BTEC National Diploma in Business
These tasks continue with me working as an advisor for the business enterprise advice centre, Poplargate Business Venture. I have a customer who has set up a small business in the area, selling products only to other businesses. She is having difficulties with her business and can often find it hard to pay her bills on time. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying.
In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. The working capital position for White’s accounts show a clear positive management of money going out of the business and money coming in. The above figures shows that the business has a reasonable amount of money going out, and the total current assets are greater than the outflows of the business. Therefore, this shows a positive summary of White’s accounts. The business has a total profit of i?? 2,660.
This shows good management of working capital as well as good cash management, and it means that they can be able to invest, attract investment, pay for its expenses, improve their operations and as a result of these things, make a profit. Solvency When a business is considered as solvent, it means that the business has the ability to pay for legal debts. Each of the figures above defines that the business is solvent. For example, the value of the total current assets is greater than the liabilities, which means that the business has enough money left over to meet its short term debts as well as long term debts when they are due for payment.
Also, there can be improvements made to the business in order to meet with its legal payments more effectively, such as, reducing the necessity of taking out an overdraft or business loan so that the business will have less liabilities and outflows to worry about. This all comes down to good management of working capital as I explained above, this is very essential in meeting with the business aims and objectives. Current assets – Things that a business owns, that can be turned into cash in the short term, such as stock or debtors.
Current assets are very important in a business, and the more assets a business has, the more it can meet with its debts and liabilities. Current liabilities – Things that the business owes in the short term, such as goods bought and not paid for, or loans borrowed that must be paid for. Current liabilities are things that businesses should avoid because it means that the business is more in risk of being in debt if the business cannot pay its loans. Current ratio – Current assets divided by current liabilities, this shows how many assets a business has compared to liabilities.
Determining the current ratio is very important for businesses as it shows whether the business can pay for its liabilities easily, or not. Acid-test ratio – Current assets minus stock, divided by current liabilities, this ratio shows how well a business can meet its liabilities without having to sell stock. Acid-test ratios give an overview of what the value would be like if a business took out the stock figure away from the current assets. This is for the purpose of meeting with its liabilities without having to sell stock.
Ratios such as the current and Acid-test ratios allow businesses and potential investors to see how well they are able to meet their liabilities. From looking at White’s current ratio, I can see that the business is sure that it can pay its liabilities easily because it has a current ratio of 1. 5. This figure is a positive result for the business because it means that it can easily pay its liabilities, without being in business debt. Moreover, the figure for the Acid-test ratio shows a negative figure – 0.
7, because it is below 1, which shows that the business has fewer liquid assets and this could cause problems. Since, the figure is negative, it shows that the business may be insolvent and there is a risk that business may be in debt later on, if this figure doesn’t change. White’s ratios shows that it has a healthy current ratio but a poor Acid-test ratio and this suggests that it is holding too much stock, and this could be prevented by reducing the amount of stock that is being bought – so the business has enough cash available to pay its creditors.
As a result of calculating the ratios, it can give a prediction of the business’s future problems of managing their liabilities as well as reviewing business performance and therefore it can be changed in order to turn the figure into a positive ratio. Seeing as the result of the Acid-test ratio is negative, the business can think ahead of ways of obtaining finance in order to reduce the impact of the business being in debt, such as taking out a short term loan or increasing an overdraft to pay creditors.
In general, ratios are usually compared year by year between companies in the same industry because it shows whether there are any trends occurring that are similar as their competitors. For example, if the ratios for White’s accounts are negative and their competitors have a positive ratio than the business has to act quickly and identify the problems that they are having with their business, in order to make the figures positive, so there is enough capital available to pay its debts.