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2.3.2 Liquidity - Coggle Diagram
2.3.2 Liquidity
Liquidity
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Cash is very liquid, non-current assets such as factories are not liquid, inventory and debtors (receivables) are in between.
When a business doesn't have enough current assets to pay its liabilities when they are due is called insolvent.
Can be improved by decreasing stock levels, speeding up collection of debts (debt factoring).
Current ratio
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A value much higher than 2 suggest that the firm has more current assets than it really needs. The more money tied up in these assets could be reinvested in the business to make more profit. This could put of potentuial investors as it suggests the business isnt focused on maximising profit.
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Liabilities
Current liabilities
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e.g. Overdrafts, taxes, payables (money owed to creditors), dividends due to be paid to shareholders.
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Acid test ratio
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Inventory takes a long time to sell or might not sell at all. By removing it from current assets the acid test ratio gives a more accurate measure of the ability of a firm to pay its current liabilities.
Working capital
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the cash and assets that can easily been turn into cash, that the business has available to pay its day to day debts.
Assets
Non-current assets
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e.g. property, land, production equipment, computers.
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Current assets
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e.g. receivables which is money owned to the business, and inventory (stock).
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