Definition of liquidity problem, Business Management

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An examination of up to three reasons is adequate for maximum marks.

a)  Cash Flow estimate for Cottam Stationers Aug

 

Sep

Oct

Nov

Cash sales

2000

5000

2000

3000

Stock purchases

1000

2500

1000

1500

Rent

0

2000

0

2000

Utilities

500

500

500

500

Other costs

2000

1000

1000

1000

Total outflow

3500

6000

2500

5000

Opening cash balance

5000

3500

2500

2000

Net cash flow

(1500)

(1000)

(500)

(2000)

Closing cash balance

3500

2500

2000

0




 

 

 

 

 

b) Definition of liquidity problem, i.e. the degree to which Cottam Stationers can meet its short term debts. The firm seems to be suffering from deterioration liquidity as seen by the closing balance figures. The net cash flow for the first four months of trading is also negative suggesting the firm has inadequate working capital.


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