Financial Decision-Making 12-4

Financial Performance Ratios Comparisons of a company’s financial elements the indicate how well the business is performing. Current Ratio Current Assets Current Liabilities Tells whether a business can pay its debts when they become due. Ratio should be at least 1:1

Should be no higher than 2:1 Net Profit Debt to Equity Ratio Total Liabilities Owner’s Equity Tells how much the business is relying on money borrowed from others that will have to be paid back rather than money provided by the owners Should be no higher than 2:1 Return on Equity Ratio Net Profit Shows the rate of return the owners are getting on the money they invested in the company.

Net Income Ratio Total Sales Net Income Shows how much profit is being made by each dollar of sales for the period being analyzed. Should be compared to past periods and competing companies Will show if additional sales are as effective in adding to the company’s profit as those in the past.

Making Financial Decisions Discrepancies are differences between actual and budgeted performance. Three Steps in Financial Decision-Making Prepare a budget Use the budget as a guide to the operations of the business Make needed adjustments to bring performance in line with the budget.