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1.What are the basic types of financial ratios and how can they be used during the life cycle of a business? For small business firms, who are the likely users of these ratios and what are their concerns or interests?
2.What are the uses of pro forma financial statements? What methods can be used to construct pro forma statements and what are the pros and cons of each?
3.What is a venture’s life cycle? What are the various stages in the life cycle and what are the important activities in each stage? How can this concept be used in the financial planning and management of a small business?
Expert Answer
1.Financial ratios are of four types, namely profitability, liquidity, leverage, and operating ratios.
They help a small business owner understand the financial needs of the firm better and get a grip on how things are moving in terms of the firm’s ability to generate and utilize cash.
Data should be collected on a regular basis and different ratios calculated from time to time, compared with earlier data and stored for future use.
2. A pro forma financial statement can help a firm to look at its financial situation by excluding certain unusual, non-recurring events like a merger, an acquisition which might have altered its financial scope.
Pro-forma financial statements help investors in getting a clear view of the firm’s operations, as well as the exact profits made by the firm.
The problem with pro-forma financial statements is that they are open to manipulation by inaccurate reporting of elements like goodwill, depreciation, interest and taxes.
