Business Owner Idea

[Name of the Institution

Business Owner Idea

Abstract

This research paper based on several concepts related to finance and it discusses each part in great details. This paper discusses initially about financial ratios importance in a particular small business and comparison of it with other ratios that are vital of a large business. It also discusses about debt financing advantages and disadvantages and preference of issuing stocks in preference to bonds for fund generation. It also discuss over relation of financial returns with risks, beta concepts and comparison between systematic and unsystematic risk.

Introduction

Financial ratios describes in detail information regarding financial progress of the company. Risk and Return are main tools for firm in investment decision making. Every company has several ways to generate fund among which broadly includes debt financing and equity financing.

Discussion

Financial Ratios

It is assumed that being an owner of small business what implications financial ratios has and its relative importance. Financial ratio is regarded to be ratio between two or more entities from organization financial statements. Business owners gain greater advantage from ratio analysis as they use it to trend an organization progress and it make appropriate changes in order to enhance organization performance. Financial ratios are relationships that are estimated from organization financial information and used in comparison analysis. There are several ratios which are calculated in order to measure financial strength of company. These ratios are drives from dividing financial measurement or account balance with another. Normally these measurements and account balances are extracted from income statement and balance sheet. Financial ratios for small business can be used for solvency cases and it has less relevance for gearing ratios as it has less concern with equity and debt financing as it is established at limited scope whereas in larger corporations requires to analyze gearing ratios as well as it has great importance for them.

Debt Financing

Debt Financing relates to generating funds through loans from any financial institutions. Debt financing has main advantage that it provides founder access to retain control and ownership within the organization. Further, it provides small business owners with a huge degree of financial freedom as compare to equity financing. Debt obligations are restricted to the loan repayment duration, after which the lender is unable to have any claim on the business, whereas in equity finance there is no limitation on claim until their stock is sold. Major disadvantage confined to debt financing is that impose restriction to small business to make regular monthly payments of amount of principal and interest. In usual cases, it becomes difficult for many young companies to cope with debt as they faces shortfall in cash flows which restrain them from making regular payments. Many lenders also impose severe penalties for any late payments. Further, unable to pay off debts can also put an adverse effect on firm's credit rating and its capacity to regain future financing. Organization gives preference on issuing as stocks holder does not charge any interest or payable liability, whereas, bondholders provides cash to corporation and ...