Question

As a small business owner, your financial strategy may be limited by the lack of revenue during periods of your business. These fiscal challenges may be overcome by understanding and utilization the company’s financial information effectively. Develop a post that discussed each of the financial ratios

Answer 1

When there exists a lack of revenue during the planning stage of the financial strategies it becomes important to draft and craft such strategies which can use the available funds to gain maximum profits with lesser amount of risk involved. A company must understand the financial needs of it by evaluating in depth the financial documents and information in those documents. Focus must be at the places which have a scope of improvement and have show signs of potential earnings. A critical study of financial ratios may help them to analyse and evaluate the financial needs which will make decision making easier for them. The following ratios can be a good tool for the same objective-

1. Current Ratio- It indicates the proprtion of current assets with current liabilities. It is equal to total current assets divided by total current liabilities. This indicates the limit up to which current liabilities can be waved by the current assets. If this ratio is more than 1 it indicates the current liabilities can be fully paid off by current assets. Otherwise the company needs to put its funds in the current asset so that the working capital needs are fulfilled.

2. Cash Ratio- The cash ratio is used to examine the ability of the firm to settle short-term liabilities by using the cash and cash equivalents. The cash equivalents refers to the marketable securities and other instruments which can be converted into cash easily.The cash ratio indicates the extent to which current liabilities can be paid through very liquid assets. If this ratio is less the funds must be put in order to full the cash requirements.

3. Quick assets ratio- this ratio is similiar to current ratio just that it takes into account only the quick assets that is the current assets less the inventories to pay off the current liabilities. If this ratio is less than the company may deploy funds to ready cash and keep it as it is for day to day operations.