BUSINESS REPORT

Business Report

Business Report

Financial Ratios

The financial ratios are calculated in order to assess and evaluate the performance of the company. There are many ratios but the most important ones are as follows:

Measures of Liquidity

Liquidity is the firm's ability to meet its day-to-day operating expenses and satisfy its sort-term obligations as they come due (Grabowski, 2010). A general overview of a company's liquidity position can often be obtained from two simple measures: current ratio and net working capital.

Current Ratio

The current ratio is one of the most commonly cited of all financial ratios.

Net Working Capital

Though technically not a ratio in the formal sense of the word, net working capital is often viewed as one of the important ratios. Actually, new working capital is an absolute measure of the liquidity that indicates the dollar amount of liquidity that indicates the dollar amount of equity in the working capital position of the firm.

Activity Ratios

Activity ratios compare company sales to various asset categories to measure how well the company is utilizing its assets. Three of the most widely used activity ratios deal with accounts receivable, inventory and total assets.

Accounts Receivable Turnover

Most firms invest a significant amount of capital in accounts receivable, and for this reason they are viewed as crucial corporate resources. Accounts receivable turnover is a measure of how these resources are being managed.

Inventory Turnover

An important resource that requires considerable management attention is inventory. Control of inventory is important and is commonly assessed with the inventory turnover measure.

Leverage Measures

Leverage deals with different types of financing and indicates the amount of debt being used to support the resources and operations of the company. There are two widely used leverage ratios: The first, the debt-equity ratio, measure the amount of debt being used by the company; the second, times interest earned, assesses how well the company can service its debt.

Debt-Equity Ratio

It is a measure of leverage, or the relative amount of funds provided by lenders and owners.

Times Interest Earned

This is the so-called coverage ratio and measures the ability of the firm to meet its fixed interest payments.

Debt Financing

Debt financing is a strategy that involves borrowing money from a lender or investor with the understanding that the full amount will be repaid in the future, usually with interest. In contrast, equity financing—in which investors receive partial ownership in the company in exchange for their funds—does not have to be repaid. In most cases, debt financing does not include any provision for ownership of the company (although some types of debt are convertible to stock). Instead, small businesses that employ debt financing accept a direct obligation to repay the funds within a certain period of time.

Advantages and Disadvantages of Debt Financing

Like other types of financing available to small businesses, debt financing has both advantages and disadvantages. The primary advantage of debt financing is that it allows the founders to retain ownership and control of the company. In contrast to equity financing, the entrepreneurs are able to make key strategic decisions and also to keep and reinvest ...