Computation of current ratio
Current ratio =
Current Assets/current liabilities
The current ratio of the company is projected at 1.66 in 2017 while it was 1.82 in 2016. From the computation it is clear that the company has sufficient assets to meet the obligations. The standard ratio is 2:1 however it differs from one company to another. Generally a ratio of 1:1 is considered appropriate (Porter & Norton, 2014). From the computation it is clear that the business has sufficient funds to meet the obligations.
For the qualification of a business loan, it is essential to evaluate the Debt Service Coverage Ratio and needs to be more than 1.25. Other things being equal the higher the DSCR above 1.25 the greater is the chance for the loan approval. As the DSCR has move ahead 1.25 it means that the business is making 25% more income as compared than is needed to cover the debts.
As seen from the situation the business has tangible assets that comprise of investments is intangible assets are not present in the business. Hence debt to tangible net worth cannot be computed.
Having a good DSCR can enable approval for the loan however, it does not end here. There are other risks that the business might face. As part of the loan agreement, the lender may need to keep the debt service coverage ratio at a specific level year over year (Vaitilingam, 2014). If the level of DSCR falls below the prescribed limit then the lender will call the balance due. This is a risky situation because calling the balance due indicates that the time frame is short generally 90-120 days to pay the entire balance. If this is not done then it will be considered as negligent and the lender will take an initiation of the collection proceedings (Laux, 2014).
Risk associated with the business
Yes, the business has risk because the business contains no tangible assets. In order to perform effectively, it is essential that the business should comprise of both tangible and intangible assets. The absence of assets such as goodwill, intellectual property and other tangible assets pose a threat because they project the net worth of the company. The business can show this worth with proper documentation and the assets can serve as collateral that makes it easier for the company to obtain a loan (Ross et. al, 2014)
As per the financial statements, it can be stated that the business has sufficient cash because the cash and cash equivalent at the end of the year that is 2017 is higher as compared to the year 2016. There is net increase of cash at the end of the year. The major reason why there has been a major shift from the deficit to surplus is owing to the fact that investments are sold and hence there is a surplus or inflow of cash. Hence, going by the projection of the business it can be said that the positive amount denotes a positive scenario to the business. In 2017 Cash and cash equivalence at the end of the year is $28788 and this means the business has closed the accounts on a positive note and for the next year 2018, the business will have positive cash scenario. The net increase and figures at the end of the year denotes that the cash position of the business is formidable and hence, the prospect remains good in the upcoming times.
Endowment funds are specifically structured in a manner that has strict contractual obligations, as well as rules. Such needs to be followed by the non-profit organization and the main aim of the fund is to provide a strong support to the long term financial health of the non-profit organization and the beneficiaries (Vaitilingam, 2014). An endowment funds can be defined as an investment fund that is established by the foundation and regular withdrawal is made from the capital that is invested. The capital that is present in the endowment funds are mostly used by the universities, non profit organization and hospitals. It is utilized by the company for the specific needs of the company and helps in the process of operating. Such funds are funded by donations that are deductible for the donors.
Financial endowments are tuned in a manner so that the principal that is invested remains intact and the investment income can be used for funding on an immediate basis so that the non profit company can operate in a smooth fashion. For endowments that are structured a portion of the principal is released every year and the donation has a bearing over a long time frame (Petty et. al, 2012).
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting. Accounting and Business Research. [online]. 44(4), 380-382. Available from: https://www.ccsenet.org/journal/index.php/ijbm/article/viewFile/4235/3672 [Accessed 28 August 2018]