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Start Up Financial Plan Ratios

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Ratios and their analysis represents a method for comparing financial data between periods, against competitors, and against targets or industry standards. It allows a top down view of results to raise red flags or signal where adjustments might be made.

A start up company has no history to compare financial results or projections. But they can still provide meaningful insights as to how the firm is doing. And from a budget start up view - the financial plan can be evaluated for reasonableness of assumptions.

Major Ratio Types
in the Financial Plan

  • Liquidity
  • Coverage
  • Leverage
  • Operating
  • Comparison to Sales

Liquidity Ratios
in the Financial Plan

Current Ratio - Total current assets divided by total short-term liabilities. This is a measure of the business capability to survive in the near future.

Quick Ratio - Total current assets not including inventory divided by total short-term liabilities. This is a more conservative measure than the current ratio.

Receivables turnover - Annual sales divided by accounts receivable. This represents the number of times trade turns over. A high number suggests greater liquidity.

Days sales in receivables - Accounts receivable divided by annual sales. This indicates how quickly receivables are being collected stated in days. A comparison is then easily made versus terms of payment.

Sales to Working Capital - Annual sales divided by working capital ( current assets less current liabilities ). This evaluates the efficiency of using working capital in generating sales.

Coverage Ratios
in the Financial Plan

Cash Flow versus Current Debt - Cash basis net income divided by current debt. This indicates whether the company can handle its debt , or is capable of taking on additional debt.

Interest Coverage - Income before interest and income taxes divided by interest expense. Important for creditors, it shows how many times earnings cover interest payments.

Leverage Ratios
in the Financial Plan

Debt to Net Worth - Total liabilities divided by tangible net worth. This reveals the relative ownership position of creditors. A high number indicates greater leverage.

Fixed assets to Net Worth - Net fixed assets divided by net worth. This shows the extent that the owners are funding fixed assets.

Operating Ratios
in the Financial Plan

Pretax Income to Net Worth - indicates return on investment ( ROI ).

Pretax income to Total Assets - indication of efficiency in employing business assets.

Net Margin - Pretax income divided by net Sales - measures management's overall performance.

Comparison to Sales Ratios
in the Financial Plan

Expense Items versus Sales - meaningful expenses for comparison vary by industry. For instance , in the fast-food restaurant business - food, paper and labor represent the most significant direct expenses and should always be compared. In a retail internet company wholesale costs, production costs or shipping might provide good candidates.

Analyze and react to your Financial Plan
- especially if you are a start up business!



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