Syllabus: Pearson Edexcel AS Business
Module: Managing Finance
Lesson: 2.3.2 Liquidity

Introduction

Liquidity is a critical concept in financial management, forming a core part of Pearson Edexcel’s AS Business Theme 2: Managing Business Activities. Specifically aligned with topic 2.3.2 Liquidity, this lesson helps students understand how businesses ensure they have enough cash to meet short-term obligations – a real-world issue faced by enterprises of all sizes.

This article offers curriculum-aligned support for teachers, SLT, careers leads, and headteachers. It provides practical teaching insights, live business links, and guidance on assessment demands – giving confidence that your lesson delivery is rigorous, relevant, and effective.

Key Concepts

From the Pearson Edexcel specification for AS Business Theme 2 (2.3.2 Liquidity), students are required to understand:

• The difference between cash and profit

• Interpretation of a statement of financial position (balance sheet)

• Calculation and interpretation of current ratio and acid test ratio

• The importance of managing working capital to maintain liquidity

• Strategies for improving liquidity (e.g. reducing credit periods, stock control, and delaying payments)

Teachers should ensure students can not only perform calculations, but also interpret what liquidity ratios say about a business’s financial health – and use them to make decisions.

Real-World Relevance

Liquidity issues are a top reason why businesses fail, especially SMEs. In 2023, Wilko – a high street staple – entered administration citing cash flow problems, despite having valuable stock and brand equity. Their inability to pay suppliers on time reflected poor liquidity management, not necessarily a lack of profit.

On the flip side, companies like Tesco actively manage their liquidity through strong supplier relationships and efficient stock rotation. Their balance sheet management is a case study in leveraging working capital to maintain operational flexibility.

These examples show students how liquidity isn’t just about ratios – it’s about the day-to-day survival of businesses in competitive markets.

How It’s Assessed

In the AS Paper 2 exam (Pearson Edexcel), liquidity is assessed through both calculation and analysis. Common question types include:

• Calculation questions using financial data to determine current or acid test ratios

• Data response questions interpreting a statement of financial position

• Application and analysis: students may be asked how a firm should respond to liquidity concerns, or to evaluate the implications of certain working capital strategies

Command words such as calculate, interpret, analyse, and evaluate are regularly used. Encourage students to show workings clearly and relate answers back to the context provided in case studies.

Enterprise Skills Integration

Teaching liquidity offers a prime opportunity to develop students’ enterprise skills, especially:

• Problem-solving: Deciding how a firm should improve liquidity given constraints

• Numeracy: Carrying out financial ratio analysis with accuracy

• Decision-making: Weighing up whether to take on a loan, cut costs, or extend payment terms

• Communication: Explaining financial decisions clearly using relevant evidence

Tools like Enterprise Skills’ MarketScope AI can support decision-making tasks where students evaluate the financial health of a simulated business and suggest liquidity improvements.

Careers Links

Understanding liquidity directly links to finance, accounting, and business operations roles – supporting Gatsby Benchmarks 4 and 5. This topic is especially relevant for:

• Finance apprenticeships (e.g. Assistant Accountant Level 3)

• Business administration with a financial element

• Entrepreneurial pathways, where cash flow forecasting is essential

Invite a local business owner or finance manager to talk about how they manage working capital, or run a workshop with your careers lead focusing on finance-sector roles.

Teaching Notes

Common pitfalls:

• Students often confuse profitability with liquidity. Use side-by-side comparisons to reinforce the difference.

• Formula errors: Drill current ratio and acid test ratio formulas until they’re second nature.

• Ignoring context: Remind students that a “healthy” liquidity ratio varies by industry and business model.

Tips:

• Use case studies (e.g. Wilko, John Lewis, or a local SME) to ground ratio analysis in real-life situations.

• Set up a mini-debate: “Is it better to be profitable or liquid?”

• Use Enterprise Skills’ Pitch Deck Analyser for activities where students review a fictional business plan’s liquidity data and recommend actions.

Extension ideas:

• Compare the liquidity of two businesses using real financial statements (e.g. from Companies House).

• Explore how liquidity issues might affect other functional areas – HR, marketing, operations.