First We Look At The Liquidity Ratio

Category: Finance, Financial Planning.

When we talk about financial analysis we are not basically interested in the profits or losses firm is making or incurring. When one firm investing large amounts of capital in one area then its basic motive is absolutely moneymaking, but when we think what good managers usually think then we have to look at it with slight difference.

It is true that all existing firms keep an eye on the profit of margin they are earning or whether they are into the zone where their existence looks little awkward. Good business is not always about good numbers showing on the balance sheets or income statements. Average managers usually take a sigh of relief when they look at the higher profits of margin or cost recovering process. It is lot more than that. Good managers maintain a good mixture of keeping an eye on profit margins and healthiness of certain ratios. They are mostly concerned with ratios.

But proactive or excellent managers know the art of reading between the lines. If you look all around the world at the stalwarts of business world, they rely heavily on the position of their ratios. Key relationships are typically revealed in ratios that provide insight into some aspect of company behavior. Business always runs by the combined efforts of relationships between people, and events, things. Here we look at the financial position of Lester clothes for the period of 200and as we mention above that we have to keep in view the fluctuating position of ratios. Basically managers observe three ratios liquidity ratio, activity ratio and profitability ratio. Because maintaining finance of any organization, ratios give the actual and correct picture.

First we look at the liquidity ratio. For example the current ratio tells that there are sufficient assets for pay off the debts. It is a financial ratio that indicates the company s ability to meet its debt obligations. This actually portrays the strength of any company to meet its obligations. Looking at the balance sheet and income statement of the company that according to the present situation, they will be able to pay off their debts gracefully. the Company has current assets of$ 600000 and current liabilities of$ 25000It means that the company has sufficient funds to pay of its debt. All firms whether small or gigantic need external finance to bolster their reputation.

Activity ratio is the indicator that reflects the standing of the organization. This ratio tells us how many times the inventory is turned over to meet the total sales figure. It is the ratio that tells about the company s internal performance with respect to key activities defined by management. If inventory sits too long, money is wasted. It is like an idle talented person. The inventory needs to convert into sales to increase the profit ratio. It shows the behavior, performance and enthusiasm of staff to meet the targets when we calculated the inventory turnover ratio.

Third and last variable is the profitability ratio it describes the firms profits profitability ratio describes the company s profit which is calculated as net income divided by sales. It turns out to be satisfactory depending on the overall industry situation. If we calculate the net income of Lester clothes which is around$ 215000 by the total sales$ 2900000 then we gather a figure of 8% . This entire related figure justifies that organization is performing satisfactory and can attain the trust and confidence of share holders To get finance from a certain group of share holders. This figure shows that managers are making good use of resources at hand. Organizations need to present a clean sheet to get the required finances and keep them as their loyal partners in the future as well.

So these figures pose a great opportunity for all those who are looking for a lucrative option to invest money. Shareholders play an important role in raising finance of any organizations. All good organization provides all necessary proofs to share holders that they are investing at a right place. Controlling and managing financial resources smartly is the price objective of all proactive managers. Fair and reliable audit figures from income statement and balance sheet enhances chances to make shareholder believe in overall performance. It shows and proves their worth to even the best of organizations.

Read more...

So. What Is Cash Flow Planning - Finance and Financial Planning:

You ve heard it a million times- cash can make or break a business. In fact, many PROFITABLE businesses fail because of cash flow issues.

One Spouse Cannot Make Financial Decisions For The Other Spouse - Finance and Financial Planning:

Are you a gambler?

Should You Trust Or Not Trust - Finance and Financial Planning Articles:

Living Trusts have become very popular and are being heavily promoted to seniors. That is the question.