Question

Say that you are analyzing the financial records of the business you have been thinking about buying. You discover that, although the firm has excellent current and quick asset ratios by industry standards (current assets are higher than current liabilities), its cash is low, and it hasn’t paid its bills on time. How would this influence your decision? List five steps you would take, including three questions you would ask the owner.

Reference

Harvard Business Review Press. (2018). The Harvard Business Review Entrepreneur’s Handbook : Everything You Need to Launch and Grow Your New Business. Harvard Business Review Press. Retrieved from https://eds-b-ebscohost-com.ezproxy.snhu.edu/eds/ebookviewer/ebook/bmxlYmtfXzIyMjMzOTFfX0FO0?sid=2e7f38c8-8cb4-4f05-85fc-2e065560021d@pdc-v-sessmgr06&vid=3&format=EK&rid=1

Answer 1

Difference between current and quick asset ratios is due to liquidity and its is mentioned already that Cash is low. So with this business there is liquidity crunch and it is not able to pay its short term liabilities. Liquidity is only reason that it hasn't paid its bills on time which again shows that its customers relations are not good.

1. Liquidity crunch so not able to pay short term liablities

2. Study customer buyer agreement to know the penalities clause

3. Customers relations are not good so in future their can be supply issue

4. Liabilities are less then assets which is one positive point

5. Debtor turnover ratio i will ask which is main reason for Cash crunch if debtors are paying on time then there will be liquidity in hand other wise what are penalities for late payers

6. Stock turnover ratio , how quick we convert raw material into sales so that less storage expenses and more cash in hand.