People looking at your business plan, particularly common and preferred shareholders will be interested in the overall performance of your business. These ratios offer a number of different ways to measure the success of your business to date. These are some of the important ones in business plans.

Earnings per share (EPS)

[ (Net Income – Preferred Dividends) / Number of Common Shares ]

Because the number of shares is not known, this ratio actually doesn’t mean anything on its own unless you related it to the Price Earnings ratio below.

Price earnings ratio

[ Market Price per Common Share / EPS ]

This ratio will be compared to the P/E ratio for the industry to see how profitably investors expect this company to be. Higher means that investors are expecting higher returns, but of course it is more risky because there is more to lose. For private companies, this ratio can be used to ballpark (very roughly) the share price of the business. Use the P/E ratio for the particular business sector (get it from the FTSE Actuaries Share Indices in the Financial Times) and multiply it by the EPS to get the Market Price per Common Share.

Return on Assets (RoA)

[ (Net Income + Interest After Tax) / Total Assets ]

This ratio is used to see how profitable the assets of this company are. If there is a low RoA, it may indicate that the business has high capital intensity, which means higher up front investments.

Return on Investment Capital (RoIC)

[ (Net Income + Interest After Tax) / (Equity + Long Term Liabilities) ]

This figure shows how much all the guys on the right side of the balance sheet (investors, creditors, shareholders, etc.) are getting on their investment. It will be compared to the industry.

Debt to Equity (D/E)

[ Total Liabilities / Equity ]

This ratio gives an idea of the capital structure of the business. Of course a high ratio indicates that the firm is highly leveraged, getting more of its funding from debt than equity.

Debt to Capital (D/C)

[ Long Term Liabilities / Long Term Liabilities + Equity ]

This is just another way of looking at the amount of debt compared to equity. A higher ratio might indicate a weaker position because of the cost of debt.

Tags: financial indicators, financial ratios, performance, ratio analysis
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Investors, particularly common and preferred shareholders, will be interested in measuring the profitability reflected in your business plan financials. These are some of the key ratios they will look at.

Return on Equity (RoE)

[ Net Income / Total Shareholder Equity ]

This number will tell an investor how much profit the firm has earned using shareholder equity. It reflects how much growth is expected as a result of investment, but it is not the only factor to look at since different companies have different capital structures.

Gross profit percentage (GP%)

[ Gross Profit / Sales ]

This is important for telling how well a company manages its cost of goods. This ratio shows how much of the revenue from a good is over and above the cost of the good.

Profit Margin (PM)

[ Net Income/ Sales ]

The profit margin ratio gives a good idea of how well managers control costs. A higher profit margin indicates that a company earns more money for every dollar of sales.

Tags: financial indicators, financial ratios, profitability, ratio analysis
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Investment utilization refers to how well a business uses its investments and assets. While creditors and preferred shareholders may not really look carefully at these numbers, common shareholders will look very carefully because these numbers deal with their investments and are a good help at judging the quality of management.

Asset Turnover

[ Sales / Total Assets ]

This shows how efficiently a company uses its assets. A higher number is better, but a company with a low asset turnover may also indicate the company’s strategy is to sell at low margins.

Invested Capital Turnover (ICT)

[ Sales / (Liabilities + Equity) ]

This shows how much sales are generated from the investments of all the people on the right side of the balance sheet, including banks and shareholders.

Equity Turnover (ET)

[ Sales / Equity ]

This shows how much sales are generated from investment by shareholders. It indicates how well managers use equity investments.

Capital Intensity (CI)

[ Sales / Capital Assets ]

Capital assets are purchased to generate sales either directly or indirectly, so this number measures how well a company’s capital assets generate sales.

Days Cash (DC)

[ Cash / (cash expenses / 365) ]

This number is used to measure how long a company could go without any new cash injections. The larger the number, the less risky the business.

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Creditors and preferred shareholders will be really interested in a business’s ability to pay its bills. These are some of the indicators will be looked at to provide this information.

Days Receivables (DR)

[ AR / (Sales / 365) ]

This number indicates how many days it takes for the business to collect on its invoices. Of course, longer is worse because it means that money is not there to reinvest.

