabilities
Why is cash important?
Majority of business failure is due to poor cash flow and it is the most liquid of all assets
Ways to improve lidiquity
1) Encourage cash sales (large discounts to people who pay cash)
2) Sale and leaseback (cash can be raised whilst still using the equipment)
3) Extend credit with selected suppliers (delay paying suppliers for goods bought)
4) Introduce fresh capital (use saving’s or taking out loans to improve capital)
