Financial Statement Ratio Analysis Essay Example | Topics and Well Written Essays - 3500 words

Financial Statement Ratio digest - Essay Example(basic raw material) plus an oven to bake the cookies (plant and machinery), and also a place to keep the oven (premises). Plus, non to forget, skilled labor (Youve got to know how to make cookies OR hire someone who can.). Last but not the least, your have to find a way to sell the cookies - either hire a salesman with a located contribute or hire an agent with a fixed share in profits (Selling and dispersal overhead). All these factors would sum up to be the Cost incurred on making the cookies. Based on this cost, you may reconcile your expected Selling Price and thus the Contribution per unit. (Activity Ratios)Also, to keep things going, you would need enough money readily available for your short stipulation charterments (like buying more raw materials, paying rent, electricity bills, wages to employees, etc.) as well as for persistent term requirements (paying off debts, more money for further expansion, etc.). Also, you v ery well know that your creditors forget supplement you material on credit only if you are worthy of it. i.e. you are able to pay them in time. (Liquidity Ratios)In both the cases, money doesnt come free of cost. Business should be profitable enough. Both the parties would again, cover your credibility as well as the worthiness of the bloodline. In the first case, you would be liable to pay a fixed interest to your bank, regardless of what you make. In the second, youve got to make enough money so that you and your hero are glad that you invested in the transmission line. Therefore, to be sure of what you are doing, at every moment you would be analyzing your profitability ratios, like you would constantly be calculating your earnings as against your investments (EPS) and comparing it with what ever was the next surpass use of your money (opportunity cost).Further, you could even decide your debt-equity ratio - how much share in the profit should be sacrificed for funds and h ow much should you borrow from the bank. And if you make handsome profits, how much of it should be invested back in the business (retained earnings). Or maybe you have better uses for your money and decide to take a further lend against your business from the bank so as to free your capital and maximize your returns on investment (leverages). Thus, organizing your Capital Structure is a very basic and important decision.The point behind this entire example is that the smallest of small business would require analyzing their basic ratios to know how well they are doing. Without comparing various financial figures (ratios) we cannot make an informed decision. Without these, you will never know what can go wrong with your business. Before staring any business you must know in advance what you may expect from the business and what you should be expecting in return for your time, elbow grease and investment. At any stage of the business you must know how much have you given to the bu siness and how much the business can return back and what is the present condition as well