The National Society of Collegiate Scholars recently accepted Eric Baumbach of Willowbrook, Illinois, into its membership. He has served as the data analyst chair of service fraternity Alpha Phi Omega at the University of Illinois at Urbana-Champaign. Among his various academic and career pursuits, Willowbrook’s Eric Baumbach has shown a special interest in accounting.
Public accountants perform many important financial services to individuals and companies. Perhaps the most important aspect of public accounting is auditing. In any given year, much of an accounting firm’s resources are typically devoted to performing audits of financial statements for private companies. These can provide up to half of the firm’s revenue.
Some accountants specialize in preparing income taxes for individuals and businesses. This route offers substantial job security, as accountants are often called upon to help navigate the ever-changing laws that govern taxation.
Public accountants offer a variety of day-to-day accounting services for clients as well. These can include maintenance of accounting records, reconciliation of bank statements, payroll, quarterly tax filings, and other services that may be too burdensome for businesses with limited staffing.
Accounting methods and analysis may provide many clues to the quality of a company. Having liquidity and being able to meet short and long term obligations is essential for any business. Lenders or investors should know that having enough working capital is essential for the success of any business. Formulas may be used to determine a quick analysis.
For a company to meet short term obligations one might want to use the Quick Ratio:
Current Assets – inventories / Liabilities = Quick Ratio
The Current ratio helps analyze the ability of a company to cover short term obligations. A current ratio of 2.0 or higher is generally considered attractive.
Current Assets / Current Liabilities = Current ratio
The Debt to Equity Ratio reveals the dependence on debt for the operation of the company. Generally, the lower the number the less dependence the business has on debt for their operations.
Total Liabilities + Shareholder Equity = Debt to Equity Ratio
The cash conversion cycle (CCC) is useful to measure to view the company inventory and how it applies to production and sales and applies it to operations and terms from creditors. A shorter work cycle indicates a better position of working capital.
Days Sayles outstanding + Days Payable Outstanding + Days Inventory Outstanding
= The Cash Conversion Cycle.
A full understanding of the industry along with the individual business will make this analysis more useful. Using a combination of ratios may help a more complete understanding of the balance sheet and helps lenders and investors understand their risk.
A resident of Willowbrook, Illinois, Eric Baumbach is currently studying for a dual bachelor’s degree in accountancy and finance at the University of Illinois at Urbana-Champaign. He is a member of the university chapter of the Alpha Phi Omega service fraternity, served as past director of finance and as a member of several committees. He also serves as a volunteer consultant for entreCORPS, an organization dedicated to developing and offering the best solutions to startups, municipalities and businesses.
Eric Baumbach of Willowbrook, Illinois, studies accountancy and finance at the University of Illinois. In addition to his studies, Mr. Baumbach has gained diverse work and service experience, having worked as a lifeguard at the Five Seasons Sports Club in Burr Ridge, Illinois, and having served as the leader of a local chapter of the Soldiers’ Angels. Beyond his scholarly focus, Eric Baumbach is interested in investment theory and the stock market.
The following three factors are just a few of many important considerations when planning to invest.
1. Think ahead. There is a difference between funds you will withdraw in the next five years and funds you plan to save for later in life. Perform due diligence to find stocks and investment vehicles that match the time frame of your investment.
2. Know your risk tolerance. Some investments are higher risk (more chance of loss), but appreciate at a faster rate, while others are lower risk, generally building interest more slowly.
3. Maintain realistic expectations. Some stocks produce high returns, while others generate are quite small. Although a given stock may generate an unusually high return, understand this could be luck and that most stocks grow over time. A single investment may offer both options, fluctuating over the course of many years. Be conscious of expectations and how they are affecting the decision-making process.