Understanding the Concepts

Understanding the Concepts Name: Course: Professor Name: (May 17, 2012)  Understanding the Concepts Introduction In running a business organization, there are various important concepts that need to be put in place by the management. These concepts apply to both small and large business entities. This paper addresses the important financial ratios applied in a small business in comparison to those applied in a larger organization. The paper farther addresses the issue of debt financing, its advantages and disadvantages and the way it is applied in businesses. The concept of beta is also an important factor in a business and for that it is not left behind in this paper. Systematic and unsystematic risks are also important matters that are discussed through the paper and how they are applied in businesses. This paper will seek to analyze the importance of understanding the concepts of running a business. Main Body A financial ratio is a relative amount of two identified and selected numerical values in a given business taken from its financial statements. The ratios are used to indicate the business’ performance and financial position. The information provided by the financial statements is majorly used to calculate various ratios (Bragg, 2006). To begin with, the liquidity ratios provide a clear indication of a business’ ability to meet the short-term financial requirements. A smaller business contains smaller budgets that run for a short period of time. On the other hand, large organizations have large financial budgets that are basically long-term in nature (Bragg, 2006). The asset turnover ratios in a small business indicate how well it utilizes and put in use its available assets. Smaller businesses contain fewer assets that can be utilized fully. On the other hand, the larger corporations do not fully put in use of their widespread assets. Asset turnover ratios are also known as efficiency ratios or asset management ratios. Another important form of ratios is the profitability ratios. This is used to give the measures of a firm’s success in making profits. Smaller businesses make relatively smaller profits in accordance to their sizes whereas larger organizations make large profits (Bragg, 2006). Dividend policy ratios are important in entities as they portray fully the dividend policies of firms and also the forecast of future growth. A high future rate of return is not necessarily dictated by high dividend yields in a business (Bragg, 2006). The financial leverage ratios provide a reliable form of description of an organization’s use of long-term debt. The debt ratios are dependent on the classified long-term leases. The forms and amounts of debts witnessed in businesses vary from one organization to another depending on the sizes of the entities (Bragg, 2006). Debt financing is a mechanism used by businessmen in starting or expanding businesses whereby they generate funds from their own sources that include credit cards, personal loans and home equity loans. Family members and friends form an important part of contributors of these funds (Chaplinsky, 2010). There are advantages that come with the concept of debt financing. These include the owner’s ability to have control over the destiny of the business, the lenders of funds do not have to share the profits generated by the business and also the interest paid in the repayment of the loan is tax-deductable. The disadvantages on the other hand include the presence of large loan payments especially at the time funds are needed to support the operating costs and also inefficiency of borrowing loans in the future especially when it becomes impossible to repay the earlier loans in time and as required (Chaplinsky, 2010). Organizations prefer generating funds through ...