Importance of Financial Stability Ratios : Common ratios to judge the financial stability of a business concern are gearing ratio, current ratio and liquid ratio. Gearing ratio shows the extent of a firm's reliance on debt to fund its activities. As the proportion of debt climbs (especially if it exceeds 65 percent of total funds for most businesses), the greater the risk of financial distress. This is the downside of financial leverage - It increases the financial risk. Accounts receivables are normally included in liquid assets, as they may be sold to a finance company at a discount for later collection from debtors. This is called debt factoring. Debt factoring is not common in all the countries. Debt factoring is used as a means of managing the cash flow from operations, rather than trying entity's funds up in accounts receivable. In arriving at liquid assets, the principle exclusion from current assets is inventory. As this may take some months to sell - and then often to credit customers - it can be many months before cash is collected from inventory. Among the current liabilities may be some debts that may not be due for many months. These may be excluded in calculating the liquid ratio. Examples include tax payable and a current portion of long term debt, both of which may not be due for some months. However, such adjustments should only be made if the repayment dates are known and are over six months later than balance sheet date.
Current ratio : Current ratio measures the number of times the current assets of a firm cover its current liabilities. This is a measure of solvency: the capacity of a firm to pay its debts through the normal cash cycle, selling inventory on credit, collecting debts and paying creditors. This ratio must normally exceed 1:1 and should be closer to 2:1. It should also be noted that an excess of current assets will result in poor asset utilization. One common (but risky) adjustment in calculating the liquid ratio is to exclude bank overdraft from current liabilities. This is not recommended. When a liquid ratio declines towards (or below) the 1:1 level (including overdraft), this is most likely time that the bank will require repayment - on demand. Hence, an overdraft should only be left out of this calculation when the firm is perfectly liquid - When it does not matter anyway!
As these ratios are based on the statement of financial position, they represent only a 'snapshot' of the financial stability of the business, taken at one point in time. These ratios can be manipulated by referring payments or delaying purchases until the following period, or by invoicing customers in advance of delivery. Known as 'window dressing', such techniques show an improved solvency position at balance sheet date. Liquid or quick ratio is a more tighter measure of short term financial stability. It measures the firms ability to pay its current liabilities from its liquid assets. Liquid assets are cash or near cash resources. In practice liquid assets include cash, bank, short term securities and accounts receivable, the assets that be readily converted into cash to meet immediate calls for payment from lenders and suppliers.
Increasing Your Personal Net Worth
Your net worth is simply the total value of your assets minus the total value of your liabilities. It is the difference between what you own and what you owe. Try to calculate and compute your net worth over various time periods in your life (e.g., this year versus last year). Is it increasing or decreasing? Positive or negative? At first glance, the task of increasing your net worth seems pretty straightforward. Net worth is simply what remains of your assets after you've settled all outstanding debts, In order to improve your net worth, all you need to do is increase what you own and cut back on what you owe. But this is only simple in principle. In practice, increasing your net worth is a demanding challenge that shows how well you manage your money. Regardless of how our net worth is doing, most of us really want to increase it. After all, it is a measure of our financial wealth; it is the money and property that is truly ours. Therefore, it is only natural to want to increase it. What's more, increasing your net worth should be a continuous process. Here are some general guidelines to help you increase it. Increasing your personal assets can be accomplished in many ways. Look at your personal balance sheet, under the assets section. Which assets do you think can you increase the value of? If you're thinking about adding more money in your bank accounts, you might need new ways to generate more positive cash flow like a new source of income or cutting back on spending. In addition, you might want to increase the amount of interest your money earns by transferring some funds to a higher-paying bank. Another way would be to invest in other assets whose value increases with time. You might want to buy stocks, bonds, or real estate as these investments generally increase in value and yield positive returns.