Business Finance: Most Popular Articles
Learning how to calculate breakeven point helps a business owner make decisions about fixed costs, variable costs, and the price of the product as they relate to the firm's profit potential.
Here are ten of the most profitable small businesses opportunities with low initial investments to start in 2013.
The market price per share of stock is the current measure of the price of a share of stock based on information from a company's financial statements instead of historical data.
Profitability ratios are the most important ratios in financial analysis to company investors. Net profit margin, return on assets, and return on equity are some of the most common profitability ratios. Analyzing the profitability ratios in order to make recommendations for a firm is one of the most important tasks of the financial manager.
The accounting formula represents the relationship between the assets, liabilities and owner's equity of a small business. It represents the relationship between the balance sheet and income statement of the business firm.
Business and financial risk refer to the amount of leverage a business firm employs. Operating leverage is the use of fixed assets to increase returns. Financial leverage is the use of debt financing to increase returns. Combined leverage is the total risk to the firm of these two types of leverage.
There are two types of costs or expenses in a small business firm. They are fixed and variable costs. Variable costs change as sales change. Fixed costs do not change with sales volume.
When a small business makes a financial transaction, they make a journal entry in their accounting journal in order to record the transaction. There are actually two entries made - one is a debit to the appropriate account and the other is a credit.
An overview of debt and equity financing for the small business; the advantages and disadvantages of debt financing for your small business; the advantages and disadvantages of equity financing for your small business; cost of capital
Interest rates are the cost you pay to borrow money on a loan. It's important to know how to calculate interest rates on bank loans. This article shows you how to calculate interest rates using a variety of methods before you take out a bank loan.
Here is a line-by-line explanation of the cash flow statement using the indirect method.
The total asset turnover ratio is an asset management ratio that measures how efficiently a company can use its assets to generate sales. Turnover ratios, in general, demonstrate a company's efficiency in handling its asset base. This ratio is the summary ratio for the asset turnover ratios as a group.
Cost-volume-profit analysis is one of the major tools of financial analysis. Financial managers use the contribution margin to do profit planning for the business firm. Here are some articles that will help you, as a business owner, in planning for profit.
A source document in an accounting transaction is evidence that the transaction has occurred. It should be recorded as a journal entry as soon as possible. Examples are canceled checks, invoices, purchase orders, and other business documents.
The operating profit margin is a type of profitability ratio known as a margin ratio. The figures to calculate operating profit margin come from a company's income statement. The operating profit margin tells a business owner a lot about the cost control of the firm.
Capitalism and socialism are two different types of political, economic, and social systems.
Small business owners are having to turn to credit cards for financing their new business. Since bank loans are hard to get due to the credit crisis, small businesses don't have much choice but to use credit cards for financing a startup business.
: What is the Gearing Ratio, What Does it Mean, and How is it Calculated? : A gearing ratio is a financial
The net profit margin ratio shows how many dollars of after-tax profit a company generates per dollar of sales.
There are a number of types of financial statement analysis that a business owner can use to determine the financial health and position of the business firm. A simple form is common size or vertical analysis.
Many reasons are given for companies to merge and acquire other companies. Some of those reasons are financial and some are non-financial. Here are some of the most common financial reasons for companies to merge with other companies.
When you start a small business, develop a chart of accounts as part of setting up your accounting and bookkeeping system. The chart of accounts is the basis of your company's accounting system because this is where all the company's financial information is filed. It is the first thing you do when you start the process of setting up your company's financial information.
Calculating the weighted average cost of capital for a company allows the business owner to compare how much it costs to finance the company's operations versus how much the company earns on its investments. Here are the steps to use to calculate the weighted average cost of capital.
Part of the process of pricing your product is including the costs of producing that product. These costs are called direct and indirect costs.
Understanding a firm's asset, liability, and equity accounts is part of the foundation of bookkeeping. Page 4.
Free cash flow is the cash a company has available after meeting all its obligations including increases in fixed assets. Free cash flow is a better method of determining a company's financial health than earnings per share. Here is a free cash flow example.
Even though financial ratio analysis is one of the most popular methods of financial analysis, it does have some limitations. Ratio analysis for a company should be benchmarked to ratios in the industry and window dressing should not be used.
Small businesses most often need short-term loans instead of long-term debt financing. Most term loans, classified as short-term, usually have a maturity of one year or less. They must be repaid to the lender within one year.
Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios with their calculations and interpretation.
Solvency ratios measure the ability of the firm to survive in the long run. Solvency ratio are a part of financial ratio analysis that deal with long-term debt servicing as opposed to the concept of liquidity that looks at the short-term.
Capital budgeting analysis is most accurate if you use the decision method of net present value. That is because net present value uses the discounted cash flow approach to valuing cash flows from a capital investment project; therefore, taking both risk and time into account.
Adjusting entries are made in your accounting journals at the end of an accounting period. The purpose of adjusting entries is to adjust revenues and expenses to the accounting period in which they actually occurred.
Closing entries are journal entries made at the end of an accounting cycle to set the balance of temporary accounts to zero to begin the next accounting period. The accounts that are closed are revenue, expense, and drawing accounts. The assets, liabilities, and owner's equity accounts are not closed because their ending balances are the beginning balances for the next accounting period.
There are four components of the cost of capital and debt is one of those. Debt is usually the cheapest component of the cost of capital. Here is how you calculate the cost of debt capital.
In order to stay solvent and profitable, financial statement analysis is a necessary activity for a business firm to perform on a regular basis. Here are some of the best techniques to use for financial statement analysis.
Pricing your product or service using markup is one popular pricing strategy. Pricing your product correctly can mean the success or failure of your business. Product markup as a pricing strategy is the basis of many pricing strategies.
This article lists several sources the small business owner can use to find angel investor funding for the start-up business firm.
A vision statement for a company is an articulation of where you see your company going in the long-term. It is your perspective on your company's future. It should reflect your dreams and your passion for your business. Writing a compelling vision statement for a business plan will help you secure funding for your business.
Business firms need to know how effectively they use their assets to generate sales. Asset management ratios or turnover ratios can help them determine this.
After you complete your general ledger entries for an accounting cycle, the next step is to prepare a trial balance. A trial balance is the process of totaling the debits and credits from the general ledger to make sure they balance for the accounting period in question.
There are accounting conventions governing how to record debits and credits for expense accounts from the income statement. Page 5.
Business firms collect and process their financial data using accounting information systems.
The inventory turnover ratio is one of the most important ratios in financial ratio analysis. It is a crucial asset management ratio as it measures the efficiency of the firm in managing and selling its inventory.
Here is an example of the comparative balance sheets of a business. Analyzing the comparative balance sheets is the first step in preparing and analyzing the firm's Statement of Cash Flows.
Shareholder wealth maximization or maximizing the value of a business firm's stock price should be the goal of businesses in capitalist societies. Shareholders own the firm and money accrues to them through the increased value of their stock. Social responsibility can co-exist with shareholder wealth maximization.
This article presents an income statement and discusses how to prepare it line by line.
A business firm's contribution margin is the amount of money it has to cover its fixed costs and contribute to its net profit or loss after paying all its variable costs. Here is the analysis.
Military men and women who have businesses need help when they are called up. VA loans are there to help them. Small business loans for veterans such as the Patriot Express Loan can help with almost any business need for a soldier or a spouse when you return. The Military Reservist Economic Injury Disaster Loan helps keep your business afloat while you are gone.
Cash flow can be defined as the way money moves into and out of your business; it is the difference between just being able to open a business and being able to stay in business. Preparing a cash budget is a tool of cash flow analysis that helps you as a business owner check up on your firm’s financial health on a frequent basis. It is the study of the movement of cash through your business to determine patterns of how you take in and pay out money. The goal is to maintain sufficient cash for firm operations from month to month.
The average collection period, or the average time in days it takes to collect a firm's accounts receivables, helps a business owner determine how liquid his accounts receivables are and how quickly his credit customers pay their bills. This ratio is part of the group of asset management ratios that help a small business to know how efficiently it is utilizing its asset base to generate sales. The ratio is also known as days sales outstanding.
Small businesses need to use worksheets to develop their budgets. This is a sample worksheet that a business can use to develop a generic budget.
There are two reasons that gross margin, or gross profit margin, is different from contribution margin for a company.
Preparing a master budget every year as a step in the budgeting process is the best way to operate a business. The master budget includes the operating budget and the financial budget and all the associated schedules. This article introduces all the parts of the master budget.
Discounted payback period is one of several capital budgeting methods that business owners use to choose between capital projects in their company. It is better than regular payback period because it uses discounted cash flows, but it still is not the best of the capital budgeting methods to use. Net present value usually has that distinction.
