Financial Ratios

Business is all about risk, right? If you don’t believe that, just look at any recession-proof business. There are companies that haven’t been around for very long, yet they’re making money. That’s because they’ve had to deal with the unexpected and have been able to weather it. But a business that’s not recession proof won’t be able to weather any economic problems – even a slight one.

So what does finance mean for business enterprises? In the simplest terms, finance can be used to assist business enterprises in meeting their financial needs. Finance can also be used as the instrument of choice for achieving specific business objectives. This can either be the funding of particular projects or operational activities. In a way, finance is a kind of science that is used to understand business and help business owners achieve their objectives.

When we talk about business finances, we basically refer to the financial resources available to a business owner. The most common sources of business finances are capital assets (such as plant, equipment, raw materials, and land), retained earnings, and liquid assets (such as accounts receivable and inventory). Other significant sources of funds for businesses include long-term loans from banks and other lending institutions, personal savings, and entrepreneurship funds (e.g., startup capital). A wide variety of techniques are applied to determine the value of these sources of funds and determine their worth. One of the most common techniques is to make use of the financial planning functions performed by banks and other lending institutions.

The purposes for which the capital funds are used are diverse and vast. Some of them are purchasing raw materials and other raw products and expending them in production, selling manufactured goods, paying wages and salaries, and purchasing inventory. Some of the most important functions of business finance are: determining capital budget, maintaining cash balances, managing debts, funding acquisitions, and funding refinancing. Furthermore, certain types of business finance are required for every business, such as: working capital financing, working capital management, merchant cash advances, short-term loans, equipment financing, and insurance.

In terms of managing financial needs, it is business finance which determines the funding requirements of the company. It must take into account such factors as availability of raw materials and the ability of workers to work; prices of raw materials and other products; and operation costs. A company’s financial needs can be fulfilled through the following means: selling its products to customers, paying wages and salaries to workers, and purchasing equipment and raw materials. A company’s financial management involves the following activities:

Although financial management has been defined as part of the overall business operations, most business owners do not closely observe this process. For example, few business owners understand how to calculate financial statements, how to obtain funding, how to increase profits, and so on. Instead, they leave the financial management process to the professionals. These professionals, in turn, hire finance officers and business consultants who oversee and administer the financial management process.

Business finance officers determine the best way to use available resources, which results in increasing profitability. Long term finance funds allow a company to make long term investments that yield high returns over a long period of time. By using long term finance funds, business owners ensure that their organizations will have enough resources to run their operations smoothly for the years to come.

A good financial ratio analysis calculates the annual operating, fixed assets, and fixed liabilities. The calculation then determines the net present value of future cash flows. It should include the effect of interest and investment rates. All other things being equal, a business with a strong financial ratio will be able to obtain a rate of interest that is lower than the interest rate on its debt. Thus, it can reduce its fixed assets and create more assets that can be used to finance its operations.

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