Liquidity 2 lessons covering liquidity. We will look at:

Slides:



Advertisements
Similar presentations
FINANCE HIGHER BUSINESS MANAGEMENT UNIT 3. IMPORTANCE OF FINANCE Ensures that there are enough funds available to get the resources needed to meet objectives.
Advertisements

Chapter 3.
It is a sheet produced at the end of a financial year stating a summary of a firms assets, liabilities and capital. What is a balance sheet? Assets being.
Ratio Analysis of Accounts. Lesson Objectives for Today: Differentiate between profitability & liquidity ratios. Calculate the main financial Ratios.
The Balance Sheet A2 Business Studies.
1 Understanding a balance sheet. Lesson Objective Understand the main elements of a balance sheet. Understand the difference between assets and liabilities.
Financial Ratios Clicker Quiz. What is this ratio? Market Price Per Share Earnings Per Share A. Inventory Turnover B. Accounts Receivable Turnover C.
1 The Balance Sheet Higher Grade Business Management 2009.
T HE I NTERPRETATION OF FINANCIAL STATEMENTS Profitability, liquidity, efficiency, gearing ratios.
Announcements It’s LSAT week! I take the test on Saturday. If you are sick, stay AWAY from me Most of IA material will be covered this week Summatives.
Monitoring the Business + - x ÷ ÷ x x ÷ : : : : Ratio Analysis C. O' Brien Chanel College.
Interpreting accounts The objective of financial statements is to provide information that is useful to a wide range of users in making economic decisions.
Liquidity 2 lessons covering liquidity. We will look at: a)What is meant by liquidity, measuring and calculating: – Current ratio – Acid test b)Ways to.
Financial Statements and Ratios Look up your stock portfolio at Howthemarketworks.com.
Ratio Analysis…. Types of ratios…  Performance Ratios: Return on capital employed. (Income Statement and Balance Sheet) Gross profit margin (Income Statement)
Using financial data to measure and assess performance.
Ratio analysis  Is a method or process by which the relationship of items or groups of items in the financial statements are computed, and presented.
UNIT 7 Revision. Sources of Finance Source of financeWhat this source of finance is, it’s advantages and disadvantages….. Owner’s funds Retained profits.
Financial Statements – Balance Sheet
Who uses Financial Statement Analysis?
KPPSB THE TEN- DAY MBA TOPIC: ACCOUNTING
Interpreting financial ratios
Managing Finances and Financial Reporting
EC7095 Financial Statement Analysis
Financial Statement Analysis
Understanding a Firm’s Financial Statements
Tutorials week 48 Amsterdam Business School
The Balance Sheet The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial.
Financial Statement Analysis
Unit 2 Financial & Management Accounting
The BALANCE Sheet What happens if we OWE more than we OWN?
Understanding Financial statements
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows
7 Analysing the strategic position of a business
Chapter 2: Balance Sheet
Interpreting financial information
Debtors £16,000 Creditors £28,000 Stocks £22,000 Cash £2,000
FINANCIAL INFORMATION
5.3 Income statements IGCSE Business Studies
Final Accounts At the end of every financial year, all businesses will prepare a set of final accounts These accounts enable the business to assess their.
Statement of Cash Flows
Accounting Fundamentals
Chapter 36 Financing the Business
Unit 6 – Business Finance and Accounting
Chapter 26 – Cambridge Tutorial
1.1 Financial Records BST.
The Balance Sheet.
Entrepreneurship Chapter 12
Chapter 3 Financial Statements
Accounts.
Accounting BBI2O.
FINANCIAL STATEMENT ANALYSIS
Accounting and Financial Information
Measures of Liquidity and Solvency
Chapter 1 The Role of Working Capital
Accounting and Business
Finance - Balance Sheets (Part 1)
Presentation Gb530 Session 1 Review of Accounting.
Introduction to Accounting IM51005B Lecture 4 Recap & Accounting for Limited Companies Dr Sarah Lauwo.
Balance sheet Business Studies.
RATIO ANALYSIS.
Unit 6 – Business Finance and Accounting
CAIIB-FINANCIAL MANAGEMENT MODULE-C – RATIO ANALYSIS RATIO ANALYSIS
Tutorials Amsterdam Business School
Entrepreneurship and Small Business Management
Financial Statements: Basic Concepts and Comprehensive Analysis
FIMO Video Presentation
“Accounting is the Language of Business”
Interpreting Accounts
Business Accounts: the Balance Sheet
Presentation transcript:

Liquidity 2 lessons covering liquidity. We will look at: What is meant by liquidity, measuring and calculating: Current ratio Acid test Ways to improve liquidity Managing working capital Reinforcement of the importance of cash

What is ‘liquidity’? Refers to the ability of a firm to find the cash to pay its bills Shows how vulnerable or resilient a company is to short- term shocks To be ‘liquid’, money needs to be available to be used quickly – either cash in a current account or an asset that can easily be turned into cash to pay bills This availability of cash is compared to the known, upcoming bills to assess ‘liquidity’ This information is found on the ‘balance sheet’ or ‘statement of financial position’

