2.3.2 - Liquidity

• the headings on a balance sheet are non-current assets, current assets, current liabilities, non-current liabilities and net assets
• current assets are assets that will be changed into cash within 12 months for example inventories, cash, trade and other receivables
• current liabilities are money that is owed by a business that must be repaid within 1 year for example borrowings, current tax liabilities, trade and other payables
• liquidity is the ease with which assets can be converted into cash
• current ratio = current assets / current liabilities
• acid test ratio = current assets - inventories / current liabilities
• working capital = current assets - current liabilities
• working capital and cash are very important for a business as they are the most liquid assets. This means that they are able to be used quickly for things such as investments, smooth operations and cushions against seasonal fluctuations
• ways of improving the cash a business has is selling stock, using overdrafts, negotiating short or long-term loans and only making essential purchases
• issues with having too much working capital is stocks are costly to keep and cash is unlikely to earn very high rates of interest