• Search Search Please fill out this field.
  • Building Your Business
  • Becoming an Owner
  • Business Plans

How to Write a Financial Analysis

Know what to include in important section of business plan

Alyssa Gregory is an entrepreneur, writer, and marketer with 20 years of experience in the business world. She is the founder of the Small Business Bonfire, a community for entrepreneurs, and has authored more than 2,500 articles for The Balance and other popular small business websites.

financial ratios of a business plan

Financial Analysis of a Business Plan

Assumptions, know the ground rules, use visuals, check your math.

The financial analysis section of a business plan should contain the data for financing your business for the present, what will be needed for future growth, and an estimation of your operating expenses.

The financial analysis section of your business plan may be the most challenging for you to complete on your own, but it also could be the deal-maker or deal-breaker when you are searching for funding.

Because of the structured, in-depth financial data required for this section, you should consult your accountant or other trusted and qualified financial professional before writing this section .

The financial analysis section should be based on estimates for new businesses or recent data for established businesses. It should include these elements:

  • Balance sheet : Your assumed and anticipated business financials, including assets , liabilities, and equity.
  • Cash-flow analysis : An overview of the cash you anticipate will be coming into your business based on sales forecasts, minus the anticipated cash expenses of running the business.
  • Profit-and-loss analysis : Your income statement that subtracts the costs of the business from the earnings over a specific period of time, typically a quarter or a year.
  • Break-even analysis : Demonstrates the point when the cost of doing business is fully covered by sales.
  • Personnel-expense forecast : The expenses of your team, as outlined in a management summary section .

Completing a financial analysis section for a business that hasn't been started yet requires some assumptions. However, these aren't guesses. What you expect from the business needs to be based on detailed research and data.

Go back to the other sections of your business plan and write down any financial assumptions you made while drafting those sections. You then can use those assumptions in your financial analysis section. The most important factor is ensuring that the data in the financial analysis section is consistent with the assumptions made in other sections of your business plan.

There may be no section of your business plan where you need help as much as you do with your financial analysis section. The assumptions, forecasting, and specific numbers can be complicated and generally difficult to wrap your head around, especially if you don’t have a financial background. This financial information, though, is exactly the data your audience will be looking for.

You can avoid the stress and uncertainty by getting help from a qualified financial professional early in the process.

When it comes to the financial analysis of your business plan, have a basic idea of what each element should include, where the data comes from, and what the numbers mean. This stands even if you have help developing the financial analysis section because you will be the one left to explain and expand on the financial data in face-to-face situations.

GAAP (generally accepted accounting principles ), a collection of rules, procedures, and conventions that define accepted accounting practices should be followed throughout this section.

Use graphs and charts in the financial analysis section to illustrate the financial data , just as you should in other sections of your business plan that include extensive data, numbers, statistics, and trends. Put the most important visuals in the financial analysis, with the supporting graphics included in the Appendix.

A quick way to lose the attention of a potential investor is by having flawed calculations or numbers that are not backed up. Double and triple check all of your calculations and figures, and have a third-party do the same to ensure everything adds up.

You also should avoid including any figures that are not explained, backed up and otherwise researched extensively, especially when it comes to assumptions you've made. Use data from current and past markets and financial situations to substantiate your numbers.

Financial Model, Business Plan and Dashboard Templates - FinModelsLab

What You Need to Know About Calculating Financial Ratios for Your Business Plan

By henry sheykin, introduction.

Financial ratios are variables used to measure a company's financial performance. They provide valuable insight into a business's liquidity, debt, profitability and other essential aspects. A business plan is a strategic document prepared by entrepreneurs to secure funding or other resources. It is a critical document that outlines the goals and objectives of the business, and how it will achieve them. Introducing financial ratios into a business plan could help to emphasize the viability of the project in the eyes of a potential investor.

What is a Financial Ratio?

Financial ratios are mathematical calculations of a company’s financial performance that provide insight into the company's performance. By comparing financial ratios such as profitability, liquidity, and solvency, investors and business owners can understand better how their business operates financially.

Types of Financial Ratios

Financial ratios are broken down into five main categories: profitability, liquidity, solvency, efficiency, and coverage. They can be further divided into various types of ratios, such as gross profit margin, cash flow, debt-equity ratio, and asset turnover.

