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Lesson 10. Managing Your Budget > Ratio Analysis - Pg. 44

Managing Your Budget 44 · Financial statements, including balance sheets, income statements, and cash flow statements, are the primary documents analyzed to develop budgets. In a for-profit company, all three state- ments apply. In a nonprofit agency, with some exceptions, there is much greater reliance on the cash flow and income statements. The higher your position of responsibility and the larger the organization is, the more likely you will be involved in the budgeting process. If necessary, you should become totally familiar with these principals. Tip Most community colleges offer basic courses in bookkeeping and financial statements. Ratio Analysis Ratio analysis is a process whereby elements of the financial statements are combined in simple mathematical equations to determine financial performance and stability of the company. Banking institutions and private investors can apply 150 or more of these simple equations to analyze fi- nancial statements, historic and projected, to determine financial performance, stability, and feasi- bility. Five categories of ratios are commonly used: · Liquidity ratios determine a company's ability to use assets to meet liability demands. · Coverage ratios determine the ability to cover debts. · Operating ratios evaluate management's performance regarding profits, net worth, assets, and sales. · Leverage ratios measure a company's level of vulnerability to industry downturns and the impact