Days Inventory (DI)

[ Inventory / (Cost of Sales / 365) ]

This number shows how many days it takes from the time inventory is bought to the time it is sold. In general, a smaller number is better, but in some industries this will be higher to provide customers with more choice and in store availability.

Working Capital Turnover (WCT)

[ Sales / Working Capital ]

This is a good indicator of how a company is using working capital to generate sales. Higher is better.
 Produces as much sales as possible for a given set of capital

Current Ratio (CR)

[ Current Assets / Liabilities ]

This is a good liquidity indicator that shows a company’s ability to pay its creditors.

Asset Test Ratio (ATR)

[ Monetary Assets / Current Liabilities ]

This ratio is another good liquidity indicator that uses only cash and cash equivalents as the numerator, so it shows the company’s ability to pay bills with no notice.

Times Interest Earned (TIE)

[ (Operating Income + Interest) / Interest ]

This measures how many times more cash it is generating than its interest payments. If the company is barely making enough to make the interest it is pretty unappealing to creditors or investors.

Cash Flow to Debt (CF/D)

[ (Operating Income + Amortization) / Total Liabilities ]

This is another measurement of how able a company is able to cover its debt. This number needs to be over 2 so that there is some cushion.

Dividend Yield on Common (DY(C))

[ Common Dividend / Market Price per Common Share ]

This number shows how much of the business pays out on dividends. This is of course unimportant unless the company pays dividends.

Dividend Payout (DP)

[ Total Dividends / Earnings ]

This number indicates how much of earnings are paid out as dividends. A high number indicates a mature company that is not growing.

Tags: financial condition, financial indicators, financial ratios, ratio analysis
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There are a common set of financial indicators that can be calculated using financial statements in your business plan. Investors will use these indicators to understand your business. You should know what they are so you understand what investors are looking at and what they will want to see.

Overall Performance Indicators

These are the key indicators of your business performance. Investors will look at how others value your company with the Earnings per Share and Profit to Earnings ratio. They will check how well your capital is performing with Return on Assets and Return on Investment Capital. Your Debt to Equity ratio and Debt to Capital ratios will tell them about your capital structure.

Profitability Indicators

These indicators assess profitability in key areas. Return on Sales will show how well managers control sales. Gross Profit Percentage and Profit Margin are important ratios that demonstrate the level of profit made on sales.

Tests of Investment Utilization

These indicators show how well you are using your assets. Asset Turnover will show how quickly you renew you assets or inventory. Equity Turnover and Investment Capital Turnover show how well you are using your financing. Capital Intensity measure how well your capital assets are doing at increasing sales. And Days Cash tests how long you could stay alive without any cash injections.

Tests of Financial Condition

These indicators demonstrate your ability to make regular payments.

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When you are looking for financing it’s important to understand the ways potential investors will be analyzing the financials of your business plan. You should be prepared and have all the information needed they need and ensure the analysis will make sense.

Understanding Details

Investors will look for details that should be in the numbers, so be sure the details are there. For example, if there are large capital assets on your balance sheet, how much does your income statement show you are spending on things maintenance or insurance?

Big numbers on balance sheet

One of the first things investors will look at is the biggest numbers on your balance sheet. This helps them understand how you running your business. They will compare those numbers to the industry standards and judge if yours make sense.

Horizontal Analysis

Investors will look at items on your balance sheet as percentages of total assets, liabilities, or equity. They will compare the percentages from year to year to see the changes your company is making and judge if it’s a move in the right direction.

Vertical Analysis

Investors will look at items on your income statement as percentages of sales and judge whether or not those proportions make sense.

Hard vs. Fuzzy Assets

Hard assets, like cash will be valued more than soft assets like development costs even if they are valued the same on the balance sheet because hard assets are easier to recover.

Accounting Review

An accountant can review your statements at different levels of thoroughness. The accountant can attach a “notice to the reader,” a “review,” or an “audit” to the front of your business plan. Banks will require at least a review.

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Before heading out in search of financing, here are some common reasons business plans are rejected. Check your business plan and see if there is one or more of these problems.

Unrealistic Projections

People tend to overestimate revenue and underestimate costs. Business plans will be rejected if the projections are unrealistic or unsupported.

No Sensitivity Analysis

It’s impossible to predict exact sales. Investors will want to see what your financials look like if you have more or less sales than predicted. You need to be able to show these situations.

