Question

What are the four classic techniques used to measure a business? Explain how each method is an effective tool to measure the business.

Answer 1

Four classic techniques which are used to measure a business should be as follows-

A. Solvency-this criteria is used to measure the payment capability of the business of its debt and the ability of business to remain solvent in the long run and continue with the going concern criteria.

Solvent firm will always be preferred over insolvent Firm because they will have the capability of sustainability in the long run.

B. Liquidity- This theory of business is concerned with generation of enough amount of cash which will be used in payment of its debt obligation and having enough cash to fund its operations so that the liquidity is an important factor and a higher amount of liquidity of the business will always be preferred.

C. Operating efficiency-operating efficiency of a business is the indicator of how the business is able to manage effectively the the operational activities in order to survive and sustain and make a profit out of it.

The best indicator of the operating efficiency will be operating margin which will be margin allocated to the overall sales based upon the operating profits and this will not be including costs like interest costs.

D. profitability-profitability of a business is concerned with making higher amount of profits which will be helpful in maximization of the value of the company in the longer run and thereby increasing the value of the shareholders in the longer runn as well so profitability of a business will always be preferred and the business of high profits will be preferred over a business with lower profits.