Liquidity

Liquidity

The ease and cost with which assets can be turned into cash and used immediately as a means of exchange.

Statement of financial position (balance sheet)

A formal financial document that summarizes the net worth of a business at a given point in time. It balances net assets with total equity.

Assets

All things that could be of benefit to the organization and can be given a monetary value.

Liabilities

All debts that must be repaid at some point in the future.

Net assets/worth

The total equity of a business, which is equal to the difference between assets and liabilities.

Current liabilities

Debts that the business may have to repay within one year.

Non-current (fixed) assets

Assets likely to be kept by the business for more than one year.

Non-current liabilities

Debts that the business has more than one year to repay.

Current ratio

The ratio of current assets to current liabilities, indicating whether the business can pay debts due within one year out of the current assets.

Acid test ratio

The ratio of liquid assets (current assets minus stocks) to current liabilities, adjusting the current ratio to remove the value of stocks from the current assets total.

Suppliers

Individuals or organizations that provide goods or services to a business and may want to assess the health of the business before agreeing to trade credit.

Investors

Individuals or organizations that lend money or buy shares in a business and may want to see how healthy the business is before making an investment.

Working capital

The difference between current assets and current liabilities, representing the amount of cash available to cover short-term debts.

Insufficient liquidity

When there is not enough working capital, which can lead to difficulties in paying short-term debts.

Bank loans

Borrowed money from a bank that must be repaid with interest over a specified period of time.

Overdrafts

A short-term borrowing facility provided by a bank, allowing a business to withdraw more money than is available in its account.

Accounts payable (creditors)

The money that a business owes to its suppliers or creditors.

Accounts receivable (debtors)

The money that is owed to a business by its customers or debtors.

Inventory (stock)

The goods or materials that a business holds for sale or use in its operations.

Net assets/worth = total equity

The equation that shows the relationship between net assets (total assets minus total liabilities) and total equity.