liquidity

Question 1

liquidity

Answer 1

The ability of a business to find the cash to pay its bills

Question 2

Causes of cash flow problems

Answer 2

-Low profits or losses
-Excess inventory held
-Too much production capacity
-Overtrading

Question 3

Current ratio

Answer 3

Current assets/current liabilities

> 1.5:5 is ideal
Below 1 means business cant cover liabiliteis (inslovent), suppliers are unhappy if business pay late unless the business has very high power
High ratio- too much working capital, Inefficient use of capital

Question 4

Acid test ratio

Answer 4

Current assets-inventory/current liabilities

> 1:1 is perfect
Significantly less than 1 is bad, some businesses happy with this if they have high stock turn over e.g supermarket

Question 5

How to improve liquidity

Answer 5

-Good cash flow management
-Optimise working capital
-Use alternative funding
-Manage expenses