Working Capital: is the cash that we have available in order to pay for the day to day running cost.
Assets: the things that our business owns (e.g., physical resources)
Receivables: value of products sold but not yet paid for. Money that the business is owed.
Payables: money owed by the business (e.g., to a supplier)
Creditors: somebody that we owe money to
Debtors: somebody that owes the business money
Dividends: the amount of profit we pay to shareholders, as a reward for investing in our company
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Liquidity
Liquidity of an asset is how easy it is to turn into cash and spend it
An asset is turned into cash by selling it
The more liquid the assets, the better the firm will be at paying bills as they can use assets as sources of capital (money)
Helps decide how much credit to offer
This is why businesses need to factor in depreciation - it gives a true reflection of how much capital the business will receive if we sell the asset today
Suppliers are particularly interested in working capital and liquidity
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Balance Sheets
show the short-term financial status of a company (how much the business is worth)
by comparing balance sheets, you can see long-term trends
identify strengths and weaknesses
Gives investors and suppliers an idea of how stable the company is financially
help the business set financial targets it wants to achieve in the future
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What's on a Balance Sheet?
the value of net current assets includes depreciation - it's what they are worth now, not when you bought them
inventories: things the business has spent money on but not yet sold
receivables: value ofproducts sold but not yet paid for. Money the business is owed.
payable: money owed by the business (e.g., to the supplier)
dividendsnot yet paid to shareholders
Net Current Assets: this is the working capital available to the business to pay for day to day spending
Share Capital: that comes from the issue of shares
Reserves: money put aside by the business for a specific purpose
net assets & total equity figures should always balance
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Depreciation
A reduction in the value of an asset over time, due in particular to wear and tear.
Building depreciation into each year's accounts avoids the fall in value hitting all at once when the business sells the asset.
Spreading the cost out over several years is a truer reflection of the situation and allows the business to make comparisons between financial years more easily.
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