Capital Ratios: Overview

January 28, 2010, 5:00 am

Small Business Finance & Profitability

By William Stong

Capital is fundamentally critical to a company. Not only does it provide the initial funds to launch your business, it is also the financial resource that helps to:

● Fund growth when times are good

● Cover losses when times are bad

In a sense, it doesn’t matter whether your business is doing well or poorly: capital is there to help you thrive or survive.

Given its importance, the amount of capital a company has is part of several ratios to monitor the health of the business. Capital, and its relationship to other aspects of your profit dynamics, is an important performance measurement.

Here are some useful sites:

● Accounting Ratios for Financial Statement Analysis

http://www.cpaclass.com/fsa/ratio-01a.htm

● Answers.com (Capital Ratio)

http://www.answers.com/topic/capital-ratio

● Wikipedia: Capital Requirement

http://en.wikipedia.org/wiki/Capital_requirement

● FDIC (Federal Deposit Insurance Corporation)

http://www.fdic.gov/bank/analytical/fyi/2003/011403fyi.html

Over the years, several capital ratios have been developed to monitor different aspects of a business. These ratios might be categorized as follows:

● Operating Margins

Margins that focus on the ongoing health of the business and how efficiently capital, from whatever source, is being used

● Regulatory Margins

Margins that are dictated by governmental agencies. Companies subject to such requirements must ensure that they run their businesses, including the amount of capital, in such a way that they meet or exceed these mandates.

● Safety Margin

Margins that focus on ensuring there is sufficient financial cushion in the company to withstand anticipated adverse impacts related to the business the company is in

In the coming weeks, we will look at all three.

Bill

William A. Stong

Email: william.a.stong@gmail.com

SBF&P # 51

Telephone: 925-202-6244