Financing and Investing: Guidelines

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1. As a small business owner, the ratios that I will find to the best important are the ones pertaining to my needs. These include liquidity ratios and profitability ratios, both of which are common to all businesses (Loth, 2012). The business will focus on these because they relate directly to cash flow and working capital. The liquidity of the company is also going to be important to bankers who are lending the company money and also the profitability ratios are going to be important to shareholders, not to mention the production managers who need to control costs and the marketing managers who need to set prices. These ratios are common to larger corporations, but large companies will also look at other ratios that my business might not worry about so much, like the investment return ratios (ROA, ROE) and the debt ratios. The small business is more concerned with the cash flow aspects of debt than the capital structure and cost of capital. Thus as a small business there is going to be more emphasis on specific types of ratios while not worrying about other types. 2. There are two main types of financing, debt and equity. Debt financing typically comes at a lower cost than equity. The reason for this is that debt financing is superordinated to equity debt holders get paid out first. Indeed, payments to debtholders are guaranteed so that the company must pay them before re-investing in the business. The result of this is that some companies prefer not to utilize debt
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