liquidity
IMPROVING LIQUIDITY
raise more shared capital
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
shows what the business owes and where it got its money from
does firm have enough money to pay its bills = tests its liquidity
LIQUIDITY= ability of a business to find cash needed in order to pay its bills
MEASURING LIQUIDITY
important section on balance sheet = current assets and current liabilities
compare these two = measures
current assets = items business owns that are in the for of cash or can easily be turned into cash without major loss
money owed by customers (receivables/debtors)
stock
cash
current liabilities = debts owed by business that are due to be paid within next 12 motnhs
trade creditors
over drafts
CALCULATING CURRENT RATIO
allows simple judgment to be made about firms liquidity
current assets/current liabilities
ideal current ration = 1.5:1 = £1.50 of current assets for each £1 of short term debt
CALCULATING ACID TEST RATIO
(total current assets-inventories)/current liabilities
ideal acid test = 1:1 = firm has £! of cash/money owed by a customers for every £1 of short term debt
postpone planned investments
selling under used fixed assets eg machinery
increase LT borrowing through loans
fixed asset = items owned by business which it intents to use over and over to generate profit
MANAGING WORKING CAPITAL
money available for day to day running of business
cycle = business buys, produces and sells
involves ensuring there is enough money in system altogether and making sure cash moves through cycle as quickly as possible
meet these two then:
control cash used = keep amount used as low as possible by reducing stock levels, control credit periods, gain as much credit as possible
miminse spending on fixed assets = lease rather than buying new = prevent large outflows = won't drain working capital
plan ahead = estimate amount of cash needed for next few months = ensure adjustments to cycle can be made in good tikme