Please enable JavaScript.
Coggle requires JavaScript to display documents.
LIQUIDITY - Coggle Diagram
LIQUIDITY
Current Ratio
- current assets / current liabilities
Movement of cash at bank a/c - is more money coming in than money going?
Link: Sales for Cash vs Sales for Credit
Paying Accounts Payable on time? Balance increasing? Meaning the business is not paying their suppliers on time
(ISSUE)
Accounts Receivable balance increasing? Link to turnover of accounts receivable and turnover of inventories
Compare to industry average - may be normal for the industry
If a business cannot meet its' short term obligations - may need cash injection or financing (which is costly)
Increased or decreased from the prior year? What has caused this? What links can you find to other elements in the statements?
Bank overdraft or high liabilities means wastage of company resources (paying interest costs to maintain a bank overdraft or late fees on accounts payable)
ISSUE
Quick Ratio
= Cash + Receivable / Current Liabilities
Similar to the current ratio but excludes inventory and prepayments
Very short term - is the business able to meet its financial obligations for payments?
Link to profitability - if sales have decreased or expenses have increased there will be an impact to liquidity
Increased or decreased from the prior year? What has caused this? What links can you find to other elements in the statements?
Turnover of Accounts Receivable
- how long it takes for credit customers to pay
convert to number of days = 365/result
Turnover in days should match the credit terms offered by the business ie 30 day credit terms should equate to a 30 day turnover (on average).
REC -
Management could review the aging report of accounts receivable and implement specific policies to chase up outstanding debts (offering discounts for quick payment). Review process of who they offer credit to in the first place or implement policies to encourage cash sales.
If customers take too long to pay their outstanding amount then the business liquidity suffers - they do not have cash to pay their suppliers or bills. Accounts Payable balance will increase.
(ISSUE)
Turnover of Inventories
- how long to sell products on average?
Other businesses are able to sell their products faster?. Indicating that they have superior products or the right type of products that appeals to customers
. (ISSUE)
A low inventory turnover could also be due to inefficient stock ordering systems, wastage, quality issues or supplier problems. All of which will negatively affect the profitability of the business as well as causing cash flow to slow.
(ISSUE)
Stock ordering - ordering too much will make this ratio worse. The business's cash is tied up in inventory and they cannot use it for other activities to grow the business.
(ISSUE)
Paying too much for goods will worsen the ratio. Supplier changed? COGS higher?
convert to number of days = 365/result
REC
- reviewing ordering (JIT system or FIFO) - stock management based on forecasted sales or seasonal trends required knowledgeable staff