Determine The Financial Ratios That Are Important To The Business.

1214 Words5 Pages
Imagine you are a small business owner. Determine the financial ratios that are important to the business. Compare your ratios with those that are important to a manager of a larger corporation. There are three fundamental ratios: the current ratio which helps you calculate whether your business has enough resources to help you tide it over the next 12 months The formula is: Current ratio = Current assets/Current liabilities A current ratio over 1 is good. If you have an abnormally high ratio , you may be carrying too much inventory or have too many unreceived accounts Total debt ratio to assess how much your business is in debt The formula is: Total debt ratio = Total debt/Total assets Businesses with high debt ratio are in trouble of becoming bankrupt or insolvent. Profit margin . How much net profit is business sales producing. The formula is: Profit margin = Net income/Sales If business sales have decreased, steps need to be taken to improve the situation (About.com Is Your Business Sick? ) These ratios are far more significant to a smaller organization than to a larger one since the small one has to take particular care over its resources. 1. Explain the advantages and disadvantages of debt financing and why an organization would choose to issue stocks rather than bonds to generate funds. The advantages of debt financing are the following: owner can make decisions independently of others and maintain responsibility for own business. He keeps his own
Open Document