Financial Understanding
FIN 100
Professor Murphy
August 26, 2012

Financial Understanding

As a business owner, financial understanding is a must. Small businesses typically finance their operations differently than large corporations. Many small businesses must rely on the personal resources and credit history of the firm’s owners to access money needed to be a success. Whether it is a small business or a corporation, success depends on having the ability to earn more than what is being paid out. Financial ratios help do just that.

The main three ratios that are used in the business world are the current ratio, total debt ratio, and profit margin. Current ratio measures whether or not the business has enough resources to pay its bills over the next 12 months. This ratio can be determined by dividing the current assets by the current liabilities found on the company’s balance sheet. Total debt ratio is exactly what it says, a measure of the company’s debt. The total debt ratio is total debt divided by total assets. Profit margin is simply how much profit is made. Net income divided by sales shows profits. Each of these can be used for any size business (Ward, n.d.).

If current ratio was to show an inability to cover the costs, debt financing may be a solution. As with all financial options, there are advantages and disadvantages. One advantage of debt financing is that it allows the founders of the company to maintain control and ownership of the company. Another advantage is that the interest paid on the loan may be tax deductible depending on the type of loan. The best part is the lenders you borrow money from do not share in your profits. The main disadvantage is the risk of credit ratings getting ruined or filing for bankruptcy (Peavler, n.d.)

An organization can choose to either issue stocks or bonds