Examples of Most Popular Financial Ratios

  • Profitability ratios assess how profitable a company is, such as gross profit margin, operating profit margin, and net profit margin.
  • Liquidity ratios assess how easily a company can access cash and pay off liabilities, such as the current ratio and quick ratio.
  • Solvency ratios measure a company’s ability to repay debt, such as the debt-equity ratio and interest coverage ratio.
  • Efficiency ratios assess how well a company is able to manage assets and liabilities, such as asset turnover and inventory turnover.
  • Coverage ratios measure the ability to meet financial obligations, such as the debt service coverage ratio.

Preparing Financial Ratios

Financial ratios are an important part of a business plan as they help in tracking company performance and predicting future performance. Preparation of financial ratios requires certain steps, data, and knowledge. It is also beneficial in understanding well the financial position of a company and designing strategies accordingly.

Steps on How to Calculate Financial Ratios

Calculating financial ratios is a tool to measure a business entity’s performance, liquidity, solvency, profitability, efficiency, and capital structure. The following steps are involved in calculating financial ratios:

  • Step 1: Set Objective: It is important to have clear objective and purpose before starting the process by considering factors like time and resources that are available.
  • Step 2: Select Ratios: Having an idea about the financial performance gives an indication about the kind of ratio to be selected for measurement. Ratios can be selected based on industry benchmark or on the basis of the company goals.
  • Step 3: Collect Data: Data collection is one of the most important steps in determining financial ratios. The accuracy of the ratios depends on the accuracy and availability of the data.
  • Step 4: Calculate Ratios: The actual calculation is the next step, where the relevant two or three financial variables are related for achieving the desired ratio.
  • Step 5: Analyze Ratios: After calculating the ratios, the results are hyperlinked with the goals and results are analyzed and discussed.

Data Needed to Prepare Ratios

The data required for calculating financial ratios include certain financial variables such as profit margin, asset turnover, liquidity ratios, and debt ratio. The financial variables depend on the ratio being computed.

For example, for computing liquidity ratios such as current ratio and quick ratio, the data required will include current assets, current liabilities, and quick assets. Likewise, for computing profitability ratios such as gross profit margin, the required data will include gross sales, gross profit and total operating costs.

Benefits of Preparing Financial Ratios

Financial ratios offer useful information that can be used to improve different aspects in a business such as expense management and product pricing. The benefits of preparing financial ratios include:

  • Better Understanding of Financial Performance: Preparing financial ratios helps in understanding the financial performance better and making future financial goals.
  • Easy Comparison with Competitors: Financial ratios help in measuring the financial position of one’s company in comparison to its competitors.
  • Achievement of Goals: Ratios help in understanding the degree of financial success achieved or needs to be achieved.
  • Identification of Problems: Preparing financial ratios helps in early identification of problems such as inventory control, liquidity, and high expenses.

Calculating Profitability Ratios

Profitability ratios are used to evaluate the financial health of a business by showing the return on investments. They provide a valuable insight into the business performance and offer important metrics that are essential to understanding the business plan.

Definition of Profitability Ratios

Profitability ratios measure a company’s ability to generate income from its operations and investments. They capture the ability of a company to increase its sales and decrease its costs by providing a quantitative analysis of how efficiently the company is using its resources to generate the desired income.

Examples of Profitability Ratios

  • Gross Profit Margin
  • Net Profit Margin
  • Operating Profit Margin
  • Return on Assets

Guide on How to Calculate Profitability Ratios

In order to calculate profitability ratios, it is essential to have accurate financial information such as sales, expenses, and capital. Further, companies may require different ratios to be calculated based on their specific goals and objectives.

To calculate profitability ratios, first, determine the sales and expenses associated with the business plan. This includes all costs directly related to the business, such as direct materials, direct labor, and marketing expenses. Next, calculate the gross profit margin, by subtracting the direct costs from sales and dividing the result by sales. Net profit margin is then calculated by subtracting all indirect costs, such as administrative and general expenses, from the gross profit margin and dividing the result by the sales.

Operating profit margin is calculated by subtracting operating expenses from net profit margin. Finally, the return on assets ratio is calculated by dividing the net profit margin by the company’s total assets and multiplying the result by 100.

Assessing Liquidity Ratios

Businesses can use liquidity ratios to assess the short-term ability to pay off immediate debts, such as business taxes, loan payments and invoice payments. These liquidity ratios measure whether a company's assets are quickly converted into cash, so management can fulfill its current liabilities.

