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HMRC internal manual

Holding and Movements Alcohol Strategy - Credibility

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HM Revenue & Customs
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Ratio Analysis: What do we mean by Working Capital and Liquidity?

Working Capital is the capital available for conducting the day-to-day operations of abusiness, normally the excess of current assets over current liabilities.

Every business needs adequate liquid resources to maintain day-to-day cash flow. The wordliquid means readily converted to cash and a business’ liquidity is its ability toconvert its assets into cash to meet all the demands for payments when they fall due.Liquid assets are the current assets made up as follows:

  • cash, (the majority);
  • debtors, who are normally expected to pay their bills in the near future; and
  • stock is the least liquid of current assets because it must be sold and the customers are then given a period of credit before they are required to make payment that can be used to pay creditors (cash sales shorten this process).