Business Report



Business Report

Introduction

Every business has different financial requirements and analytical techniques to evaluate its needs and performance with respect to nature of operations, market, and sensitivity to external and internal environments. Financial Analysis is concerned with analysis of financial statements and various accounts. It evaluates the vulnerability, suitability and productivity of business or a project. It is primarily done by analysts by calculating various ratios that evaluate the current performance of company and facilitate them to compare it to the other companies and Industry. It also provides a picture of performance trends to managers on the basis of which significant decisions are made. It also involves preparation of financial reports, which are submitted, to top management for review.

Discussion

Financial Ratios

Financial ratios is a tool that help management in taking decisions pertaining to continuation or discontinuation of a certain operating line or project, purchasing of fixed and variable assets, leasing or renting or buying specific equipment, increasing borrowing or issuing stock to raise funds, and many more. It allows a firm to assess and evaluate firm's profitability, which exhibits firm's ability to earn profit from its sales and other operations, Liquidity, which exhibits the firm's ability to pay its debts or obligations as they come due, Efficiency, which exhibits firm's effectiveness and efficiency in making sales from its assets and other resources, and lastly leverage, which exhibits the firm's ability to manage its debts and cover fixed costs (Fraser. L. M. and Orimiston. A. 2007).

Financial ratios that are more relevant to a small business operation like that of a small restaurant or a small scale day care service includes Profitability Ratios such as Gross Profit Ratio, Expense / Sales, and Net profit. Liquidity Ratios such as Current Ratio, and Acid Test Ratio. Performance Ratios such as Rate of stock turnover, Debtor's collection Period, and Creditor's Payment Period.

On the other hand financial ratios that would be more of use and relevant to a larger corporation along with the ratios above stated, due to heavy debt and equity financing may include Capital Gearing Ratio i.e. Long term Debt / (Shareholder's equity + Long term Debt) and Return on Capital Employed Ratio i.e. Net Income / (Shareholder Equity +Debt Liabilities). Both of these ratios determine the capital structure and efficiency of this structure in terms of profits earned. Other ratios include earning per share, interest coverage ratio, return on equity and fixed assets turnover (Fraser. L. M. and Orimiston. A. 2007).

Debt Financing

Every business requires certain amount of funds to carry on its operations. It can be done by either raising funds via equity or borrowing funds. Debt financing may involve acquiring loans (personal, business, corporate) from banks, issuing bonds, bills, and notes to investors and other institutions in the market. Major advantages of debt financing includes possessing adequate control over business, owners may also gain tax advantage via debt financing and protects its earnings, and no sharing in profits amongst lenders. It also has certain disadvantages such as changing interest rate over loans, adverse ...