Definition of Liquidity Ratios

Liquidity ratios measure a company's ability to pay off short-term debts and obligations. Higher liquidity ratios indicate that a company is better able to pay off its liabilities and lower liquidity ratios indicate that a company may be at risk of not being able to pay its obligations. Common liquidity ratios include current ratio, quick ratio and cash ratio.

Examples of Liquidity Ratios

  • Current Ratio: This ratio is used to measure the ability of a company to pay its liabilities using its most liquid assets, such as cash, inventory and accounts receivable. Current ratio is calculated by dividing current assets by current liabilities.
  • Quick Ratio: This ratio measures the capability of a company to pay its liabilities using only its most liquid assets. Quick ratio is calculated by dividing quick assets (cash, marketable securities and accounts receivable) by current liabilities.
  • Cash Ratio: This ratio is used to measure the ability of a company to pay its liabilities using its most liquid asset, cash. Cash ratio is calculated by dividing cash by current liabilities.

Guide on how to Calculate Liquidity Ratios

  • Current Ratio: To calculate current ratio, divide total current assets by total current liabilities.
  • Quick Ratio: To calculate quick ratio, divide total quick assets (cash, marketable securities and accounts receivable) by total current liabilities.
  • Cash Ratio: To calculate cash ratio, divide total cash by total current liabilities.

By examining these ratios, company management can assess the company's ability to meet its short-term demands, adjust pricing and production decisions, increase or decrease the size of the company's inventory and plan accordingly.

Demonstrating Feasibility Ratios

Feasibility ratios are an important part of a business plan, as they provide an accurate assessment of the potential financial stability of a project and its potential for success. By analyzing these ratios, investors and lenders can quickly identify whether or not the project is worth their investment.

Definition of Feasibility Ratios

Feasibility ratios are a type of financial ratio used to analyze the financial stability of a project by assessing the amount of risk it may pose. These ratios measure the project's ability to generate cash, repay debt, and cover its ongoing expenses. They are used to determine if the project is feasible and if it can meet the expected goals and objectives.

Examples of Feasibility Ratios

Some of the most common feasibility ratios include:

  • Cash Ratio: This measures the company’s ability to cover its short-term liabilities with cash.
  • Debt Coverage Ratio: This ratio is used to identify how much of a company’s cash flow is used to cover its debt obligations.
  • Return on Investment Ratio: This ratio measures the profitability of a project by comparing the project’s net profits to the amount of money invested.

Guide on How to Calculate Feasibility Ratios

To calculate these feasibility ratios, you will need to have certain financial documents, like a cash flow statement and balance sheet. You will then use this information to analyze the project’s current financial standing and its potential for success. Here are some tips on calculating feasibility ratios:

  • Find the figures that you will need to calculate the ratios, such as cash flow, net income, and debt levels.
  • Calculate the cash ratio by dividing the total cash available by the current liabilities. This will tell you how much cash is available to cover the short-term liabilities.
  • Calculate the debt coverage ratio by dividing the net income available by the total debt. This will tell you how much of the net income is used to cover debt obligations.
  • Calculate the return on investment ratio by subtracting total fixed costs from the net profits available and then dividing the result by the total amount invested. This provides an estimation of the project’s profitability.

Feasibility ratios are a great way to assess the financial viability of a project and its potential for success. By carefully analyzing these ratios, you can come up with an accurate assessment of the project’s feasibility and decide if it is worth investing in.

In this blog post, we discussed the importance of financial ratios in constructing a successful business plan. We discussed the common types of financial ratios and their utility in measuring the financial standing of a business, such as solvency, profitability, and efficiency. Additionally, we discussed the steps to integrating financial ratios into the business planning process, such as collecting the financial documents, being aware of benchmarks, and creating a strategy based on the analysis.

Summary of Information Presented

Financial ratios are analytic tools used to measure the performance of a company and aid in business planning. Common and useful types of financial ratios can include a debt-to-assets ratio (for solvency measurements), a current or operating ratio (for liquidity measurements), or a return on assets ratio (for profitability measurements). To effectively use financial ratios in a business plan, a company must gather financial documents, be aware of industry benchmarks, and use the analytics to create a strategy.

Benefits of Using Financial Ratios in a Business Plan

Using financial ratios can be immensely beneficial for businesses of any size. These measurables tell the story of a business's performance over time and provide owners and managers with data to guide the direction of the business. Additionally, they can help investors assess the risk of a certain business venture while also gauging the profitability of said venture.

