Working Capital and Improving Liquidity (Edexcel A-Level Business): Flashcards
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Working capital formula
Working capital formula
Current assets - Current liabilities
Current ratio formula
Current ratio formula
Current assets / Current liabilities
Ideal current ratio range
Ideal current ratio range
Between 1.5:1 and 2:1
Acid test ratio formula
Acid test ratio formula
(Current assets - Inventories) / Current liabilities
Why exclude inventories from acid test ratio?
Why exclude inventories from acid test ratio?
Stock can't be sold quickly/may be obsolete/can't pay bills
% of business failures from poor cash flow/working capital
% of business failures from poor cash flow/working capital
21%
Does profitability guarantee survival?
Does profitability guarantee survival?
No - cash flow does, not profitability
What is shrinkage?
What is shrinkage?
Theft, usually by employees
Sale and leaseback definition
Sale and leaseback definition
Sell assets then lease back for cash whilst retaining use
When might negative working capital occur?
When might negative working capital occur?
Supermarkets - sell stock fast for cash before paying suppliers