Financing and Investing: Guidelines

Looking at financial ratios can help you determine the effectiveness of your business operations. The main areas/ratio that I have focussed on and which I guess are important for apprehending the current situation of a company is listed below:

Financial ratios are critical when it comes to the determination of not only the performance but also the financial health as well as stability of any given firm. In that regard, as a small business owner, I would utilize a number of ratios to find out how my business is really performing. Some of the ratios I would make use of in this case include the current ratio, debt ratio and net profit margin. According to Baker and Powell (2005), of all the liquidity ratios, the current ratio happens to be the most widely utilized. This ratio according to the authors "is computed by dividing the firm's current assets by its current liabilities." As a small business owner, this ratio would help me determine my business' ability and readiness to settle its short term obligations. On the other hand, the debt ratio according to Baker and Powell (2005) "measures the percentage of a firm's total assets financed by debt." It is essentially computed by dividing the sum of all the liabilities of a firm with the sum of its assets. A debt ratio of more than 1 in the case of my business would be an indicator that the value of the entity's assets is lower that the value of its debt. The reverse is true. The net profit margin according to Baker and Powell (2005) "measures the percentage of sales that result in net income." In the author's opinion, the same is computed by dividing the net income figure with the net

ANSWER Financing with debt is cheaper than with equity because of the tax deductibility of interest.

Before the type of finance is selected, sources of finance must be assessed after considering the following specifics relates to the business itself and the source: exactly how much money is needed and in what time, what exactly is the charges for the source (rates of interest, dividends etc.), the risk involved, the timespan of the contract (between company and supplier of finance), the control of the business over the source or over the ability to pay back finance received so the gearing ratio of the business (the relationship between what is owns and what is owes). Eg, long term loans and ordinary shares can produce greater amount of capital compared to personal savings or the sale of assets. But although the company must repay in time the amount borrowed from a bank it can have as continuing capital the money invested by shareholders. Also, while the rate of interest is fixed and included in every payment, dividends are paid only when the company generates profit. Therefore, the company has more control over finance if is source are investments rather than bank loans

Financial ratios are extremely important to any business. The ratios help you address issues in performance, profitability, efficiency, and solvency. These ratios can be compared to other ratios of businesses in the same industry. This can be a great indication of how good or bad your business is doing compared to competitors and the Industry.

Basic source of finance are shareholders & borrowed funds. Business finance loans are one of the most feasible sources of finance gathering tool for any company. In order to expand or to start a new business, the business financing plays a vital role in the modern day’s market.

The company’s performance on these dimensions shall be measured through financial ratios analysis. As there are many variations of ratios available to measure more or less the same aspect of performance, I have short-listed, in the following table, the key ratios that will be utilized in the analysis:

Financial ratios are great tools to measure the financial performance of an entity. Investors, stakeholders and other financial statement users apply

2.3. If company profit is not sufficient to cover the investment plans, then the company has to start looking for external financing in order to fulfil its investment program. Financing however may be costly if company results are not good enough to motivate any bank to give a loan. If banks refuse a loan, then the company should try to raise funds on the stock

As a major way of raising money to finance the operations of a company, debt financing has several advantages

Carried premium or carry: share of the profit of an investment or investments fund that is paid to the investment administrator in abundance of the sum that the director adds to the partnership.

Survey the main considerations in the basic choice between debt and equity financing. The case allows an application of the classic FRICTO (flexibility, risk, income, control, timing, and other) framework, as well as

On the other hand, equity financing does not carry repayment obligations or interest charges. Also, if a company is financed through equity, its gearing ratio will be lower and borrowers will be more willing to lend money to the company in case something goes wrong in the future, since it will not have a big proportion of debt in its capital structure, meaning that it will be less risky.

There are other parties apart from the management who would be interested in financial ratios. They include: creditors, who would be particularly interested in the liquidity ratios to determine the company’s ability to pay up, shareholders who would be interested in profitability ratios to establish whether the company is viable, potential investors who would like to determine the likely returns in their investments.

In this article, a prediction is made that states if firms whose asset values are unclear, if they will use debt to cover financing needs, and issue equity as a last resort. These predictions were tested. It was found that investment induced deficit were financed using both long term debt and short term debt, as well as equity. It was also found that cash balances were not a source of financing. Another finding was that small firms, high-growth firms, and less profitable firms tend to use equity to cover financial needs. Altogether, information showed that agency costs play an important role, however, there were not