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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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