The Liquidity Rock

THE LIQUIDITY ROCK

(Sung to the tune of Hokey Pokey)

You put the current assets in

That’s the cash, debtors and stock.

You put the current debts in

Then you do the liquidity rock.

You press the answer button

And you hope for two to one,

That’s what liquidity’s all about.

Hey, do the liquidity bash

It’s known as the working capital ratio

Hey, it measures ready cash

And that’s what it’s all about.

YOU RAISE ME UP

You raise me up so I can beat competitors

You raise me up as high as I can be

And when I count, I find that there are three of us

We’re called the profitability family.

The first is called the Gross Profit Ratio

It’s found by placing gross profit over sales

You then just multiply it by one hundred

If it’s too low, the business in question fails.

The next is called the Net Profit Ratio

It’s done by dividing Net Profit by the sales

Firms try to stop it going down and getting low

‘cos if it does, the business is off the rails.

The last’s return the owner gets on equity

Sometimes called simply ROE

It comes from NP divided by the equity

And helps decide to invest in B or C

EFFICIENCY, THE RED-NOSED RATIO

(Sung to the tune of Rudolph , the red-nosed reindeer)

Efficiency is a ratio family

It contains two ratios, you see

One is expenses over sales

‘cos every sale has a fee.

The goal is to keep the sales up high

But keep all the expenses low,

This means the inputs stay low

But outputs nearly hit the sky.

Then there’s the Accounts Receivable Turnover ,

how fast the debts are paid;

The customers should always pay on time

And if they do the bells will chime

The sales are divided by the debtor amount

It really isn’t hard you see

You then divide into 365,

And hope for about thirty.

HAPPY SOLVENCY

(Sung to the tune of Happy Birthday)

Happy solvency to me

Total debt on equity

Then multiply by one hundred

And you hope for sixty.

Happy solvency to me

You’re in good company

When you’re equal to competitors

And your gearing’s sixty.

If the gearing’s too low

A bigger loan is the go.

The bank will be happy

And the business will grow.

If the gearing’s too high,

And interest rates hit the sky,

Stakeholders won’t be happy

As insolvency is nigh.

Little Balance Sheets

(Sung to the tune of Little Boxes)

In a Balance Sheet there are assets

And these are what a business owns

They are current and non-current

And they sit there all alone.

On the other side are liabilities

And these are what the business owes

And they’re current and non-current

Like the assets, just the same.

And then there’s OE

And it shows up all the things that the owners own

And it’s added to liabilities

So both sides are just the same.

How much is the business’s Net Profit?

(Sung to the tune of How much is that doggy in the window?)

Let’s start with the revenue from sales

Then take away Cost of Goods Sold

The answer is called the Gross Profit

But that’s not all there is, so I’m told.

You must then subtract the expenses

Like wages, the phone and the rent

‘cos businesses spend a lot of money

They need to see where the Gross Profit went.

The expenses are added together

A calculator makes it a whiz

And that’s a better sign for a business

As it can see what its Net Profit is.

FOR COGS IS A JOLLY GOOD FELLOW

(Sung to the tune of For he’s a jolly Good Fellow)

Let’s start with the stock that you start with

And add any purchases made,

Then take off the stock that you’re left with

And the answer is Cost of Goods Sold

The answer is Cost of Goods Sold

The answer is Cost of Goods Sold

Let’s start with the Opening Stock

And add any purchases made

Then you subtract the Closing Stock

And the answer is called the COGS .