Write a 4-5 page paper in which you: 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...

Financial Management
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Financial Ratios
Ratio Analysis is one of the most commonly used tool of financial analysis. It is
essentially an effort to develop useful relationship between individual items or group of items in
the balance sheet or income account. The objects and utility of ratio analysis is limited not only
to the internal parties but to the credit suppliers, banks and lending institutions also. Ratio
Analysis tells about the financial position of the enterprise as to whether the capital structure of
the business is in proper order, whether the capital structure of the enterprise is satisfactory,
whether the credit policy in relation to sales and purchases is sound and whether the company is
creditworthy. Thus, ratio analysis highlights the liquidity, solvency, profitability and capital
gearing position.
For a small business enterprise, liquidity and profitability ratios are most important. The
liquidity ratio measures the ability of the company to meet its current liabilities with the
available current assets. The profitability ratio measures the profit generating ability of the
company. It typically measures the profit generated per dollar of asset or money invested. The
small enterprise is interested in knowing the profitability and liquidity ratios. The small
enterprise runs the business with his own money and generally do not take debt from a financial
institution or banks. Therefore, solvency ratios and market performance ratios are not meant for
them. Solvency ratio measures the proportion of debt in a company and market performance
ratio is for investors. It measures the market performance of the stock by using various ratios like
earnings yield, price earnings ratio, dividend yield etc.
Debt Financing
The corporate expansion or increased research and development program can be financed
by way of issuance of debt. The debt can be defined as the funds obtained from the external
sources like creditors, banks, lenders, issue of bonds, debentures etc. which grants loan in lieu of
regular interest payments. Debt is generally source of long term financing and it is not required
to be repaid earlier.
The main advantage of issuance of debt is that the company can raise the capital without
any change in the ownership. The benefit of maintaining the ownership is that the management
has the complete control over the decisions made on behalf of the company. The interest is paid
to the bondholders and the interest paid by the company is tax deductible. It can translate into
large tax savings for the company. The issuance of debt ensures more...