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BTEC National Diploma in Business

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Introduction

BTEC National Diploma in Business Finance, cash flow and insolvency Assessment 4: Insolvency and Bankruptcy Scenario 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. Task 1 I am examining White accounts and found the following figures: - Stock - The amount of current materials the business has - �3,800. - Debtors - People who owe money to the business - �3,000. - Creditors - A business or a person that the firm owes money to - �1,800. - Overdraft - A banking facility that allows you to draw out more money than there is in your account, in return for a fee plus interest charges - �2,640. - Cash - �300.00 - The current amount of money that the business has. Working capital position 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. ...read more.

Middle

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. Current ratio = current assets current liabilities Acid-test ratio = current assets - stock current liabilities The current ratio also known as the working capital cycle for White's accounts adds up to a total of 1.5 and the Acid-test ratio adds up to 0.7. 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. ...read more.

Conclusion

Whereas, the Acid-test ratio shows a negative figure and as I explained above this means that the business is holding too much stock and it can be reduced, since the business doesn't need it at the current moment. Furthermore, the money that is left can be used to pay creditors, business loans and overdrafts. These ratios determine whether the business is successful in terms of effective cash management and meeting with its day to day expenses. Also, the business is receiving �3,000 from their debtors. This is quite a large amount of capital that the business will get and it can ease the flow of managing cash. The business has to pay creditors �1,800, this figure is quite reasonable because the business already has that amount of money available to cover for and it is not greater than what their debtors are going to pay the business. Nevertheless, this doesn't mean that the value of creditors can't grow but it gives a clear view of how much money the business expects to pay creditors if they carry on monitoring their inflows and outflows. In terms of paying for overdrafts and bank loans, the interest can grow on it if the business isn't continually paying the specified amount each month. This all comes down to creating yearly ratios, so as to determine whether the business is keeping track of effectively observing how much assets they have and covering their short term and long term liabilities as well as monitoring business performance. ?? ?? ?? ?? Summiya Begum Teacher: Miss Landers 1 ...read more.

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