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 current liabilities.

• 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 owners capital.

• Gross Profit Margin (60% or better) Gross sales less cost of goods sold.

• 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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