Filing an amended tax return is important and necessary if you have made certain errors on your return or if you have received new information since filing your federal income tax form.
An important debt or financial leverage ratio is the total debt to equity ratio. This ratio measures the amount of debt financing used by the firm as compared to investor financing.
LIFO and FIFO are two of the most popular methods of inventory accounting. Each has a very different effect on the company's bottom line. Here are the explanations.
Dividend per share is important information for investors as they analyze what types of stocks in which they want to invest. Dividends per share indicate whether the firm is a dividend-paying stock, indicating a more mature firm, or a company that is growing.
The Sarbanes-Oxley Act of 2002 was passed in response to a number of corporate fraud incidences in the early 2000's and increases the rules on corporate governance and corporate accountability in order to protect investors.
What is the free cash flow calculation? There are three ways to calculate free cash flow.
Here is a list of the top small business accounting software packages for 2012. Some of these are free accounting software packages. One of these software packages should be right for any type of business from the tiny microbusiness to small and medium-sized businesses.
Time value of money is one of the core principles of small business finance and small business financing operations. Time value of money is the basis of discounted cash flow analysis when analyzing financial assets and physical assets owned by the business firm.
Payback period is a capital budgeting decision method that has been in use in business for a long time, even though it is certain not the best decision method. It is best used with other decision methods. It has some advantages and many disadvantages. Payback period does not consider risk nor time value of money.
The 5Cs of credit are a method of evaluation that a bank or other financial lender uses to determine if a business is a good candidate for a loan. Each of the 5Cs is discussed from the viewpoint of the bank when they evaluate a credit application from a business.
At the end of your accounting cycle, you will need to prepare a Statement of Retained Earnings. Learn how to prepare one here.
Market value ratios evaluate the economic status of your company in the wider marketplace. Market value ratios give management an idea of what the firm's investors think of the firm's performance and future prospects.
Capital budgeting is the process of acquiring fixed assets and capital investment projects. Capital budgeting projects are some of the largest investments a business will ever make. Business owners choose the project that has the highest rate of return as compared to the firm's weighted average cost of capital.
Good accounts payable and accruals management can have a major impact on the profitability of a business firm. Business firms should build trust with suppliers in order to obtain the best discounts, service, and information possible.
Internal rate of return is one of several decision methods that financial managers use when evaluating a capital budgeting project. It is usually compared to net present value and has several flaws.
Here's an example of how to prepare a direct materials purchases budget which is a portion of the operating budget for a business firm.
The general ledger is the main accounting record for your business. All of the business's financial transactions are taken from the general accounting journal and recorded in the general ledger in a summary form.
If you offer credit to your customers, you have to monitor your accounts receivables. One method of doing this is to develop an aging schedule for accounts receivable.
This article will give you a line-by-line explanation of how to prepare a basic balance sheet.
Asset turnover ratios measure a firm's ability to use its asset base to generate sales. In the case of the fixed asset turnover ratio, the business owner measures how well the investment in plant, property, and equipment generates sales for the firm.
The market to book value ratio, also called the price to book ratio, allows investors to see how much a company is worth with regard to its book value.
Preferred stock is usually the cheapest source of financing for the business firm after debt financing. Here is the calculation of the cost of preferred stock.
The debt to asset ratio measures the percentage of debt financing the firm has in relationship to the percentage of the firm's total assets.
A company's cost of capital is the cost of money the company uses to finance their operations and purchases of assets. Cost of capital is important because the company has to be vigilant and sure that their cost of capital is lower than their return on capital.
A small business often buys from a number of vendors or suppliers using store credit or credit based on their relationship with the supplier. Here is an example of a transaction using store credit, or accounts payable.
There are two methods of accounting - cash accounting and accrual accounting. Cash accounting is usually used by small businesses with relatively simple transactions. Accrual accounting is used by larger businesses with a more complicated accounting system.
Some small businesses actually prosper in a recession. These are called counter-cyclical businesses. Other small businesses survive but don't actually thrive.
There are five categories of financial ratios. Each measures a different financial aspect of the business firm.
Here is an example of a contribution margin income statement illustrating break-even in dollars.
The fixed charge coverage ratio is an important debt ratio in financial ratio analysis because it is a broader measure of the ability of a company to cover its fixed charges than the times interest earned ratio.
Definition of budgeting. Business Finance.
