liquidity

• statement of financial position (balance sheet)

  • helps understand the financial health of a business
  • shows a business liabilities, assets and equity
• liquidity?

  ability of a business to turn its assets into cash
• assets?

  • anything of value a business owns that can be turned to cash
  • examples: property, land
• liabilities?

  • financial debts that a business owes
  • examples: rent, wages, taxes
• creditor?

  a business who provides supplies/ services and doesnt demand instant payment
• non current assets

  long term assets which are not expected to be sold within the next year
• current assets

  short term assets that will be sold within the next year
• non current liabilities?

  debts which are not expected to be paid off within the next year
• current liabilities

  debts which are expected to be sold within the next year
• equity?

  • represents the shareholders stake in the business
  • the money returned to investors
• net assets formula

  total assets - total liabilities
• equity formula

  total assets - total liabilities
• current ratio formula

  current assets / current liabilities
• acid test ratio

  (current assets - inventory) / current liabilities
• ways to improve cash position of a business

  • reduce inventory
  • sell fixed assets
  • use overdraft
  • demand cash payments from customers
  • pay suppliers on credit terms
• causes of cash flow problems

  • low profits
  • excess inventory held
  • overtrading
  • seasonal demand
• working capital?

  the funds that a business has in order to meet day to day expenses
• working capital formula

  current assets - current liabilities
• factors influencing working capital

  • amount of stock
  • production lead time
  • credit
  • poor cash flow forecasting
  • unforeseen events