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Selective Definitions

Acid Test
Measures ability to meet current debt. This is a stringent test since it discounts the value of inventories. Cash and near-cash divided by current liabilities. A rule of thumb is one to one. A lower ratio indicates illiquidity. A higher ratio may indicated unused funds.
Cash flow
Measure of financial health. Equals net profits plus amounts charged for depreciation, depletion and amortization over a given period of time.
Current ratio
Ratio of all current assets to current liabilities. This is one of the liquidity financial ratios used to look at your working capital and measure short-term solvency.
Days receivables
This alternative view of receivables is useful to explain graphically what changes in collection operations and credit do to a business.
Providing working capital to businesses by buying their receivables (usually at a discount and on a non-recourse basis) rather than lending against them.
Federal funds rate
Rate for which overnight federal funds are traded.
Financial statements
Collective name for historical financial reports of assets, liabilities, capital, income and expenses.
Financial ratios
Used to assess performance of businesses overtime and to to compare to others in the same profession. The most important ratios to small businesses are liquidity, efficiency, profitability and solvency.
Fixtures are items that become attached to real property. Examples are heating and air conditioning systems, wall mounted shelving, and security alarm systems.
Name used by banks to describe moneys owed to a business and yet to be received.
Cancellation of a contract without penalty. Specific requirements apply to bank disclosures of borrower's rights to rescind.
Return on assets (ROA)
A percentage calculated by dividing net income after tax by total assets. This ratio is best used to compare within the same industry usually using average assets for a period to be more accurate.
Return on investment (ROI)
Net profit divided by net worth. This ratio tends to magnify short-term shifts in thinly capitalized companies.
Risk management
Controlling the probability and/or severity of a potential adverse event so that the consequences of that event are within acceptable limits.

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