Cash is king in small businesses. Without cash and liquidity management, small businesses will not survive one day. Financial ratio analysis is one tool of cash management.
This article describes the relationship between the financial statements based on the accounting equation.
Small businesses must make a decision between single-entry bookkeeping and double-entry bookkeeping when they are established.
Cash flow and profit are not the same thing. Cash flow is the money the business owner has available. Profit or net income is determined by when sales are made.
The future value of an investment is one type of time value of money calculation. Here are three methods you can use to make this calculation.
Finding sources for startup business financing is often difficult. Getting financing approved for a startup business is even more difficult. Here are six sources of business financing for your startup business that may work for you.
There are four major types of capital investment projects that are subject to capital budgeting decisions. Different types of financial analysis is appropriate depending on the type of capital investment project.
There have been important, society-changing financial events that have happened in the first decade of the 21st century. Here are the top ten!
Trade credit, or accounts payable, are a small businesses most important source of financing. There is a cost of trade credit stated in the form of not taking a cash discount if offered by a supplier.
Business firms complete an accounting cycle every accounting period. This cycle follow a series of approximately eight steps ending with closing the books for that accounting period. Here is a description of each step of the accounting cycle.
This article presents an overview of financial statement analysis and preparation for the small business. It touches on the income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows.
Even though venture capital and angel investing are both ways for a fledgling firm to obtain equity financing and get off the ground, only a few will qualify and be of interest. It is worth pursuing, however, for many businesses particularly in New Economy fields such as biotech, software, and just about any technology field. Here are some differences between venture capitalists and angel investors.
The cash conversion cycle looks at the time tied up in converting inventory and receivables to cash, as well as the amount of time the company is given to pay its bills without incurring any penalties.
Definition of equity; business definition of equity
If you want to start a new business, there are steps you must take to get it off the ground.
This article is a gateway article to a library of information on how small businesses can successfully apply for a small business loan. There is a series of steps listed that small business firms must take in order to apply for a business loan.
Long-term and intermediate-term business loans are appropriate for small businesses so they may grow and expand by purchasing buildings, capital equipment, and other long-term assets.
One of the last steps in the accounting cycle is the preparation of the financial statements. The information from the accounting journals and the general ledger is used to develop the financial statements.
opportunity cost definition. Business Finance.
Liquidity analysis, a part of financial ratio analysis, is important to a business as they need to know whether or not they can pay their short-term debt obligations. The quick ratio is a more specific measure of liquidity than the current ratio.
The return on equity ratio is perhaps the ratio investors in a company look at most. This ratio lets the investor know how well the company is utilizing their investment in the firm.
Some industries are more profitable than others for start-up businesses. Check out these industries if you are thinking about starting up a business.
This is an example of how to handle a double-entry bookkeeping journal entry when selling a product or service for cash.
: What is the Definition of Earnings per Share, its Calculation, and Use? The earnings per share discussed
Cash flow refers to money that moves into and out of a business firm. Cash flows arise from operations, investing, and financing.
What is my Dun and Bradstreet Number? Learn how to check if your business has a DUNS Number and how to obtain a D&B Number if you don't have one.
You can start a profitable new business during a recession doing outsourcing work for other companies.
Net working capital is a financial formula that accompanies the current ratio in helping the firm determines its liquidity position.
Every small business needs a petty cash account as a part of accounts payable for small, daily business expenses. Setting up and managing your petty cash account is part of your bookkeeping function and office accounting system.
Financial leverage or debt ratios measure a business firm's ability to meet its long-debt debt obligations or those with a maturity of more than one year.
Contribution Margin Ratio. Business Finance.
Every business owner should know how to amortize a loan. Loan amortization simply means figuring out how much interest and principal you have to pay on a loan each time the loan comes due, along with how much the balance is reduced. It is always a good idea to double check your lender's calculations.
All businesses who extend credit to their customers need to develop a credit policy in order to have a set of guidelines to follow in administering their accounts receivable. Here are some factors you should consider when setting up the credit policy for your business.
Using the DuPont Model allows the business owner to break the firm's profitability. both ROI and ROE, down into component parts to see where profitability actually comes from and where any problems might exist.
The cash flow margin is one of the most important profitability ratios. The cash flow margin ratio tells a company how well it converts sales to cash. It takes cash to pay expenses, so the conversion of sales dollars to cash is extremely important.
The present value of an annuity due is one type of time value of money calculation. Here are three methods you can use to make this calculation.
