The working capital over total assets ratio is a financial ratio used by a business to give an indication of it’s liquidity or financial distress. The ratio is calculated by taking the difference between the current assets and current liabilities and dividing this by the total assets of the business.
A business can fund it’s operations from both internal (retained earnings) and external (debt and injected capital) sources. The retained earnings to total assets ratio is the ratio of the accumulated retained profits of the business compared to its total assets, and is an indication of the percentage of assets funded by internal resources.
Efficiency is the ability of a business to use its asset base to generate revenue (and therefore profit). The asset turnover ratio is used in the financial projections template as one indicator of efficiency, and shows the amount of revenue generated by the business relative to the amount invested in assets.
Profitability is the ability of a business to control its expenses in relation to its revenue. The profit margin ratio is used in the financial projections template as one indicator of profitability, and shows the percentage of revenue retained by the business after deducting all expenses.
The financial projections template includes the calculation of two return ratios to indicate the ability of the business to generate profit from its assets (return on assets), and to provide a return to the owners of the business (return on equity).
The financial projections template includes the calculation of four key financial ratios which indicate the profitability, efficiency, leverage, and liquidity of the business. It is important to monitor the four ratios in order to ensure that they are in line with industry norms. Any variation in either the absolute value or the trend in the ratio should be analysed and explained before finalizing the business plan financial projections.
Liquidity is the ability of a business to utilize its short term assets such as cash, accounts receivable and inventories, to pay its short term liabilities when they fall due. The current ratio, used in the financial projections template is one indicator of liquidity.