Liquidity

?
  • Created by: Izzie
  • Created on: 12-05-17 09:44
View mindmap
  • Liquidity
    • Statement of financial position (AKA balance sheet)
      • Balances net assets with total equity
      • Assets= items of value owned by a business
        • Non-current assets are likely to be kept in the business for more than 1 year
          • E.g. vehicles, premises, machinery
        • Current assets are likely to be turned into cash within a year
          • E.g. stock, cash & cash equivalents
        • Shown as positives
      • Liabilities= the money a business owes
        • Non-current liabilities are debts the business has MORE THAN 1 year to repay
          • E.g. bank loans
        • Current liabilities are debts the business has to repay WITHIN 1 year
          • E.g. overdrafts, accounts payable (creditors)
        • Shown as negatives
    • A measure of a firm's short term survival
    • Current Assets/Ratio
      • Stocks assumed to be the most illiquid part as it's hard to turn them into cash quickly
    • Acid test ratio over 1.0 is generally good news
    • Business with low liquidity's in danger if short term creditors demand quick payment
    • Improving Liquidity
      • Aim is to increase current assets &/or reduce current liabilities
      • Sell assets no longer being used e.g. turn from non-current asset to current asset
      • Switch to long term sources of finance
      • Monitor debtors to avoid bad debts (people who are bad at paying debts off)
      • Move cash balances from current account to high interest account so value increases more rapidly
    • Working capital = measure of a firm's liquidity/ability to meet day to day expenses
      • Stated on financial position as net current liabilities / assets
    • Shareholders/owners, suppliers & investors need to know about the businesses liquidity

Comments

No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all Financial Planning resources »