MODULE 2.2

• Financial Position of a Business

  • Capability of the farm business to meet all its obligations as these come due without disrupting normal farm operations
• • LIQUIDITY – ability of the farm to generate the amount of cash needed to fully pay its debts due within 12-month period without disrupting normal operations
• • SOLVENCY – ability of the farm to generate cash beyond a one-year period to meet current and future financial obligations
• Analyzing Liquidity

  1. Current Ratio
  2. Working Capital
  3. Acid-test Ratio/Quick Ratio
• Analyzing Solvency

  1. Net capital Ratio
  2. Networth Ratio
  3. Debt-asset Ratio
  4. Debt-equity Ratio/Leverage Ratio
• Current Ratio (CR)

  • Measures the amount of CA relative to CL
• Working Capital (WC)

  • Measures the money that would remain after selling all CA and paying all CL.
• Acid-test Ratio / Quick Ratio (QR)

  • Measures the ability to pay short-run obligations quickly
• Net capital ratio (NCR)

  • Determines the part of total assets that is still owed to lenders
• Networth Ratio (NR)

  • Measures what part of total assets is financed by the owner’s equity
• Debt-Asset Ratio (DAR)

  • Measures what part of total assets is financed by the creditor/s.
• Debt-equity Ratio (DER) or Leverage Ratio

  • Compares the proportion of financing provided by lenders with that provided by the business owner.