Not In line with Industry Norms

Business plans that have numbers that are far off from what is normal in the industry will be highly scrutinized and rejected unless there is a good reason for the difference that is supported by more than simple assumptions.

Overkill on Spreadsheets

It’s common for people who can’t dazzle investors with solid figures to try to baffle them with BS. More important than the numbers are the assumptions. For a start-up there should be maybe two pages of statements with enough projections to show some significant revenues.

You Don’t Understand Your Own Numbers

Don’t delegate your business plan. If you need to, have a consultant review it, but if your team doesn’t know your numbers well enough to justify the all your numbers you will look stupid when you’re presenting the plan and investors won’t be interested.

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Investors have a few main issues they are generally looking at when analyzing the financials of your business plan. Understanding what they are looking at will help you ensure you have a business plan that is going to be well received. Here are 5 of main issues:

Forecast Earnings before Tax (EBT)

Investors will be looking at what your forecasted EBT is compared to the industry norms. If your EBT is different, they will want to know why.

Time to Break Even

Typically investors want to see that your business will break even within about 2 years.

Forecasted ROI

The typical investor will invest in about 1% of the plans that come across his desk. Of those plans, he expects about 2% to really pay off enough to cover the poor performance of the others. So the investor is looking for businesses with high potential ROI. If your forecast ROI is less than 20% investors will usually not be interested unless you’ve got an extremely solid plan.

Cash Flow (EBITDA)

If your cash flow doesn’t allow you to service your debt then your business is probably going to fail. Investors and especially creditors will need to be comfortable that your cash flows every month are going to be enough to cover at least 2 – 3 times the minimum debt payment.

Amount of Leverage

Depending on your track record, creditors are going to want to see that you have invested a significant amount of your own money. The more debt you’re asking for in proportion to your own equity, the more risk a creditor is taking in proportion to you, the person responsible for the business.

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It’s important that the financial portion of your business plan includes everything that potential investors or creditors will be looking for. These are the 5 basic things you will need to include.

Financial Statements

Investors will be looking for your historical financial statements. Typically you should include 3 – 5 years of financial statements if your business has been around that long.

Projected Financial Statements

Include your pro-forma financial statements along with your projected cash flows. Your projected cash flows should be broken down by month, and each month should be considered independently rather than simply dividing yearly projections by 12.

Break Even Analysis

Of course a business with more fixed costs will take longer to break even than one with more variable costs and will be more risky.

Proposed Source of Capital

Include an explanation of what sources of capital you are looking for.

Appendices with Supporting Numbers

People often make assumptions in their business plans but don’t provide any supporting numbers to back it up. It’s not good enough to make “reasonable assumptions,” without a real reason. You need to show that your assumptions are made based on something more provable.

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When it comes to getting financing for your business, obviously potential creditors or investors will need to see the numbers to make sure they can achieve their returns. The better you can understand what they need, the better chance you will have of getting your financing.

Include All Components

There are some basic components that need to be included in your financials. These include historical financial statements, projected financial statements, a break even analysis, a proposed source of capital, and appendices of numbers that support your assumptions.

Understand the Issues

Knowing what kinds of things investors will be interested will help you sell your plan. Some things that they will be looking for is whether your numbers are consistent with the industry, how long it will take to break even, what is your forecasted ROI, if your cash flow is going to cover debt servicing, and how leveraged your business is.

Understand the Downfalls

There are some common reasons business plans fail to get financed that you can look for in your plan before approaching investors. These include unrealistic projections, no sensitivity analysis, not in line with industry norms, spreadsheet overkill, and your own lack of understanding of the numbers.

Understand the Analysis

It’s important to understand how your financials will be analyzed so you can be sure that the details that should be there are there. Investors analyze your financials by looking at the big numbers on your balance sheet, looking at changes that have occurred from year to year, looking at percentages of different items within the last year, looking at what kinds of capital assets you have, and checking how thoroughly the reports have been reviewed by an accountant.

Understand the Indicators

There are several financial indicators that investors will calculate and read. Understand what these indicators will tell potential investors about your overall performance, your profitability, your utilization of assets, and your financial condition.

Tags: business plan, business plan financials, financials
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