Liquidity is a business's ability to pay its short-term debts when they fall due. A business with plenty of cash, or assets easily turned into cash, is liquid.

What is the difference between cash and profit?

Cash is the money a business holds at a given moment. Profit is the surplus of revenue over costs across a period of time.

How can a profitable business run out of cash?

A business may sell on credit and wait months to be paid while paying its own bills now. Profit on paper can then leave too little cash to cover debts.

How can a business have plenty of cash but still make a loss?

The cash may come from a loan, the owners' capital or the sale of assets rather than from trading. Costs can still be greater than revenue.

OCR GCSE Business J204

Business Activity

Topic overview Enterprise and entrepreneurship Business planning and the business plan Sole traders, partnerships and limited companies Business aims and objectives Internal and external stakeholders Organic and external growth How business functions depend on each other

Marketing

Topic overview The purpose of marketing Primary and secondary market research Market segmentation Product design and the product life cycle Pricing methods Point of sale promotion and advertising Place and the marketing mix

People

Topic overview The role of human resources Organisational structures and ways of working Communication in business Recruitment and selection Employee motivation and retention Training and staff development Employment law

Operations

Topic overview Production processes Quality of goods and services The sales process and customer service Consumer law Business location Procurement and choosing suppliers Logistics and supply chains

Finance

Topic overview The role of the finance function Sources of finance Revenue, costs, profit and loss Break-even Cash, liquidity and profit Cash flow forecasts

Influences on Business

Topic overview Ethical and environmental considerations The economic climate Globalisation and multinational companies International branding and competition

Finance

Cash, liquidity and profit

3 things to know
Component 02

Overview

Why cash and liquidity matter, the difference between cash and profit, how selling on credit or overstocking drains cash, and how a business improves its cash position.

What you need to know

Answer each one before you reveal it.

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Key term

Why is cash important to a business?

Key term

Define liquidity.

Key term

What can happen to a business that lacks liquidity?

Questions from this subtopic

Each one with the model answer underneath.

1
Why is cash important to a business?
Model answer
Cash pays wages, suppliers, rent and other bills as they fall due. A business that runs out of cash cannot trade, even if it is profitable.
2
Define liquidity.
Model answer
Liquidity is a business's ability to pay its short-term debts when they fall due. A business with plenty of cash, or assets easily turned into cash, is liquid.
3
What can happen to a business that lacks liquidity?
Model answer
Suppliers may stop delivering and staff may go unpaid. Creditors can take legal action, and the business may be forced to close.
4
What is the difference between cash and profit?
Model answer
Cash is the money a business holds at a given moment. Profit is the surplus of revenue over costs across a period of time.
5
How can a profitable business run out of cash?
Model answer
A business may sell on credit and wait months to be paid while paying its own bills now. Profit on paper can then leave too little cash to cover debts.
6
How can a business have plenty of cash but still make a loss?
Model answer
The cash may come from a loan, the owners' capital or the sale of assets rather than from trading. Costs can still be greater than revenue.

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Business Activity

Marketing

People

Operations

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Customers may receive quality.

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AOwners may gain from higher profit.

BEmployees may lose jobs or face lower pay.

CCustomers may receive poorer quality.

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Assemble a full-mark answer from its marking points, in the order an examiner wants them.

Aim means a broad long-term goal of a business.

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