Russian: Are there any guidelines which enable the businessman to conduct his affairs efficiently and profitably and to compare his company's performance with those of other companies?
American: Yes, there are. One of the major tools is ratio analysis. Ratios make it easy to see trends, risks and to assess the results. All most important decisions are based on ratios.
R.: What are the most commonly used ratios?
Am.: We in the US operate with three main categories of ratios. We use ratios measuring solvency, efficiency, and profitability.
R.: Could you give some examples of each?
Am.: Yes, sure. Let's begin with measuring solvency.
R.: Solvency is the ability of a firm to meet its short-term liabilities as they come due, isn't it?
Am.: Yes, you are absolutely right. And one of the most commonly used measures of solvency is the current ratio.
R.: How is it found?
Am.: This is the ratio of all current assets, liquid assets, accounts receivable and inventories to current liabilities.
R.: When is a firm considered solvent on this measure?
Am.: If its current ratio is 2 to 1 or above. There is another ratio related to this one. It's the-debt-to-equity ratio. It is found by dividing total debt by the equity.
R.: I see. It's the indebtedness of a firm compared to its equity capital. But it's really more a measure of leverage than a measure of solvency.
Am.: Yes, you are right in a way. A highly leveraged company is one with a high proportion of bank loans to equity. But the ratio has some bearing on solvency, too. A low debt-to-equity ratio makes it easier for a firm to borrow to meet its short-term cash needs.
R.: That's clear. A ratio higher than 1 to 1 would make a firm a risky borrower. And what ratios help to measure a firm's efficiency?
Am.: One such ratio is that of sales to inventory, called the inventory turnover ratio.
R.: We say that stock or inventory has "turned over" when it has been sold and replaced with new stock. If we want to double our profit one way is to double the rate of stock turnover.
Am.: Yes, and this ratio varies widely from one industry to another. We can't say whether the ratio is good or poor until we know the product we are discussing. And now let's turn to measuring profitability.
R.: It's the figure that really matters in the end to any businessman, isn't it?
Am.: Yes, practically there are two measures that compare profit to the capital invested in a firm. One such measure is return on equity and the other is return on assets. Both are very important for investors.
JR.: No doubt. Knowing the payback of an investment is important because the earlier the payback, the quicker the money can be reinvested, and also the less the risk investors are exposed to.
Am.: You are right, the ratios show how the capital "works". Investors' decisions totally depend on the ratios.
Ex. 1. Answer these questions:
1. What financial concerns face every enterprise?
2. What problems do finance managers face daily?
3. What does financial management involve?
4. What are financial managers concerned with?
5. What are the major components of a balance sheet?
6. How is the finance function most commonly organized?
1. What is a financial ratio?
2. What do financial ratios help to measure?
3. What groups of ratios have been developed?
1. Can you give examples of ratios measuring solvency, efficiency
Ex. 2. Give derivatives of:
management n effectively adv maintain v acquisition n
behave v expose v determine v control v
convince v relationship n quote v indicate v
profit n assess v analysis n measure n
receive v debt n risk n turn v
replacement n invest v pay back v total n
Ex. 3. Find English equivalents for the following Russian phrases from the text:
Ex. 4. Say in a few words what the main text is about.
Ex. 5. Sum up the content of the dialogue.
Ex. 7. Work on vocabulary and grammar.
a) Study the key words of the unit in the dictionary at the back of this book:
e) Match the verbs from (a) with the nouns from (b) below:
a) to maximize b) services
to perform company
to delegate cash
to acquire outlays
to reduce value
to generate cash flow
to evaluate production facilities
to expand calculation
to calculate authority
to adjust shareholder wealth
to manage inventories
a) Supply the articles where necessary.
b) Write down 3-5 questions about the texts.
c) Say in what activities financial managers are involved.
Financial Management explains how ... financial managers can help maximize the value of their firms by making better decisions in such areas as capital budgeting, choice of capital structure, and working capital management.
Financial managers also have ... responsibility for deciding the credit terms under which customers may buy, how much inventory ... firm should carry, how much cash to have on hand, what types of securities to issue, whether to acquire ... other firms (merger analysis)
and how much of the firm earnings to plough back in the business versus payout as dividends.
A successful firm usually has ... rapid growth in sales, which requires investments in ... plant, equipment and inventory. The financial manager must help decide on ... specific assets to acquire and the best way to finance these investments. For example, should ... firm finance with debt or equity, and if debt is used, should it be long-term or short-term?
In this connection, the financial manager must deal with ... money and capital markets, where funds are raised and where the firm's securities are traded. As a consequence, financial managers of many large companies are responsible for working with investors (for example, mutual funds), bond rating agencies, stock holders, and the general financial community.
Financial managers, controllers in particular, are also responsible for financial accounting - preparation of the financial statements for ... firm, cost accounting - preparation of ... firm's operating budgets, and preparation of reports that the company must file with the various government (local, state and federal) agencies.
One of... major documents developed and controlled by financial managers is the Enterprise Financial Plan. It comprises ... requirements for financial resources and the amounts currently available and expected in ... future to meet them, i.e. the estimated revenues and expenditures of an enterprise within some future period of time. The enterprise financial plan determines whether ... cumulative revenues exceed the cumulative outlays at every point of time during ... plan period and whether the necessary capital structure is assured.
The enterprise financial plan is composed of ... revenue plan, ... expenditure plan and ... financing or credit plan.