Small business have to have a working financial budget that they follow every day. Business budgeting is the process of creating a business budget that works for a company and is used as a guideline for daily operations. A budget should estimate income and expenses and record differences in actual and estimated figures.
Credit and debit card processing have become necessary to operate a business. This means that credit card processing fees have become front and center among expenses for businesses. They can take a chunk out of your cash flow and profits, though add to your sales exponentially. Learn all about credit card processing fees here.
Analyzing liquidity ratios like the current and quick ratios, plus net working capital, give company's a picture of their current financial position. Page 3.
Customers enjoy shopping at businesses that offer a wide range of payment processing services. Setting up a merchant account and offering a wide range of merchant services, such as credit and debit card processing, will help ensure that customers keep coming back to your business.
A firm's liquidity ratios show its ability to meet its short term debt obligations. The current ratio is the broadest measure of liquidity.
Book value per share is a market value ratio that is used for accounting purposes by financial managers or owners of business firms.
A business owner can prepare the Statement of Cash Flows using one of two methods - the direct method or the indirect method. This article gives the pros and cons of each.
The definition of capital structure
This is an example of a bookkeeping entry of moving an item from inventory to sell as a product through a cash sale. This type of transaction results in two bookkeeping entries
Budgeting for your business includes preparing your operating budget which will eventually lead to calculating your operating profit on the income statement.
The Glass-Steagall Act, or the Banking Act of 1933, was enacted during the Great Depression to separate the powers of commercial and investment banks. It kept banks from using depositors' money to make risky investments. It was repealed in 1999, but the Obama administration is thinking about re-enacting parts of it again in order to protect depositors money in the future.
The sustainable growth rate is the maximum amount a small business can growth without needing new financing. Here is an explanation of the sustainable growth rate and how to calculate it.
definition of cost-plus pricing. Business Finance.
The amount of your small business's inventory investment directly affects your profit and cash flow. Analyze your dead, slow-moving and productive inventory in order to move out inventory that is dragging down your profitability.
Asset management ratios include the accounts receivable turnover ratio as a part of financial ratio analysis. The accounts receivable turnover ratio, along with the average collection period, measures the efficiency of the firm's credit and collection policies.
The present value of a sum of money is one type of time value of money calculation. Here are three methods you can use to make this calculation.
IFRS, international financial reporting standards, issued by IASB, the International Accounting Standards Board, and FASB, the Financial Accounting Standards Board that sets accounting standards for U.S. companies are working together to establish consistent accounting standards on a global basis.
The cost of retained earnings is an opportunity cost and the cost of common stock used in the weighted average cost of capital formula. It is a component cost included in the cost of capital of a company.
The gross profit margin is a profitability ratio that falls in the margin category. It shows average profit considering only sales and cost of goods sold.
In order to satisfy a number of Internal Revenue Service requirements and to simplify recordkeeping, you should always keep your business banking and personal banking separate.
This is an example of how to handle a double-entry bookkeeping journal entry when selling a product or service for cash while offering a discount on the sale.
Small business owners need to plan ahead to succeed. Learn how to forecast your finances with pro forma statements.
This article summarizes the different types of different business entities such as sole proprietorships, partnerships, corporations, and limited liability companies from a legal, accounting, and tax perspective.
Using financial ratios as a tool of financial analysis can have a powerful positive impact on the small business firm.
The times interest earned ratio is a debt ratio that measures how well a business can cover its interest expense. It is one of the debt or financial leverage ratios that businesses need in order to monitor their debt position.
Agency cost is the operating expense caused in a business firm when managers and shareholders disagree about firm decisions. This disagreement leads to the agency problem, which is the conflict in businesses between shareholders and management due to this desire on the part of management for self-interested behavior and the goal of the firm which is maximization of shareholder wealth.
Horizontal and vertical mergers are two types of mergers that are considered to be non-financial mergers. These mergers occur along business and industry lines. In the case of horizontal mergers, two firms in the same business merge. With regard to vertical mergers, two firms along the same supply chain merge. Both lead to possible anti-trust issues.
Return on invested capital, also called return on capital employed, is a performance and profitability ratio that is one of the most important valuation measures. It indicates the firm's ability to generate returns from its available capital or debt and equity.
Not all small businesses grant credit. Instead, they make all their sales on a cash basis. In many cases, this costs them sales and customers because, like it or not, we live in a credit-driven society.