small businesses are growing and are seldom in equilibrium

Equity means the monetary value a person or a business has in the estimation of a bank or other financial institution. For example, if you own a home, a bank would assess a certain value to the home, and would loan that amount of money, if you offer the home as security--and it is said that you have that amount of equity in your home.

The equity of a business would be determined by any real estate owned, by any savings the business possesses, by equipment owned by the business, vehicles owned, by inventory of materials on hand, by outstanding debt owed to the business (this would be discounted depending upon an estimate of the ability of the debtor to pay). Equity such as this would be used, for example, to determine the amount of a line of credit a bank would be willing to advance the business.

When you ask about "formulas for cash flow," you're chopping up the sentence in a manner which destroys the sense of what is written. The locution to which you want to pay attention is ". . . formulas for cash flow and the ratio of debt to equity . . ." The author is saying that there are specific formulas which are applied to established business to determine their financial health which are based upon cash flow (how well money is handled by the company, as well as how much money is handled) and upon the ratio of debt to equity. The sense of the entire sentence is that these formulas cannot be applied to new (young might be a good description, too) small businesses because they are seldom in equilibrium. The author does not say why new small businesses are "seldom in equilibrium"--although the reasons ought to be obvious--but that is not germane to the questions you have asked.

Look at the clauses this way:

Because new small businesses are growing and are seldom in equilibrium . . .

. . . formulas for cash flow and the ratio of debt to equity . . .

. . . do not apply to them in the same way as to established big businesses.

Thanks for your time .the big problem I'm suffering here is to see 'the ratio of debt to equity' .

suppose the company has a debt of 100 mn USD ...and asset i.e equity monetary value say $200 mn USD . ...now what they are trying to say with this ratio ?

Also , How cash flow can influence the big business vs small business.

I understand , all these questions can't be answered from the text I have posted. But If you have any information on these , I'd love to listen that.

Love to gather extra bit of information on this kind of business

Thanks for all of your help. Thanks for your time.

A debt to equity ratio indicates how financially healthy a company is. To use your example, a company with $200,000,000 US in equity, and only $100,000,000 US in debt could be considered to be an extremely, financially healthy company. Banks would be delighted to give such a business a loan, or extend a line of credit, because a ratio of 2:1, equity to debt, shows that they are both fiscally responsible, and commercially successful.

That wouldn't be a small business, though--that amount equity could only be found in a large, a very large business, whether it were privately owned or a corporation. I've worked for small businesses whose gross annual receipts were $200,000 US or even less. I didn't work full-time, but mostly as a business management advisor. With that level of gross receipts, they are not going to be able to afford many full-time, permanent employees. Other small businesses for whom i have worked ran in the range of $500,000 US to $1,000,000 US per annum.

So the ratio of debt to equity is one means of judging the financial health and commercial success of the business.

A large business will want to manage its cash flow carefully, of course, as any business should. However, a large business doesn't have to worry about cash flow as much as a small business. To give you an example from a small business to which i provided business management services: this company had nine, full-time, permanent employees, and the owner was one of those employees (he took a salary rather than taking profits out of the business, which he wanted to grow into a larger business). Therefore, every two weeks, it was necessary to find about $20,000. That was the money to pay the employees, and to pay the tax liabilities on that payroll. When you pay someone a salary in the United States, you have to withhold their income tax based on a schedule from the Internal Revenue Service. In many states, you also have to withhold income tax which is owed to the state. In the state in which that business was located, it was also necessary to withhold income tax for the city in which the business was located, as well as a school district income tax for people who did not live in that city, or any other city with an income tax. The actual payroll was about $13,000 every two weeks--but the tax liabilities, the income tax withheld for the Federal, state and city tax agencies, the school district income tax, the unemployment compensation payments, and the social security (a national pension plan) and medicare (a medical insurance program for retired persons) added up to another $7,000 or $8,000 every two weeks. In addition, there was a health insurance premium to be paid for the employees every month, and a liability insurance premium and automotive insurance premium to be paid one each quarter (every three months). All payroll withholding actually represents money which is legally the employees money, so if you don't properly withhold that and pay it on time, among a lot of other legal problems you will have, you will be guilty of theft from your employees--it's their money you're withholding, not yours. If your health insurance premiums lapse, the state will make you pay the entire cost of their medical bills, as well as taking you court for breach of contract. If you don't pay your liability insurance, you can't sign new contracts with customers. If you don't pay your automotive insurance, the police can impound your company vehicles.

That company did "high-end" work, which means expensive equipment and systems installed at a very high price. But that also means you don't get paid right away. So, for a contract worth $100,000 US, the customer must pay 25% "up front," before we would start work. Then they have to pay 40% when the job has been half-completed. Finally, they owe $35,000 when the job is done. It's easy to get the first $25,000, because they want you to start work. It's not as easy to get the next $40,000, because they'll drag their heels, waiting to see if you'll actually "down tools" and stop working on the project (and you need to do that, if you expect them to take you seriously and be responsible). You might have to wait a very long time to get your last $35,000.

So, part of my job was to make the owner aware of his liabilities, and in order of their significance. You have got to pay payroll and payroll taxes right now. You had better not be late with any of your insurance premiums, either, although they will often wait for a week to ten days--after which they'll cancel your coverage, and charge a big penalty to re-instate it. The law requires you to deposit payments to any approved pension plan within a certain specified period of time. So, i'd have to tell him something such as: "Yeah, i know those DVRs are part of a one time sale, but you have a payroll Friday, and that means you have to make your 941 deposit (payroll taxes) and state deposit by the following Wednesday, and a week from Friday is the end of the month and the quarter, so you have your insurance and pension payments to make, too. So, no, you can't have that $25,000, it's already spent, and you better look through these suppliers' bills and decide who you want to pay with the paltry sum we'll have left over in our bank account."

Cash flow can be very crucial for a small business, much more so than for a large business. Banks will only have so much patience with a small business who doesn't do any large transactions with them, and if you're taking money out of your line of credit to pay your payroll taxes, they'll know it, because you deposit your payroll taxes at your bank. Do that a couple of months in a row, and the bank manager is going to want to have you in for a little chat.

A big company has millions of dollars in transactions with the bank, and the bank managers compete with each other to see who can kiss their collective ass first. Cash flow is important to big businesses, but it is far more important to a small business. It doesn't mean much to have hundreds of thousands of dollars in contracts if you're not getting paid in time to meet your payroll obligations.

You're welcome for the time and the help. Like many of us, i enjoy the sound of my own voice.