Understanding the Concepts

Understanding the Concepts

Financial Ratios for Small Business Owner

It is a fact that the size of the business influences the financial analysis of the company. The owner of the small business will focus more on three types of ratios such as days of sales outstanding, debt to asset and quick ratio. According to researchers, these ratios are crucial for the small business owner but not for the manager of larger corporations. Days of sales outstanding ratio is very important for the small business owner because of liquidity issues. The small business owner does not have much resource to finance his or her business activities. It is commonly seen that the small business owner used to relay on its sales proceedings for financing its working capital. On the other hand, it has been seen that the manger of large corporation do not relay on the sales revenue for financing its working capital. The working capital is known as life blood for any organization regardless of its size. The company needs funds on daily bases for financing its daily operations.

The manger of large corporation has many options to fulfill the need of working capital such as short term loan from financial institutions. This option is not available to the owner of small corporations because the financial institutions want a grantee or sound business position in which small business lacks. Therefore, the small business owner is more worry about its outstanding sales. Debt to asset ratio is another ratio which is crucial for the small business owner because small business owner do not have the option to finance his or her business from equity. The manger of large corporation can issue shares to generate funds because a large corporation has a good market value and reputation so the general investor can trust large corporations and buy equity stock. The small business owner cannot issue equity stock because they are not known in security market and if small business owner still issue equity than small business owner have to offer high return because small businesses are supposed to be more vulnerable to risks. The third ratio is quick ratio which shows the liquidity position of the company. If the liquidity position of the small business owner is high then there are high chances that he or she will face resistance from its supplier and creditors in term of obtaining more goods and extending credit limit. On the other hand, it has been seen that the manger of large corporation can ensure its creditor and supplier when the quick ratio is low because of large business revenues and high valued assets (Melicher & Norton, 2011).

Debt & Equity Financing

Debt financing is a method to acquire funds to conduct the operations of your business. The primary and the most crucial advantage of debt financing is that the owner can retain his ownership and does not lose control of the company. Companies usually issue stocks rather than bonds because unlike bonds, they are not liable to make ...