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V Business Forms and Financial Ratios

There are three forms of business organization: sole proprietorship, corporation and partnership. Sole proprietorship is the simplest way to set and run business, because a sole proprietor is the only responsible person for all company’s debts and obligations. The sole proprietor is allowed to run his business under his own name without any other words. Advantages: all profits are received by sole proprietor, relatively low start-up costs and capital, the greatest freedom from regulation, minimal working capital, tax advantages to owner of the business, owner has the direct control over the decision-making process.

Disadvantages: unlimited liability, difficulties in raising capital and lack of continuity in sole proprietorship if the owner is absent for a long time. (Lucas 2002) Partnership is an agreement when two or more sides (persons) are going to combine their available resources in one business. Partnership agreement has to be signed with the assistance of lawyers, because in case of dissolution or disagreement the business should protect its shareholders or other partners.

Advantages: easy formation, relatively low start-up costs, additional available resources of investments, possible tax advantages, limited regulation and broader base of management. Disadvantages: divided authority, unlimited liability, lack of continuity, difficulty in raising capital and finding suitable

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partners, possible conflicts between the partners. (Lucas 2002) Corporation is known to be a legal entity “that is separate from its owners, the shareholders”. (Lucas 2002) Shareholders are not personally responsible for debts and obligations and acts taken.

Corporation can be either private or public. Private corporation can formed by one or more persons and it is not allowed to share securities to the general public. Advantages: limited liability, specialized management, continuous existence, separate legal entity, possible tax advantages, easy raising of capital and ownership is transferable. Disadvantages: close regulation, the most expensive form of organization, charter restrictions, double taxation of dividends, conflicts between shareholders and executives, extensive record keeping.

The overall role of financial manager in corporation is that he is responsible for financial transactions and good performance of the corporation. That is why financial managers are responsible for: maximizing operating income, maximizing the number of outstanding shares, minimizing the risk of operating cash flows, etc. Financial manager is one of the most responsible and important persons in corporation, because financial performance depends closely on his skillfulness. (Lucas 2002) Finally it is necessary to point out main financial objectives of the firm.

They are: to maintain high profit margins, to continue to leverage the strength of the brand names, to maximize new management opportunities, to reduce costs of capital, to improve profitability, etc. I agree that such objectives are important for corporation, because they will assist in further development and they aim at maximizing corporation’s profits. What is more important is that such objectives ensure good performance of the corporation in the market. Financial ratios are important to the understanding of the financial health of a company.

Firstly, liquidity ratios are ratios used for identifying whether the company is able to meet its short-turn obligations (current, quick and cash ratios). Quick ratios, for example, are the measurements of liquidity which doesn’t include current assets. Cash ratios measure whether the company is able to pay off its liabilities and obligations. Banks and investors realize whether the company is credible and is able to pay debt and obligations and whether it is worth of investing money.

(Financial Ratios 2007) Secondly, asset turnover ratios are ratios used to identify whether the company effectively utilizes available resources. Turnover ratios are known also as asset management ratios and efficiency ratios. These ratios are divided into receivables turnover and inventory turnover. Receivable turnover are the primary indicator of how the company is collecting its assets, whereas inventory turnover indicates amounts of goods and services which are sold during the given period.

In such a way, banks and investors have an opportunity to assess company’s resources, their utilization and inventory turnover. (Financial Ratios 2007) Thirdly, financial leverage ratios are ratios used to identify whether the company is able to meet its long-term liabilities. In other words, in contrast to liquidity ratios these ratios measure how the company utilizes long-turn debts. Banks and investor see whether the company is able to pay long-term obligations and debts. (Financial Ratios 2007)

Fourthly, profitability ratios are ratios used to identify whether the company successfully generates profits. Profitably ratios measure gross profit from sales, costs of goods, and effective utilizing of available assets. Profitability ratios show banks and investors whether the company is perspective. (Financial Ratios 2007)


Financial Ratios. (2007). Retrieved October 2, 2007, from http://www. netmba. com/finance/financial/ratios/ Lucas, Joseph. (2002) Types of Business Organization. Retrieved September, from http://www. lucaslaw. com

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