Entrepreneurs and corporate owners utilize financial ratios as a tool to measure management benchmarking and performance. Financial ratios consist of asset turnover, calculations in productivity, liquidity, and monetary power. Liquidity ratios support business managers with shaping and fulfilling the business’ short-term financial needs. Asset turnover ratios are indicators that provide a report of revenue to managers of how well their business is doing. The long-term financial need is calculated by the financial power of that business.
When considering goods or a service earned independently one should think of the profitability ratios. This week using the sample financial statements a calculation of the financial ratios and interpretation of the results will be provided. Method to Calculate Working Capital Balance sheets are important to a business to maintain their working capital. “Working capital is the financing in a small business that helps a company pay its trade creditors and cash flow – it is the finance that businesses need for their day-to-day trading operations; all businesses require working capital” (Market culture, 2013).
A business can lower potential complications by paying attention to their working capital. The working capital retains all of the business short- term assets, and uses them to invest into its short- term accountabilities. To lower business financial worries, the business should retain a large amount of working capital. The method to calculate working capital is to take Current Assets from Current Liabilities and it will equal your Working Capital (CA-CL=WC). In the provided working capital example financial statements for 2010 and 2009 are the following (see table 1):
Based off of the provided business financial statements, the working capital is higher in 2010. Understanding Working Capital According to Brad Sugars (2007), the six biggest mistakes in raising startup capital is to have a half-baked business plan, Focus too much on the idea and too little on the management, Not asking for enough money, having too many lenders or investors, Failing to get the proper legal agreements, and Poor cash flow management.
Now knowing the start-up capital mistakes brings one to question what capital is. Capital is something that is by a business to increase their assets and make them rich. Capital can defined by a business asset for example cash, or possessions, real estate, equipment, software, a number of types of transportation or contracts. A business that understands capital can enhance the overall sustainability of the business. Conclusion
In conclusion, business owners that use financial statements to calculate financial ratios can enhance their operations. The owners can also use the data against historical and industry benchmarks. The financial statements also instil trust in business stakeholders because owners are able to address loss and profits quickly. Interpreting financial data should be a routine duty for any business owner and the best way to evaluate financial data is to hire a professional ?