Harlem Business Alliance. Financial Ratios and Projection Assumptions

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1 1 Harlem Business Alliance Financial Ratios and Projection Assumptions

2 2 Why is this Important? Growth Map ($m) $35 $20 $15 $4 Year 1 Year 2 Year 3 Year 4 Entrepreneurs are in business to make a profit. Their aim is to increase relative profits as the business becomes more established.

3 3 Introduction to Financial Statements Types of Financial Statements Income Statements Profit & Loss Reports on a company's income, expenses, and profits over a period of time Profit & loss account provides information on the operation of the enterprise Balance Sheet Statement of Financial Position or Condition Reports on a company's assets, liabilities, and net equity as of a given point in time Cash Flow Statements Reports on a company's cash flow activities, particularly its operating, investing and financing activities

4 4 Ratios Most common tool used in financial statement analyses. Below we have highlighted the formulas for the most common ratios used: Profitability Solvency Gross Profit Margin % (GP) - GP/Sales x 100 Debt (D) to Total Assets (TA) D/TA Net Profit Margin % (NP) - NP/Sales x 100 Debt (D) to Equity (E) D/E Direct Costs (DC) as % of Sales - DC/Sales x 100 Expenses (Exp) as % of Sales - Exp/Sales x 100 Liquidity Stability Current Ratio CA*/CL** Return on Equity (E) NP/E X 100 Quick Ratio (CA*- I***)/CL** Return on Total Assets (TA) NP/TA x 100 Net Working Capital (CA*-cash) - CL** Asset Turnover TA/Sales Days Sales Outstanding Debtors/Sales x 365 * - Current Assets *** - Inventory ** - Current Liabilities

5 5 Graphs Graphical representations is also used in the financial analysis process. Graphs sometimes make it easier to spot trends in large volume of financial information.

6 6 Introduction to Financial Statements Financial Assumptions Income Statements Revenue projection is the basis of a company s projecting activities. No projection can be reasonably completed/accurate, without a clear understanding of the Company s revenue Model. Revenue Model Price How was price determined? Do you have different lines of products or services and how does the price points differ? Do you anticipate increases in your prices annually? Are your prices higher, lower or the same as your competitors and why? Quantity How much quantity will you sell? How do you expect quantity to increase/decrease over time? Which market are you going to be selling quantity to? How larger is this market and what percentage of this market can you win?

7 7 Introduction to Financial Statements Financial Assumptions Direct Costs Cost What is the costs to produce your goods or services? How much will you pay workers per hour and how many workers you expect to hire How much will be incurred for direct material and other overhead costs Do you anticipate increases in your prices annually? Are your costs higher, lower or the same as your competitors and why? Operating Expenses Quantity How much quantity will you sell? How do you expect quantity to increase/decrease over time? Which market are you going to be selling quantity to? How larger is this market and what percentage of this market can you win? Wages - Hourly/Annually -Number of workers and rates Rent price per square foot multiplied by number of square foot Marketing, Other Expenses, Stationary if there are no specific costs these costs are usually projected as a % of Sales Debt Interest projected based on the debt balance and the anticipated rates Taxes are usually projected at 20% to 35% of net income

8 8 Introduction to Financial Statements Financial Assumptions Balance Sheets Balance Sheets are typically projected using financial ratios. However, there are some items that are projected based on invoice, receipts, loan or other forms of agreements Balance Sheet Item Basis of Projection Fixed Assets Account Receivables Inventory Other Current Assets Accounts Payable Other Current Liabilities Loan Based on Start-up Cost Analysis or Invoice Value Debtor Days Outstanding Inventory Turn % of Sales Creditors Days Outstanding As % of Sales Loan Agreement or expected Loan Agreement Equity Actually cash or assets actually or expected to be assigned/invested in the business

9 Thanks You. 9