1. Financial Decision-Making
12-4

2. 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

3. 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.

4. 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.

5. 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.