Liquidity, Overtrading, Over-capitalisation

Question 1

What is liquidity?

Answer 1

the concept of liquidity ufes to the availability of cash in the business on how easily the assets can be converted into cash. It is crucial that she business ensures that it has enough cash payments to meet such as payroll, rent when they become due. The lack of cash is referred to as illiquidy and can lead to rapid bankruptcy of a business

Question 2

What is overtrading?

Answer 2

Overtrading occurs when the sales volume of a business grows rapidly but without having long-term funding in place to finance this growth.
the resinen tries to do too much, too quickly and
liquidity can suffer badly as a result.

Question 3

Overtrading key indicators

Answer 3

1) Rapid in sales volumes and turnover
2) Reducing profit margins
3) Increase in trade receivables (debtors) days
4) Increase in trade payables (creditors) days
5) Increase in the level of inventory
6) Increased use of bank overdraft

Question 4

The bank usually provides types of references.
What are they?

Answer 4

1) Unqualified, positive assurance
2) Good for your purpose
3) Should be good for your figures
4) A guarded statement

Question 5

What is over-capitalisation ?

Answer 5

It occurs when a business has too much cash tied up in its current assets, its working capital is too high. This might involve very high lents of inventory, excessive outstanding receivables balances or simply a lot of cash sitting in the bank account
The business will be losing out on investment opportunities as it has excessive funds tied up in inventories and receivables thus the profits made by the business will suffer