I do not think that having shareholders in a business is good, because the business doesn’t stay yours. You will be funded by the shareholders however you will have to give the shareholders back a percentage of money in a limited period of time or by giving them the payments in months. Once the share holders have got all their money back as they have a share now in your business you will still have to pay them. So therefore it is a bad idea to have a shareholder unless you run out of options.
Profitability ratio:
This is the first aim and objective of a business so that the business is in a long duration of a business. Generally the profit ratio will show if the business is able to meet its objectives by examining the calculations, for example, investments. Small businesses mainly try its business on low standard budgets this is because they know that what they sell is profitable or not. and usually do not care for profit ratios. They will start producing more products in quantity if they know that there is a demand for it and they don’t really worry about the profit ratios.
Utilisation ratio:
Profitability ratio is mainly used because it shows the business how effective the capital employed has been used to generate the sales revenue. Some businesses do not think of using such ratio because the businesses are medium based company which owns a warehouse and are working from there. They would think of recruiting staff when they know that their sales are high and the time to do the job isn’t enough. They run their business by according to situations if front of them and do not use ratios.
Depending on how the assets are used profits can be affected, for example; if machinery equipments are only used for a few hours a day then it is not that much of a use to the business, then the outcome leads to less sales revenue and less profit for the business which could make the business into debt or make them in loss.
Financial Ratio:
This is also the working capital management ratio. This ratio evaluates the sufficiency of the working capital in the business and the useful use. There are funds that have working capital and fixed asset in the business. What the business has which is assessable to sell or that can be changed to money is a current asset, for example; debtor’s cash or stock. And when a business owes to someone that is current liability.
Working capital is necessary in the business because it is needed when the business has to too much debt that needs to be paid then to pay it off they need to sell their asset. Some businesses that just borrow money from the bank and don’t care about what working capital they have and if by any chance their business doesn’t start running or goes in loss quite quickly then this will lead them to be in debt. This debt then will only be able to be paid back only if make some sales.
Why using financial ratios are good?
-
Simplifies financial statements: Ratio’s make the financial data simpler for a business so that you have a clear understanding of it and don’t understand it wrong.
-
Facilitates inter-firm comparison: Ratio’s can outline the things that are associated with successful and unsuccessful firms. So therefore it reveals the strong firms as well as the weak firms and ratios also show the overvalued and undervalued firms.
-
Helps in planning: Ratios also help keep track of the performance of the business. Ratio’s can also help out with the business’s management.
Help in investment decisions: Ratio’s help in investment decisions because in the situations of lending decisions in the case of bankers and also in investors.
Why they may not give the complete picture?
Ratios may not give the complete picture because as they are based only on the information that has been recorded in the financial statements. Financial statements aren’t always accurate and not always updated that result in non accurate data being entered for the calculations, which is why ratios may not always give the complete picture.
Ratio’s can only be judged by comparing the ratios to the previous year for example; for the first year of the business they won’t be able to carry out any ratio calculations because that is the first year of their business and there wasn’t a previous one. The prediction of the upcoming year may be wrong because due to factors that will put the business off, even if they do get a pervious account data. In order to have a good final answer which may be hard to decide you cannot just do one ratio you will have to do at least a few of them.
Why you compare them over a period of time?
It is likely that the price level can be different from what was seen before when time goes by, this may affect the validity of the ratio. The ratio analysis may not clearly point out the trend in solvency and the profitability of the business. So therefore it is important that the financial statement needs to be used to the correct price level.