2.3.2 Liquidity & 2.3.3 Business failure GapFill

WORKING CAPITAL

Working capital is vital for the day-to-day  running lead operate race  of a business.  It will be used by a business to pay its    users friends bankssuppliers .  The two main ways to improve working capital management in a business are to speed up payment by customers and slow down payment to suppliers. 

  An individual A customer An investor A man looking to finance a business would want to know how well it manages its working capital and they can use some ratio analysis to check the figures.

To measure liquidity, an investor would look at the Statement of   ComprehensiveFinancial Money Income  Position (SFP), which used to be called the balance sheet.  This is a snapshot of how much the business owns and  owes wants uses likes . 

RATIOS

The two main ratios are:

  New Aged Old Current  Ratio: Current Assets (CA) divided by Current Liabilities (CL) 

This ratio is expressed to 1; for example, 2.9:1.   This means that for every £1 of debts the business has, it also has £2.90 of assets that it can quickly turn into cash.   The ideal ratio is 1.5:1; lower than this and there is not enough cash to pay bills, higher than this and there is too much cash tied up in   slack stack slickstock .

  Carboxylic Acid Nitric  Sulfuric  Test Ratio: Current Assets (CA) minus stock divided by Current Liabilities (CL) 

This is also known as the  quick fast sluggish rapid  ratio and is a harsher test of liquidity because a business cannot guarantee to sell all of the stock.  Stock can also spoil, become obsolete or just go out of fashion.  If a business has an acid test ratio of less than 1:1 then its current assets (minus stocks) do not cover its current liabilities. This could mean a problem for the business.  Some retailers with strong cash flow and fast-moving stocks may have an acid test of 0.4:1 and be fine; it just depends on the   industrial industry needs area .