Statement of financial position (Balance Sheet)  Main categories £000 Non-current assets eg buildings 1,500 plus Current assets eg cash 600 minus Current liabilities eg payables 400 Non-current liabilities eg loans 700 Equals Net assets, which is the worth of the business 1,000 All PLCs must publish documents showing financial performance including a ‘statement of financial position’, known as a ‘balance sheet’ This records all the assets and liabilities of a business. Assets = what the firm owns Liabilities = what the firm owes / must pay or pay back Net assets = the value of the company Take Ted Baker and put in this format

Current liabilities = bills which must be paid within 12 months  Main categories £000 Non-current assets eg buildings 1,500 plus Current assets eg cash 600 minus Current liabilities eg payables 400 Non-current liabilities eg loans 700 Equals Net assets, which is the worth of the business 1,000  Current assets £000 Inventories (stocks) 200 Trade and other receivables 250 Cash 150 Total current assets 600  Current liabilities £000 Trade and other payables 250 Short-term loans 150 Total current liabilities 400 Current = ‘short term’ - in the next 12 months Current assets = the finance they have, or expect to have in the next 12 months Inventories = stock ready to be sold (eg clothes in a clothes store – will be turned into cash when sold) Trade receivables = money owed to them by customers who have bought goods but have not yet paid for them (bought on credit) Current liabilities = bills which must be paid within 12 months Trade payables = bills from suppliers (eg. thi business owes £250,000 to its suppliers. This firm must have received goods from their suppliers but did not pay immediately (trade credit). This bill still must be paid. Short-term loans = loans which need to be paid back within the next 12 months

Measuring liquidity – current ratio This business will have to pay out £400,000 over the next 12 months Does it have enough short-term assets (finance) to pay these bills? Compare current assets to current liabilities in a ratio – the ‘current ratio’  Current assets £000 Inventories (stocks) 200 Trade and other receivables 250 Cash 150 Total current assets 600  Current liabilities £000 Trade and other payables 250 Short-term loans 150 Total current liabilities 400 Current Ratio = current assets ÷ current liabilities (expressed as a ratio) In this case 600 : 400, or 1.5 : 1, shortened to ‘1.5’ Accountants believe an ideal ratio is 1.5 Less than this means the firm may not have enough to pay bills and may become bankrupt; higher and the firm may have too many resources not being used Take Ted Baker and put in this format

Measuring liquidity – acid test  Current liabilities £000 Trade and other payables 250 Short-term loans 150 Total current liabilities 400 Another ratio looks more carefully at a firm’s ability to pay bills by excluding inventories inventories may take time to turn into cash may need to reduce prices to sell stock quickly, reducing their value & contribution to paying bills This is the ‘acid test’ ratio  Current assets £000 Inventories (stocks) 200 Trade and other receivables 250 Cash 150 Total current assets 600 Acid test = (current assets – inventories) ÷ current liabilities (expressed as ratio) In this case (600 – 200) ÷ 400 = 400:400 Which is 1:1 or shortened to ‘1’ Ideal ratio is 1 Take Ted Baker and put in this format

Liquidity ratios Current Ratio Current Assets : Current Liabilities Statement of financial position £m Non-current assets 19550 Inventories 2375 Receivables 1170 Cash & cash equivalents 2300 Total current assets 5845 Current liabilities (8160) Net current liabilities (2315) Non-current liabilities (6000) Net assets 11235 Share capital 7000 Reserves & retained earnings 4235 Total equity 11235 Current Ratio Current Assets : Current Liabilities Acid Test Liquid Assets : Current Liabilities Do you think this business has enough short term assets to meet its short term debts? Liquid assets has been calculated as: Receivables + cash & cash equivalents. Explain an alternative way of calculating liquid assets.

Liquidity A business with low liquidity is in danger if short term creditors demand payment quickly e.g. the bank recalls an overdraft Business may seek to improve liquidity: Increase current assets and/or reduce current liabilities Sell assets that aren’t being used i.e. turn them from a non-current assets to a current asset (cash) Switch to long term sources of finance – money doesn’t have to be repaid so quickly Monitor debtors & tighten up on credit given to customers Postpone investment plans What steps could a business take to improve cash flow? What is the relationship between cash flow and liquidity?

Working capital Another measure of liquidity / ability to meet day to day expenses Working capital = current assets – current liabilities On the statement of financial position as ‘net current liabilities’ or ‘net current assets’ Working capital answers the question: If the firm had to pay off all its short term debts could it do so out of its short term resources i.e. inventories, payables and cash If not then it may have to sell non-current assets to pay its debts and the business may cease trading e.g. if a limousine hire business has to sell its limousines it no longer has a business

Practice question Using the extract from SuperGroup Plc’s statement of financial position calculate: Current ratio Acid test Working capital Comment on the liquidity of SuperGroup Plc. http://annualreport2014.supergroup.co.uk/financial-statements/balance-sheets