Introduction
This paper evaluates how entrepreneurs can interpret and utilize different business ratios to the advantage of their business. The four vital rations include leverage, operation, profitability and liquidity ratios (Scarborough, Wilson, and Zimmerer 250).
How an entrepreneur can construe and utilize different business ratios
Business ratios are fundamental in determining the financial status of a company at a given time. There are twelve financial ratios, some of which appear on a company's financial records. However, both small and large entrepreneurs use four important ratios. The liquidity ratio exhibits a company’s capacity to settle its short-term debt commitments (Vasiu, Nicolae and Iulian 188). A high ratio displays that the business has a large margin of safety.
The leverage ratio breaks down the capital of the company to define the amount contributed by the owner and the borrowed capital (Scarborough, Wilson, and Zimmerer 251). A high leverage ratio indicates that the company does not owe much to the creditors. The Operating ratio shows the allocation of resources in a business and helps evaluate its effectiveness. Finally, the profitability ratio helps examine the productivity of the company and how well it manages its finances.
A high profitability ratio indicates the suitability and viability of the business. According to Tracy (12), the profitability ratios analyses help produce profit and loss statement. Importantly, entrepreneurs analyze various financial statements including income and cash flow records to examine different aspects of the business like solvency and effectiveness. Start-ups can present their financial ratios to lenders when searching for funding. At times, small entrepreneurs require the financial ratios to compare performance with similar companies. Moreover, financial ratios help business people predict the future performance.
Conclusion
Both large and small entrepreneurs need financial ratios to determine productivity, efficiency, and the ability of the company to settle its long-term and short-term debts. Start-ups can use financial ratios to seek for funding from financial institutions, angle investors, and other lenders.
Works cited
Scarborough, Norman, Doug Wilson, and Thomas W. Zimmerer. Effective Small Business Management: An Entrepreneurial Approach. 9th ed. United States: Prentice Hall, 2011. Print.
Tracy, Axel. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. United States: Createspace, 2012. Print.
Vasiu, Diana Elena, Nicolae Balteș, and Iulian Nicolae Gheorghe. "Liquidity ratios. A structural and dynamic analysis, during 2006-2012, of the companies having the business line in industry and construction, listed and traded on the Bucharest Stock Exchange." Theoretical and Applied Economics 22.3 (604), Autumn (2015): 187-206. Print
