BUSINESS - 2.3.2 - LIQUIDITY

define assets

resources owned by the business

cash,machinery , premises

define liabilities

debts owed by the business

loans, supplier credit , taxes

define capital

money put into the business by owners

share purchase

what is a statement of financial position

document detailing the assets and liabilities of a business

used by shareholders,lenders and supplier to asses a business

assets are equal to

liabilities + equities

whats a non current asset

the long term assets of a business not expected to be sold within a year

property, machinery

what are current assets

short term assets of a business likely to be turned into cash within the next year

stock, trade credit , cash

what are non current liabilities

debts not expected to be paid off within a year

mortages , money set aside for expenses in future

what are current liabilities

debts expected to be paid within a year of trading

how are net assets calculated

total assets - total liabilities

assets and liabilities should be balanced so net assets = equity

whats equity

equity represents shareholders stake in a business

total assets - total liabilities

what is liquidity

the ability of a business to turn its assets into cash to pay its current liabilities

accounting liquidity measure the ability of a firm to pay off their debts as they arise

what are some highly liquid, and less liquid assets

most liquid: money in the bank , cash

less liquid: property , machinery , vehicles

how is liquidity measured

current ratio and the acid test

what is the current ratio + what does it tell us

current ratio = current assets / current liabilities

shows for every £ of liability a business has how many £ of current assets are their to pay it

how does the acid test ratio differ + what does it tell us

ACR = current assets - invetories (stock) / current liabilities

stock in not considered as a liquid source as their is no guarantee stock will be sold

what do different current ratios tell us

if the result is 1.5:1 - 2:1 then the business has plenty of capital to meet its day to day bills

above 2:1 then too much mony is tied up in assets

what are some limitstions of statements of financial position

• value of assets may not be the same as what they can be sold for

• only a static snapshot of one period, dopesnt account for any changes

what are some uses of statements of financial position

• asseses liquidity

• evauluates the peformance/health of a business

• useful to present to investors

what are some strategies to improve the cash position of a business

• sale and leaseback of assets

• increase productivity

• get longer credit periods from suppliers

• limit sales made on credit

what are some of the main causes of cash flow problems

• too much sales on credit

• high overheads

• too much capital tied up in stock

• over investments in capacity ( investments resulting in the business having a productive capacity above the demand for their goods)

what is the formula for working cpaital

current assets - current liabilities

what is working capital

the accessible funss for day to day business operations

shows the financial health of a business and its ability to meet its short term liabilites

what does the amount of working capital a business has tell us

positive or high WC = business had funds to cover short term debts and day to day operational expenses

low WC indicates business has an issue paying its expenses

what are some factors influencing a businesses working capital

• amount of stock held

• production lead time (time to produce +deliver)

• credit - how much from supplier and given to customers

• lean production (not having unneccesary stock/cost)