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.
complete 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 think banks or creditors look at these three particular ratios?
- Do you feel these ratios are important to monitor or are other ratios are just as important?