11.5.  Ratio Analyses

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The Guide > 11.  Financial Projections > 11.5.  Ratio Analyses

Highlight the key ratios and trends over time. To do this, it is essential that projected income statements, cash flow forecasts and balance sheets are linked and integrated with each other so that ratios can be calculated as the following example shows:

The following ratio analysis is based on the foregoing 5-year projections for Any Company Inc.:

 


This table was "pasted in" as a picture from Exl-Plan, PlanWare's Excel-based financial planner.
It is fully-integrated and linked to cashflow forecasts and projected income statements and to a
much more detailed analysis including many additional ratios. See Using Exl-Plan with Free-Plan.

 

The ratios highlight:
 

Income margins rising from 1.4% of sales to 8.3% in 20XX.
 
Income to total assets progressively rising from 2.6% to 13.7%.
 
Debt declining from 188% of owners' equity in the first year to just 3% in 20XX.
 
An improving trend in "per share" items.

 

Do a reality check to confirm that ratios are reasonable. For example, the following ratios could be cause for concern:

Net income (profit) before taxes above 15-20% for any year.
Sales below break even for more than one year.
Sales/total asset ratio above 3-5 (times) in any year.
Net debt/equity above 80% in any month or year.
Current asset ratio below 1 in any month or year.
Interest cover under 2 in any year.
Return on total assets above 30% per year.

Compare projected financial ratios with industry norms and justify any significant deviations. 

For help with financial projections and ratio analyses, see Financial Projections with Exl-Plan. For additional guidance, review the online white papers dealing with the following:

Preparing Financial Projections
Making Cashflow Forecasts
Managing Working Capital.

For latest information, see the Financial Projections section in the Business Plan Guide at http://www.planware.org/gfinancials.htm

 



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