Accounting Assgnt Wk Eight

Finance and Business Transcript

Speakers: Narrator, Host, Paul C. Clendening

NARRATOR: On the subject of banking and finance, we hear Paul C. Clendening, a banker from Kansas City, who is active locally and nationally with Robert Morris Associates, National Association of Bank Loan and Credit Officers.

HOST: What does the term finance mean in reference to a small business person?

PAUL C. CLENDENING: The term finance refers to the dynamic measurement of a company’s health and progress. Business owners are given accounting information that historically report what a company’s sales have been, how its assets and its liabilities are structured, etc. But the dynamic interaction of those assets, liabilities, and income figures really relate to the health of the company itself. The primary way to utilize financial information is to look at a trend analysis and a ratio analysis.

HOST: What about liquidity. What does that mean?

PAUL C. CLENDENING: Liquidity is a very important day-to-day measurement for a business owner and really a key tool to use in the management of that business. As an example, one of the most common ratios of liquidity is the current ratio. The current ratio is defined as the total current assets of the company less the current liabilities. Now what that should show is a margin of short-term assets in excess of the short-term liabilities. The benefit of that to the small business owner of manager is that it provides a working capital cushion that generates cash to meet short-term obligations and therefore gives the company flexibility in meeting its obligations, paying its people, and gives it the opportunity to take advantage of market conditions.

The two other measurements of liquidity are very important to a business manager and/or owner. And one relates to the accounts receivable and the other relates to the inventory. And there is a ratio that relates to the number of days that the receivables – accounts receivable are outstanding. And the reason I mention this is accounts receivable and inventory, for most small businesses, are really the largest concentration of assets of that company and the better they work for that company, the more healthy that company will be.

Days outstanding of accounts receivable is a ratio that is effectively computed by dividing the net sales for the year by 365 days. And that gives an average dollar figure for sales per day of the company. And taking that figure, one divides that into the average accounts receivable outstanding for the year to show as a net figure, what the average number of days those accounts receivable were outstanding. Now, why do I say that? The speed with which the company can collect this accounts receivable relates directly to the recovery of the cash for the sale of a product or service and that cash is then available for payment of its bills and/or investment, and degeneration –

[End of Audio]

From “Finance,” 1986, Films Media Group. Copyright 2012 by Films on Demand. Adapted with permission.