Business Capital

Business Capital Liquidity Measures

  • This analyses whether the business owner can pay his/her bills as they fall due. The cash flow position of the business will require close scrutiny.
  • This information is found in the Statement of Financial Position/Balance Sheet. For example, current assets – short term assets ie. cash, stocks, trade debtors etc. , figures can be compared with short term liabilities, trade creditors, overdrafts.


  • This occurs when a business expands to quickly without having the necessary finances to finance the expansion. It can occur even when a business is in a profitable position. There is a shortfall of working capital and cash.
  • By their very nature, retail businesses experience this problem as they may expand too fast. There is significant capital investments in their operations before any sales revenue is generated. Sales are generated on a credit basis and their trade customers pay their debts at a late stage.
  • Overtrading can be avoided through maintaining stock levels at an optimum level, leasing instead of investing in capital equipment and ensuring prompt payments from their customers.

Measures to appraise the efficient use of Capital

financial ratios
ProfitabilityStability MeasuresLiquidity
Gross Profit/Sales Revenue X 100% = Margin%

Operating Profit/Sales Revenue X 100%

Net Profit/ Sales Revenue X 100% = Margin (%)

Sales Revenue/Total Assets = Turnover

Net Profit/Total Assets x100 = Return on Investment %

Net Profit After Interest & Taxes/ Owner’s Capital = Return to the Owners %

Operating Profit/Capital
Employed X 100% (ROCE)

Long Term Debt/Owners
Capital = Debt/Equity Ratio

Profit before Interest and Taxes/ Annual Interest Payments = Times Interest Covered

Working Capital: Current Assets/Current Liabilities = Current Ratio/ Liquidity Ratio

Current Assets less Inventory/Current Liabilities = Acid Test/ Quick Ratio

Accounts Receivable /Credit Sales x 365 = Collection Period

Cost of Sales/ Average of Opening and Closing Stock/Inventory = Stock Turnover

Cash Flow = The pattern of cash flowing through a business
Efficient use of capital – ratios – Business Organisation – John J Teeling

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