Page 139 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes to help forecast how demand will ebb and flow throughout the coming months.
A common dictum is that 80 percent of your revenue comes from 20 percent of your inventory.
By figuring out which of your products this applies to, you will be able to make informed
decisions about how much of a certain item to order - and when. Inventory that is not being
transformed into cash is useless. If you have out-of-date inventory, the best strategy is to sell it
for the best price you can. Many small business experts believe that healthy cash flow is truly the
secret to success. Once you have a handle on how to balance your inflows and outflows, you may
find you agree.

Self Assessment

State whether the following statements are true or false:
5. Accounts receivable make up a large proportion of the cash coming into a small business.

6. Not Many owners have successfully accelerated accounts receivable collections by offering
discounts to those who pay early.
7. Paying early can leave you short of cash at a crucial time.

8. Many small business experts believe that healthy cash flow is truly the secret to success.

9.3 Applications of Business Ratios

A tool used by individuals to conduct a quantitative analysis of information in a company’s
financial statements. Ratios are calculated from current year numbers and are then compared to
previous years, other companies, the industry, or even the economy to judge the performance of
the company. Ratio analysis is predominately used by proponents of fundamental analysis.
There are many ratios that can be calculated from the financial statements pertaining to a
company’s performance, activity, financing and liquidity. Some common ratios include the
price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.

9.3.1 Importance of Business Ratios

Business ratios are used to assess the performance of the firm in the following aspects:
1. Trend analysis

2. Inter-firm comparison
3. Operating efficiency analysis
4. Long-term financial viability
5. Reveals strength and weakness of business
6. Overall profitability of the business

9.3.2 Financial Ratios

Financial ratios are the indicators of the financial well being of a business plan. These are used
as tools to determine the financial viability of a business plan. Financial ratios are corroborated
with other facts before any judgmental action is taken. These are calculated by using the
information available in historical and/or forecasted balance sheets and other financial
statements. Ratios are commonly used for trend analysis — tracking of financial figures over a

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