Meaning
Financial ratios are the relative magnitude of two selected numerical values taken from an enterprise’s financial statements. The company’s financial ratios demonstrate its credit unworthiness. The ratios indicate whether a company is a cable of repaying its loans (Bragg, 2009). The business financial ratios are deteriorating and are far behind the market average standards.
Remedies
According to the Wine club for entrepreneurs by Pam Newman on November 30, 2007, there are seven ways of improving a company’s liquidity. Use sweep accounts in the financial institution to earn interest on any excess cash balances. This can be achieved by keeping all the operating capital into an interest bearing accounts and only getting it when it is needed.
The company could also consider relocating to another place. This will help establish a new business with a new reputation (Scarborough, 2006). The new business that it will disguise will have no detrimental accounting history. This disguise will help the company qualify for a loan.
This company should form a franchise relationship with a bigger, more stable company than itself. The franchise will heap the burdened business to showdown behind the stable firm. This will allow the company to get a loan. The banks will be sure that it cannot default since the loan will be relatively small as per the assets base of the entire business formation.
Cisco
Cisco is one of the companies in the fortune 100 according to Cnn.com magazines. As per their press release dated February 8, 2012, Cisco is the worldwide leader in networking, the way people get connected, communicate, and collaborate. In 2011, its net income was $2.2 billion, from sales of $11.5 billion which reflected a growth of 11%.
According to Richard Bull (2007), financial ratios measure the performance of a process using a common unit mostly money. Some of the most notable ratios to the company are discussed. The debt ratio will indicate the proportion of debt a company has as compared to its assets. This is an indicator of the potential risks faced by the company faces. This ratio makes the company know its position regarding debts. If the ratio is greater than one, the company takes extra precautions since it is operating on debts hence the importance of the ratio (Bull, 2007).
A quick ratio is another indicator of a company’s short-term liquidity. It indicates a company’s ability to meet all the short term obligations of its liquid assets. Once the ratio decreases, it signals a problem in the company. The ratio helps check whether it is performing well indicated by an increase.
The inventory turnover ratio informs the frequency tab in which the company’s inventories have been sold. The more the number, the stronger the sales are. This ratio helps the business know the rate. The company may use the ratio to reflect on its prices and selling strategies.
The current ratio shows whether a company can meet short-term debts obligations or not. (Robb, 2003). The ratio should be more than one, otherwise, the company should form a strategy that reduces its debts and increases the assets.
Conclusion
Companies should, therefore, involve specialists who could advise them concerning the ratios since they are the basic factors in business. This will enable them to work together. Knowledge of the ratios is also vital for any entrepreneur.
References
Bragg, S. M. (2009). Business Ratios and Formulas: A Comprehensive Guide. Hoboken, NJ: Wiley.
Bull, R. (2007). How to use financial ratios to maximize value. New York: Elsevier.
Cisco. (2012). Press release AN JOSE. NASDAQ: CSCO.
Robb, C. M. (2003). External debt statistics: guide for compilers and users. International Monetary fund.
Scarborough, Z. (2006). Effective Small Business Management. London: Wilson Pearson-Prentice Hall.