Reference no: EM131585269

• Discuss the best way to leverage a breakeven analysis when defining a business strategy.
• Analyze the 12 financial ratios mentioned below and determine which is the most useful to the greatest number of small businesses. Explain your rationale.

1. Current Ratio

The current ratio measures a small company's solvency by showing its ability to pay current liabilities from current assets. It is calculated in the following manner:

2. Quick Ratio

The quick ratio (or the acid test ratio) is a more conservative measure of a firm's liquidity because it shows the extent to which its most liquid assets cover its current liabilities. This ratio includes only a company's "quick assets"-those assets that a company can convert into cash immediately if needed-and excludes the most illiquid asset of all, inventory.

3. Debt Ratio

A small company's debt ratio measures the percentage of total assets financed by its creditors.

4. Debt to Net Worth Ratio

A small company's debt to net worth ratio also expresses the relationship between the capital contributions from creditors and those from owners. This ratio compares what the business "owes" to "what it is worth." It is a measure of a company's ability to meet both its creditor and owner obligations in case of liquidation.

5. Times Interest Earned Ratio

The times interest earned ratio earned is a measure of a small company's ability to make the interest payments on its debt. It tells how many times the company's earnings cover the interest payments on the debt it is carrying. This ratio measures the size of the cushion a company has in covering the interest on its debt load.

6. Average Inventory Turnover Ratio

A small company's average inventory turnover ratio measures the number of times its average inventory is sold out, or turned over, during the accounting period. This ratio tells owners how effectively and efficiently they are managing their companies' inventory. It indicates whether their inventory level is too low or too high and whether it is current or obsolete and priced correctly.

7. Average Collection Period Ratio

A small company's average collection period ratio (or days sales outstanding, DSO) tells the average number of days it takes to collect accounts receivable. To compute the average collection period ratio, the entrepreneur must first calculate the firm's receivables turnover

8. Average Payable Period Ratio

The converse of the average collection period ratio, the average payable period ratio (or days payables outstanding, DPO), tells the average number of days it

9. Net Sales to Total Assets

A small company's net sales to total assets ratio (also called the total assets turnover ratio) is a general measure of its ability to generate sales in relation to its assets. It describes how productively a company employs its assets to produce sales revenue. 

10. Net Profit on Sales Ratio

The net profit on sales ratio (also called the profit margin on sales or the net profit margin) measures a company's profit per dollar of sales. This ratio (which is expressed as a percentage) shows the number of cents of each sales dollar remaining after deducting all expenses and income taxes. 

11. Net Profit to Assets

The net profit to assets ratio (also known as the return on assets, ROA) ratio tells how much profit a company generates for each dollar of assets that it owns. This ratio describes how efficiently a business is putting to work all of the assets it owns to generate a profit. It tells how much net income an entrepreneur is squeezing from each dollar's worth of the company's assets.

12. Net Profit to Equity

The net profit to equity ratio (or the return on net worth ratio) measures the owners' rate of return on investment (ROI). Because it reports the percentage of the owners' investment in the business that is being returned through profits annually, it is one of the most important indicators of a company's profitability or management's efficiency.

• Analyze the steps involved in preparing a cash budget and determine which steps presents the greatest number of obstacles to the greatest number of small businesses. Explain your rationale.

There are five steps to creating a cash budget:

Determining an adequate minimum cash balance

Forecasting sales

Forecasting cash receipts

Forecasting cash disbursements

Estimating the end-of-month cash balance

• Analyze the steps involved in avoiding a cash crunch and make at least one additional recommendation for doing so. Provide specific examples to support your response.

A few ideas below:

1. Bartering, the exchange of goods and services for other goods and services, is an effective way to conserve cash.

2. Trim Over Head Cost: High overhead expenses can strain a small company's cash supply to the breaking point. Frugal small business owners can trim their overhead in a number of ways.

3. Buy Used or Reconditioned Equipment: Many shrewd entrepreneurs purchase used or reconditioned equipment, especially if it is "behind-the-scenes" machinery.

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