CHAPTER 14 - INDICATORS & RATIOS
Being able to summarize your important financial points
allows the Lender/Investor insight into whether or not you understand how the money world
operates. Provide support for: sales revenue, price points, fixed costs, gross margins,
and net income. The financial industry judges your potential success by RMA (a lending
trade association) standards and ratios. If you're not a good numbers person ask your
accountant to calculate the following ratios:
- Current Ratio (1 to 1 or better) Current assets divided by
- Quick Ratio (0.5 to 1 or better) Current assets less
inventory divided by current liabilities.
- Debt to Worth Ratio (3 to 1 or better) Creditors capital to
- Gross Profit Margin (60% or better) Gross sales less cost of
- Net Profit Margin (10% or better) Gross sales to net income.
- Debt Coverage Ratio (1.25 to 1 or better) Net income divided
by debt payment (Principal & Interest).
- A/R Turnover Ration (as close to 12 as possible) Gross Sales
divided by accounts receivable.
- "SIC" Standard Industrial Code (know yours)
Lenders will compare your ratios to those of your industry.
There are many good computer financial programs available
to assist you in formatting your projections. If you aren't computer literate, recruit
someone who is. After you have taken a run at the numbers by yourself, it is always a good
idea to have your accountant look them over.
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