Businesses processing more than $100,000 per month are considered high volume merchants. As part of the application procedure, high volume merchants are asked to submit financial statements consisting of Balance Sheets and P&L (Profit & Loss) Statements.
The financial statements are part of determining the credit worthiness of a business. A merchant account, in essence, is a short term unsecured line of credit. Ultimately, if the business goes bankrupt or becomes financial unstable, the processors and banks can be liable for losses.
A fast-growing company without strong financial statements can still obtain an account. However, this type of business will be considered a high risk merchant account. The most important element to account approval in this instance is the credit rating of the signatory on the account.
Profit & Loss are also known as income or income & expense statements. The P&L summarizes the costs and expenses incurred by the company during a specific period of time, generally a fiscal quarter or year. The P&L indicates the ability to generate profit by increasing revenue and reducing costs.
Data taken from financial statements is often examined in ratios. Financial ratios are classified according to the information they provide. The following types of ratios are often used:
Liquidity ratios give information about a company’s ability to meet short-term financial obligations. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. The current ratio is the ratio of current assets to current liabilities. A quick ratio is an alternative measure of liquidity which does not include inventory in current assets.
Asset turnover ratios show how efficiently a company utilizes its assets. Two common asset turnover ratios are receivables turnover and inventory turnover. Receivables turnover indicates how quickly a company collects accounts receivables Inventory ratios show the cost of goods sold in a time period divided by the average inventory level during that period in accounts receivable before they are collected.
Financial leverage ratios indicate the long-term solvency of a firm company. Financial leverage ratios show the extent to which a company is using long term debt.
Profitability ratios indicate the success of a company at generating profits. The gross profit margin is a measure of the gross profit earned on sales. Return on equity is the bottom line indication for shareholders, showing the profits earned for each dollar invested in the firm's stock.
Dividend policy ratios measure the dividend policy of a company and the prospects for future growth. Two common ratios are the dividend yield and payout ratio.