Accounting and finance for your small business (second edition) part 2
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Accounting and finance for your small business (second edition) part 2
Section IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 eriod, begins and those that are ongoing during the operating period. Naturally, there is a close connection between what you determine to do—your plan—and what you actually do.In this section, we discuss what happens when the operating period is completed. This may be an intermediate lime—not neces Accounting and finance for your small business (second edition) part 2 sarily the end of a complete fiscal year. For example, some of what is discussed in these final chapters is equally appropriate to monthly or quarterlAccounting and finance for your small business (second edition) part 2
y considerations.As Sections I and II were closely related, so Section III is closely linked to both of them. The topics to be covered here include:• Section IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 al ones during the fiscal period.ChapterPerformanceMeasurement SystemsPerformance measurements, like many of the tools discussed earlier, can be used to make rational decisions in keeping with a company's objectives. Measurements are analytical tools used by outside suppliers of capital, creditors a Accounting and finance for your small business (second edition) part 2 nd investors, and by the company itself to evaluate how well it is doing. Measurements may also be used to evaluate how the business appears to the inAccounting and finance for your small business (second edition) part 2
vestor. The type of analysis undertaken varies according to the specific interest that the parly seeks to satisfy.• A trade creditor who has supplied Section IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 ong-term financial stability. As such, he or she would be interested in cash flow and the company's ability to service its debt.• The present and expected future earnings and the stability of these earnings may be primary concerns to an investor in common slock.Depending on the planning horizon of e Accounting and finance for your small business (second edition) part 2 ach person interested in the performance measurements, the value of trend analysis may be greater than any point-in-lime measurements. How well the179Accounting and finance for your small business (second edition) part 2
SECTIONIIIEvaluating the Operations of the Businesscompany has done over lime and is expected lo do in die future are pieces of information necessary Section IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 more effectively for outside funds, you should be aware of all of the aspects of financial analysis that outsiders use in evaluating the business. Financial and operating ratios can also be effective tools for managing and controlling the business.Two broad categories of measurements will be of conc Accounting and finance for your small business (second edition) part 2 ern in this chapter. The first set is financial ratios. Financial ratios were discussed briefly in Chapter 5. Therefore, we will not endeavor to repeaAccounting and finance for your small business (second edition) part 2
t that material, but rather only supplement it here. The second set of measurements are operating ratios, which can be designed to meet the specific nSection IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 y to evaluate the financial condition or the performance of the business. A system frequently used is a ratio, or index, which connects two pieces of financial or operational information. Interpreting a ratio correctly gives the analyst an understanding of the financial condition and performance of Accounting and finance for your small business (second edition) part 2 the firm, which may not be readily apparent from the traditional forms of reporting. Il is important lo remember that a single ratio in itself may notAccounting and finance for your small business (second edition) part 2
be a particularly meaningful piece of information. Often a trend showing past historical ratios will indicate more than will the current individual rSection IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 re has been an improvement or deterioration in the financial condition over lime. In addition, the productivity, profitability, or performance of the firm relative to past performances is demonstrated easily. For example, by arraying the last five years of current ratios—that is, the ratio of curren Accounting and finance for your small business (second edition) part 2 t assets to current liabilities—you can compare the ability of the business lo pay its bills and determine if that is improving or deteriorating.The sAccounting and finance for your small business (second edition) part 2
econd comparison method involves evaluating the ratio180Performance Measurement SystemsCHAPTER6of one company against others similarly situated for thSection IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 he information derived from this study may be worse than meaningless—it may be harmful. The primary problem is comparability.Avoid using "rules of thumb" indiscriminately. The comparison (if your financial ratios with the ratios published by major sources may be inaccurate. For example, you may have Accounting and finance for your small business (second edition) part 2 multiple product lines and may not have the same product mix as other companies in the industry. You may be differently diversified, crossing industrAccounting and finance for your small business (second edition) part 2
y boundaries. It is preferable to build comparable numbers over lime for your own business rather than seek comparisons with others. However, sometimeSection IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 source of good financial ratio information.For example, the standard rule of thumb for the current ratio— that is, the ratio of current assets to current liabilities—is 2:1. It is considered advisable for a small business to maintain a current ratio (if at least 2:1 for the sake of sound cash flow a Accounting and finance for your small business (second edition) part 2 nd healthy financial condition. Remember, however, that rules of thumb are averages. As such, there may be as many companies above the average as beloAccounting and finance for your small business (second edition) part 2
w it. To show how this rule of thumb may be misapplied, take the example (if a fast food outlet. It may have a current ratio of 1:2 or even 1:3. CompaSection IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating pe Accounting and finance for your small business (second edition) part 2 ts available to meet all of the debts falling due. However, this is probably not the case. A typical fast food outlet has:•Receivables. There are generally no credit sales and no delayed payments at a fast food store. Accounting and finance for your small business (second edition) part 2 Section IIIEvaluating the Operations of the BusinessThe first two sections addressed the tasks to be accomplished before the business, or operating peGọi ngay
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