Understanding the Concepts

Understanding the Concepts

There are several financial ratios that small business owners should consider to ensure the most profitable return on their investment in the business. As a small business owner of a bakery I would consider the liquidity, profitability indicators, debt, and the cash flow indictors ratios would be important because they would reflect my ability to keep my business open. The liquidity ratios vary in the type of assets that are used in the calculation, which would require me to determine if I will include all or some of the bakeries current assets. There are also options to determine whether to use all or some of the current liabilities. Within the liquidity ratios there are the current and quick ratios. The current ratio divides the total current assets by the total current liabilities. The quick ratio takes the difference of the total current ratio and inventory then divided by the total current liabilities. The profitability indicators ratio would give me a good understanding of the resources used in generating profit and shareholder value (Loth, n.d.). The debt ratio has three debt management ratios that would evaluate the bakeries assets base and earning power. The three ratios under debt management include the debt to asset; times interest earned and fixed charge coverage ratios. The cash flow indicators ratio would reflect the amount of sales that are being made on credit versus cash. The amount of credit sales can really make a difference in the financial position of the bakery because it would mean that some short-term obligations might not be met (Loth, n.d.). The financial ratios for a larger corporation would not have quite the same effect as that with a small business. Since larger corporations may be composed of different divisions, the different industry averages would be a better method to determine the financial position (Peavler, n.d.).

Borrowing money that is intended to be back over time is considered debt financing....