When developing financial projections for your business plan it is useful to monitor the financial ratios produced so that they can be compared with other available data. By making the comparisons it is possible to see whether your financial projections are in line with industry, competitor, and if available, historical data. If the financial ratio comparisons reveal unexplained variations then the assumptions in the plan need to be improved and fine tuned to bring the projections in line with expectations.
On its own the return on equity formula tells you very little about how the business managed to make the return. In order to do this a technique called DuPont analysis is applied to the return on equity formula, which basically involves separating out the various aspects of the business to show how they have an impact on the equity return.
The return on equity (ROE) is used to measure the percentage rate of return the owner of a business gets on their invested equity.
The return on equity measures the ability of a business operation to use its money to generate earnings. It is calculated by dividing the net income by the owners equity.
Inventory represents the total of raw materials, work in process, and finished goods that a business holds for the purpose of resale.
Inventory days is calculated using the inventory days formula and shows the average number of days sales a business is holding in stock.
The Excel inventory days calculator, available for download below, calculates the inventory days by entering details of cost of sales, number of days in the accounting period, and the inventory balance.
Accounts payable represent amounts owed by a business for goods purchased on account from its suppliers.
Days payable outstanding is calculated using the days payable outstanding formula and shows the average number of days the business is taking to pays its suppliers for purchases on account.
The Excel days payable outstanding calculator, available for download below, calculates the days payable outstanding by entering details of cost of sales, number of days in the accounting period, and the accounts payable balance.
Accounts receivable represent amounts owed to a business for goods sold on account to customers.
Days sales outstanding (dso) is calculated using the days sales outstanding formula and shows the average number of days the customers are taking to pay the business for sales made to them on account.
The Excel days sales outstanding (dso) calculator, available for download below, calculates the days of sales outstanding by entering details of sales, number of days in the accounting period, and the accounts receivables balance.
The Z score Altman model takes five key accounting ratios for a business, and using the Altman Z score formula weights them according to an industry type, and combines them into a single score (the Z score) to give an indication of the financial health of a business.
The Excel break even analysis calculator, available for download below, allows for up to four different options or scenarios to be considered at a time.
For each option, the unit selling price and cost price are entered and the gross margin and gross margin percentage are calculated. By entering a value for the fixed costs of the business, the break even revenue and the break even units are calculated.
Financial ratios are used to analyse business trends and measure performance of both the business and the management. Our Financial Projections Template provides key financial ratios. The financial ratios formulas chart below acts as a quick reference to help you find information about the most important ratios used in managing a business.
Financial ratios are a relative measure of two or more values taken from the financial statements of a business and can be expressed as a decimal value such as 0.55 or as a percentage e.g. 55%.