Accounting Theory KITCHENS2GO - Analysis Term Paper

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This is often referred to as the "acid test." The standard range is 1.8:1 for a young company versus.9:1 for a more developed company. Using these benchmarks gives banks a frame of reference from which to measure.

Other indicators to banks include comparing the % of the Cost of Goods Sold on the income statement to industry averages. This gives an indication of the firm's profit margin with regard to its competitors. Operating expenses may also be examined, not only overall but by type of spending. For instance, is the company adequately staffed during peak cycles? Overstaffed during slow cycles? Is some spending preventable or reducible?

One type of expense that is often examined more closely is administrative expense. Administrative expense is largely fixed and generally not directly attributable to generating sales. There are standard measures by industry for appropriate ranges. Exceptions may include start up costs or capital upgrades.

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Lastly, inventory turnover is important to this type of business. Inventory that sits on the shelf too long indicates that inventory is not turning over often enough, that sales are not keeping pace with production.

When combining all of these factors and more, a bank or investor can achieve a good idea of not only a snapshot of how the business is doing today, but compared with yesterday and provide a glimpse of tomorrow. Banks have a fiduciary responsibility to monitor the progress and health of its investments, just as a business owner has to his or her own business. Ideally, the two will work together to identify ways to increase the success of the organization. Without strategic planning, accurate records, risk assessment and monitoring and evaluation these goals would be imminently harder to achieve and harder for the lender to assess......

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