What to do Next for Further Guidance on the Topic

For further guidance on using financial ratios in a business plan, we recommend consulting your business advisor or financial adviser. Additionally, we suggest researching accepted benchmarks in your industry and researching top performing companies to glean useful insights from their processes. You can also find useful information on online resources related to business planning and best practices.

Excel financial model

$169.00 $99.00 Get Template

Related Blogs

  • Private Equity and its Role in Startup Funding
  • Increase Collection Efficiency & minimise Financial Impact:Knowing How to Manage Debtors
  • Harness The Power of Angel Investing For Optimal Portfolio Diversification
  • The Basics of Single Entry Bookkeeping - Start Tracking Your Business' Finances Now!
  • Unlock the Power of Annual Contract Value (ACV) for Your Business

Leave a comment

Your email address will not be published. Required fields are marked *

Please note, comments must be approved before they are published

The 7 Best Financial Ratios for a Small Business

The next time you take a look at your financial statements, consider taking a few minutes to calculate these simple financial ratios.

best financial ratios for small business

Looking at all of the numbers on your financial statements can be a little overwhelming. There’s a lot of information and sometimes it’s difficult to focus on what the best measures are for your business health. That’s where knowing the best financial ratios for a small business to track comes in.

Investors and banks use financial ratios to judge the strength of a business. They’re also used by financial auditors who want insight into a company’s financial statements . However, they can be just as useful for small business owners.

always out of time

What Is a Financial Ratio?

Simply stated, financial ratios are tools that can turn your raw numbers into information to help you manage your business better. Many small business owners look at gross sales or net income on a regular basis, but those figures can only tell you so much. Financial ratios help you read between the lines, providing insight from seemingly inconsequential numbers.

Financial ratios are a type of key performance indicator (KPI). While there are a number of KPIs you can choose to track, financial ratios only use information that can be found on your financial statements. Some other KPIs may use data that you need from other sources, like website traffic and customer satisfaction scores.

Why Measure Financial Ratios?

There is a lot of data that you’re processing as a business owner. Financial ratios can help you focus on the different health aspects of your business— cash flow , efficiency, and profit. They can be used to analyze trends, compare your business to competitors and measure progress towards goals.

Essentially, financial ratios make it easier to stay up-to-date on your business health.

The Best Financial Ratios for Small Businesses to Track

There are a lot of ratios that you can track, but to keep from getting overwhelmed, you should stick to tracking a shortlist of ratios. These are the ratios you’ll want to have on that shortlist:

1. Cash Flow to Debt

(Net Income + Depreciation) ÷ Total Debt = Cash Flow to Debt Ratio

Small businesses make money every month but still have cash flow problems . Why? Much of their cash is going towards debt repayment. This is where the cash flow to debt ratio can be a useful red-flag predictor—since weak cash flow is a main reason for small business failure.

Debt usually doesn’t materialize as a liquidity problem until its due date. Maybe you borrowed money from a friend or family member to get your business up and running. As long as you’re not making payments, it can be easy to ignore that looming repayment date. All of a sudden you need to repay the loan and you don’t have the cash flow to do it.

mastering cash flow

Rather than risk alienating the people who were generous enough to help you get your small business off the ground, use the cash flow to debt ratio to keep an eye on cash flow. The closer you get to the maturity date of your loan, the higher your liquidity should be. A cash flow to debt ratio of less than one is a sign that you cannot cover your bills without securing additional funds.

2. Net Profit Margin

(Total Revenue – Total Expenses) ÷ Total Revenue = Net Profit Margin

Net profit margin is the percentage of your revenue remaining after deducting all operating expenses, interest, and taxes. Many investors look at net profit margin because it shows how successful a company is at managing costs and converting revenue into profits.

The net profit margin measures how much profit remains from each dollar in sales. So a 10% profit margin means that 10 cents of every dollar sold the company keeps as profit.

A poor net profit margin—or one that is declining over time—can be an indication of a variety of problems. Maybe sales are decreasing due to poor customer service. Perhaps you’re not doing a good job of keeping tabs on consumable office supplies, or maybe you have an employee theft problem.

A high net profit margin indicates that you are pricing your products correctly and exercising good cost control.

