Business owners monitor their cash flow for a number of reasons: to make sure their bills are paid on time, to ensure cash is received from customers, and to determine if they have enough resources to expand, purchase new equipment, or even invest in other securities or companies. To evaluate their company’s performance, they use the cash flow statement, as well as the horizontal, vertical, and ratio analysis. These tools are beneficial in monitoring revenue and expenses, as well as measuring performance against competitors.
Imagine that you own a business. Your business could be anything from a coffee shop to a home-based healthcare facility to an accounting firm. As the business owner, you are about to analyze the performance of your company and will need the information from your cash flow statement, horizontal analysis, and vertical analysis.
In your original post, answer the following:
- Briefly describe your business.
- What information will you need to prepare the cash flow statement?
- Which method will you use to prepare the cash flow statement? Why?
- How can a horizontal analysis help you evaluate the performance of your company? Vertical analysis? Which analysis do you think is more important or relevant as a business owner?
Now that you have analyzed your company’s performance, you want to expand your business and decide to apply for a small business loan. You have all the financial statements prepared and provide them to the loan officer. The loan officer reviews your paperwork and requests the calculation of three ratios: working capital, acid test ratio, and current ratio.
- How do you calculate working capital, acid-test ratio, and current ratio?
- Why do you feel these ratios are important to monitor by the internal users such as the upper management?
- Why do you think external users such as banks or creditors look at these three particular ratios?
- What other ratios in your opinion are important to monitor? Please identify two and explain why they are important.
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