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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