Current Ratios and Quick Ratios
Current ratios help evaluate a company’s ability to pay short-term obligations.
Current ratio = current assets / current liabilities
The current ratio includes all current assets, but since inventory is not always quickly liquidated, many analysts remove it from the equation and use the Quick ratio.
Quick ratio = (current assets – inventory) / current liabilities
The quick ratio emphasizes assets that are easily converted to cash. The higher the ratio, the better off the company. Analysts like to see ratios greater than 2:1 for current ratios and 1:1 for quick ratios.
There are three basic reports important to your business.
- Income or Profit and Loss Statement
- Cash Flow Statement
- Balance Sheet
An income or Profit and Loss Statement shows where and how money goes in and out of a company for a period of time. Monthly, quarterly and annual Profit and Loss Statements show the financial strength of a company.
The Cash Flow Statement is one of the most useful financial management tools because it shows you exactly how cash is flowing in and out of a business.
The Cash Flow Statement is a guide for business making business decisions such as adding employees or planning major purchases.
Regardless of where you seek funding - from a bank, a local development corporation or a relative - a prospective lender will review your creditworthiness. A complete and thoroughly documented loan request (including a business plan) will help the lender understand you and your business. The "Five C's" are the basic components of credit analysis. They are described here to help you understand what the lender looks for.
Capacity to repay is the most critical of the five factors, it is the primary source of repayment - cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.
Fair Isaac & Co, or FICO, is a generic term for a credit bureau score and refers specifically to model used by FICO. There are other statistical models, however, FICO is the most widely known.
Credit scoring has become widely accepted by lenders as a reliable means of credit evaluation. The credit score condenses borrowers credit history into a single number. FICO and the credit bureaus don’t reveal the exact methodology for computing the numbers.
FICO scores vary from 375-900 points. The higher, the better. To get the best interest rates, you generally need to score 680 or higher. Someone with higher than 680 is considered to have “A” credit. If you score below 620, you will generally pay a higher interest rate on your mortgage and your credit is considered “sub-prime.” If your score is between 620 and 680, the lender may decide which category you belong based on factors such as income, assets, payment history, etc.
Free Annual Report
Your credit score represents the creditworthiness of you as an individual or your business. A credit score predicts the likelihood that you will repay your debts.
Your business credit score determines your access to capital, rates on rental space, insurance and other business needs.
The score is comprised of data from the three major credit bureau.