liquidity

• non-current assets

  long-term resources that will be used repeatedly by the business over a period of time

  (land, property, plant, equipments, etc)
• current assets

  assets that will be changed into cash within 12 months - liquid assets

  (inventories, trade, cash etc)
• current liabilities

  any money owned by a business that must be repaid within one year

  (loans, trade, current tax, etc)
• non-current liabilities

  relate to long-term loans and any other money owed by the business that does not have to be repaid for at least 1 years

  (long-term bank loans, mortgages etc)
• net assets

  total assets - total liabilities

  (equal to shareholder’s equity)
• shareholders equity

  provides a summary of what is owed to the owners of the business

  (share capital, retained profit)
• current ratio

  liquidity ratio that focuses on the current assets and current liabilities of a business
• current ratio equation

  current assets/current liabilities

  ideal current ratio = 2:1
• acid test ratio

  similar to current ratio but excludes stocks from current assets - a more severe test of liquidity
• acid test ratio equation

  current assets - inventories/current liabilities

  
  

  ideal acid test ratio = 1.10:1
• working capital

  the amount of money needed to pay day-to-day trading of a business

  (pay expenses: wages, electricity etc)
• working capital equation

  current assets - current liabilities
• ways to improve liquidity

  • use of overdraft facilities
  • negotiate additional short/long-term loans
  • encourage cash sales and sell off stocks
  • sales and leaseback
  • only make essential purchases
  • extend credit with selected suppliers
  • reduce personal drawings from the business
  • introduce fresh capital