Context-Aware Applications - Guide to Cloud Computing for Business and Technology Managers - page 503

of an enterprise, total net cash flow and total profit are essentially
equal, in the short term, they can be very different. In fact, one of the
major causes of failure for new small business enterprises is not that
they are unprofitable but that the growth of profitable activity has
outstripped the cash necessary to resource it. The major difference
between profit and cash flow is in the acquisition of capital assets
(i.e., equipment that are bought and paid for immediately, but that
have likely benefits stretching over a considerable future period) and
timing differences between payments and receipts (requiring the
provision of working capital).
For focusing on longer-term profitability with short-term cash flows,
profit to sales ratios can be calculated (although different ratios can
be calculated depending whether profit is measured before or after
interest payments and taxation). Value added (sales revenues less the
cost of bought-in supplies) ratios can also be used to give insight into
operational efficiencies.
3. Assets : Assets entail the acquisition and, therefore, the provision of
finance for their purchase. In accounting terms, the focus of atten-
tion is on the balance sheet, rather than the profit and loss (P/L)
account or the cash flow statement.
For focusing on the raising of capital as well as its uses, a further set
of ratios based on financial structure can be employed. For example,
the ratio of debt to equity capital (gearing or leverage) is an indica-
tion of the risk associated with a company's equity earnings (because
debt interest is deducted from profit before obtaining profit distrib-
utable to shareholders). It is often stated that fixed assets should be
funded from capital raised on a long-term basis, while working capi-
tal should fund only short-term needs.
It is necessary to be aware that some very successful companies
flout this rule to a considerable extent. For example, most super-
market chains fund their stores (fixed assets) out of working
capital because they sell their inventories for cash several times
before they have to pay for them—typical inventory turnover is three
weeks, whereas it is not uncommon for credit to be granted for three
months by their suppliers.
There is, therefore, no definitive set of financial ratios that can be
said to measure the performance of a business entity. Rather, a set
of measures can be devised to assess different aspects of financial