Sources of Finance for Small and Medium-Sized Enterprises

Running head: FINANCING A BUSINESS
Financing a Business
Name of the Student:
Name of the University:
Author note:

1
FINANCING A BUSINESS
Money related experts work with organizations or people to get ready for their budgetary
prospects by offering data and direction on themes that incorporate charges, ventures and
protection choices (O'connor, 2017). Frequently called budgetary guides, these advisors work
intimately with customers to offer customized monetary exhortation. These experts gives a clear
view of where to invest how to invest along with that they also provide information on how a
company should raise fund to support their activities.
Before investing in a stock of a certain company the clients, who are the external users of
accounting information, should carefully analyze the financial data of the company in which the
client want to invest in (Jordà, Schularick & Taylor, 2016). this process is generally based on
making a data analysis of the profit and loss account, the balance sheet, and the cash flow
statement as well. The Third and the easiest way to examine how a company is performing is to
go through all the financial ratios that are present in the annual report of the company (Cassar,
Ittner & Cavalluzzo, 2015).
Firstly, the calculation of the gross profit margin which is done by deducting revenue
from sales from cost of goods sold and divided by revenue from sales. Say for instances, the
sales revenue of a certain company is about $ 75 million and it’s cost of sales is $ 57 million, so
the gross profit margin of that company will be 24 percent. This margin, which is calculated,
gives a lot of information about financial health of the company (Smallbone & Mitsui, 2016). It
gives us information about how much money the company has for going through any further
operation for example: expansion of the firm, repayment of debt, distribution of the amount of
capital raised from the owner and other shareholders. It also gives us a proper picture of how
much financially sound the company is (Wright, 2015).

2
FINANCING A BUSINESS
Secondly, operating margin can be an important source for the client to know about
financial stability of a firm. This can be calculated by dividing operating income by net sales of
the company (Lee, Sameen & Cowling, 2015). From this the client comes to know how much
revenue is left over after being able to pay for the different variable cost that are needed for
production namely: wages, raw materials, freight and so on. This operating margin efficiently
help in calculating that well is the company operating and what is the amount of profitability.
This does not only analyze the profitability of the whole company whereas can also analyze
every unit project within the boundaries of a company.
Third important ratio that is needed to be analyzed by the client is the return on the
capital employed (Saghir & Aston, 2017). It is generally calculated by dividing net operating
profit by the difference between total assets and current liabilities. The information that this ratio
deliver to the client is the amount of profit to the per unit capital employed. A Higher ratio will
estimate to be favorable whereas a lower ratio will not. The client from this can make
assumption and take decisions based on the ratio analyzed (Burns, P., 2016).
Along with knowing the profitability of a business a client needs to assess the riskiness of
the company. While establishing a relationship with a company a client should know the risk
involved with the company as if this is not done then the party involved with the company will
also be affected by the risk which the company faced itself (Mason & Harrison, 2015). This is
the reason why an effective analysis of the books of accounts should be done by a client to know
certain rations which will provide information on the riskiness there by providing a cushion to
the consequences to the risk faced. Few ratios that are important on analyzing the riskiness of a
company are the gearing ratio, interest coverage ratio and finally the liquidity ratio (Xiang,
Worthington & Higgs, 2015).