This document discusses liquidity ratios and how they can be used to assess the performance of a business. It provides information on what liquidity is, why it is important for businesses to be liquid, and defines two key liquidity ratios: the current ratio and acid test ratio. Formulas for calculating each ratio are given. Businesses are instructed to calculate these ratios for a company called Evergreen to analyze its liquidity and performance, determine if the results are good or bad, compare them to industry averages, and suggest ways to improve any issues.

1. UNIT 2
BUSINESS PERFORMANCE

2. What is required?
P4 –
Explain the performance of a selected business as
illustrated by the use of key financial ratios
M3 –
Analyse the reasons for the performance of a selected
business as illustrated by the use of key financial ratios
D2 –
Evaluate the significance of selected ratios in identifying
serious problems of business performance.

3. Ratios – An Introduction
1. PROFITABILITY 
How effective a business is at generating profits
2. LIQUIDITY
Whether a business can pay its way – meet its short-term debt

4. LIQUIDITY
What is it?
• Assesses whether a business can pay its way
• Pay its bills
• Meet its short-term debt
• All businesses want to be LIQUID (able to pay their short term
debt)
• Why?

5. Why is it necessary for a business to be liquid?
• A business needs to be liquid to ensure its long-term
survival. A business will struggle to survive with poor cash
flow.
• A business needs a positive cash flow in order to meet its
everyday commitments, i.e. in order to pay wages and
creditors.
• If a business is not liquid then they may face
LIQUIDATION and then BANKRUPTCY

6. LIQUIDITY RATIOS
• Current Ratio
• Shows every £1 of
current assets available
to meet the current
liabilities
• Formula
Current Assets
Current Liabilities
Green Planet
53307
16112
= 3.31 : 1
Good?
Bad?
How to improve?

7. LIQUIDITY RATIOS
• Acid Test Ratio
• Shows every £1 of
current assets available
to meet the current
liabilities (not including
stock)
• Formula
Current Assets - stock
Current Liabilities
Green Planet
(53307-8000) = 45307
16112
= 2.81 :1
Good?
Bad?
How to improve?

8. Task - Evergreen
Continue with your presentation including notes
1. Describe the performance of Evergreen using
LIQUIDITY ratios
a) Current Ratio
b) Acid Test Ratio
2. SHOW THE FORMULA
3. SHOW YOUR ANSWER
4. Are the results good or bad?
5. Why?
6. Can you compare with industry average?
7. Suggest ways in which any concerns could be
rectified/improved?