Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsFinancial Guide for SMEsChapter Two - Assessing the FinancialHealth of Your BusinessFinancial ratio analysis will provide the important warning signs thatcould allow you to solve your business problems before they destroy yourbusinessTopic Hint TipLiquidity RatiosUse these ratios to assess if yourbusiness has adequate cash to paydebts in due timeThe quick ratio will give you a good indicationof the “readily” available cash to meet currentdebt obligationsSolvency RatiosThese ratios measure if your businesshas adequate long-term cash resourcesto cover all debt obligationsThese ratios indicate the extent to which thebusiness is able to meet the debt obligations fromall sources, other than just cash flow, as in thecase with liquidity ratiosProfitability RatiosUse gross and net margin calculationsto measure an monitor the profitabilityof your business operationsComparing your net and gross margin calculationsto businesses within the same industry willprovide you with comparative information andmay highlight possible scope for improvement inyour marginsManagement RatiosUse the number of days for inventory,debtors and creditors to calculate thecash conversion rate for your tradingactivitiesComparing your management ratio calculationsto businesses within the same industry willprovide you with comparative information thatmay highlight possible scope for improvement inyour trading activitiesBalance Sheet RatiosUse the return on assets and investmentratios to assess the efficiency of theuse of your business resourcesThese ratios will provide an indication of howeffective is your investment in the business169156 169chapter 7-13 p79-181 Eng.indd 1698/15/11 5:03:10 PM