Related Articles

Accepting Online Payments Will Help You Scale Faster, Smarter cover image

3. Gross Margin Ratio

(Sales – Cost of Goods Sold) ÷ Total Sales = Gross Margin Ratio

If your business sells products, this is a ratio you should pay attention to. How much money do you have remaining to pay for your operating expenses (like marketing, salaries and rent) after you pay for the product that you sell?

This ratio can be measured by product or in total for your business. For example, if you’re a clothing retailer, you can measure gross margin by a product, like jeans or for clothing overall.

The higher your gross margin, the more money you have remaining to pay for your other necessary business expenses. A low gross margin signals that you may have trouble paying your operating expenses.

4. Quick Ratio

(Cash + Marketable Securities + Net Accounts Receivable) ÷ Current Liabilities = Quick Ratio

The quick ratio (also known as the acid test) is useful for any business with current liabilities such as accounts payable, short-term loans, payroll taxes payable, income taxes payable, credit card debt, and other accrued expenses.

This ratio measures your liquidity, telling you whether you have enough current assets (cash, liquid investments, and accounts receivable) to cover your current liabilities. Can you keep your business afloat even in the face of a temporary setback?

Having a quick ratio of 2.0 means that you have $2.00 in liquid assets available to cover each $1.00 of current liabilities. The higher the quick ratio, the better your position.

Wondering whether you can afford to invest cash in expanding your business? The quick ratio is a good place to start. If your quick ratio is less than 1.0, your debts are greater than your assets. You should probably work on paying down debt and saving more cash first.

Note: This ratio does not include inventory in your current assets, as inventory may not be readily converted to cash.

5. Accounts Receivable Turnover

(Total A/R Outstanding ÷ Total Sales) x Number of days = A/R Turnover

Also known as days sales outstanding (DSO), accounts receivable (A/R) turnover measures how good your company is at being paid. That is, how long it takes for a company to be paid once a sale has been made.

Cash flow is a challenge for many small businesses, and being paid quickly can mean the difference between a business struggling to pay bills or feeling very confident in its cash position.

If your A/R turnover starts getting high, it’s a sign that you should spend time working on your receivables process.

6. Inventory Turnover Ratio

Cost of Goods Sold ÷ Average Inventory = Inventory Turnover Ratio

As the name implies, the inventory turnover ratio is useful for businesses that carry inventory. It tells you how many times inventory was converted to sales during a time period. You can calculate it by month, by quarter or by year.

A high inventory turnover ratio indicates that you are turning your inventory over frequently. Companies with perishable inventory, such as food, will have a higher inventory turnover ratio than businesses with more expensive, non-perishable inventory.

Calculating your inventory turnover ratio can help you determine if you are wasting resources on storage costs or tying up cash on slow-moving or non-salable inventory. Investors frequently use this to determine how liquid a company’s inventory is since inventory is often one of the biggest assets a retailer reports on its balance sheet. It’s worthless to the company if the inventory cannot be sold.

Creditors also frequently use this ratio since inventory is often marked as collateral for loans. Before lending money, banks want to know that your inventory will be easy to sell.

If you are considering obtaining additional financing for your business, either through an outside investor or a small business loan, take a look at your inventory turnover ratio and improve that number if it needs work.

7. Sales per Employee

Annual revenue ÷ Number of employees = Sales per Employee

How expensive is your business to run? Sales-per-employee can be a good estimate for companies that need a lot of employees, like service-based businesses.

If your sales-per-employee ratio is high, that means your business is very efficient with how it uses its resources (people). You can do a lot of business without having too large a staff.

This is a useful metric to keep an eye on as your business grows. As you add more employees, is your sales-per-employee ratio taking a dip? Or are you able to keep it at the same level (or higher)?

If your sales-per-employee is generally growing over time, your business is operating efficiently. If it’s not, it’s time to look into whether this is a temporary issue (perhaps sales slowed down for a period but are going to increase) or if your business operations aren’t operating as efficiently as they could.

built to scale

The Best Way to Use Financial Ratios

Financial ratios show a snapshot of your company at a single moment in time. That’s helpful, but to make the most of your financial ratios, it’s best to look at trends. Track and compare the ratios over time, rather than calculating them once to try and determine if the results are good or bad.

The easiest way to do this is to keep a spreadsheet of the ratios you calculate over time. Every quarter, get the information that you need from your accounting system and calculate the ratios. This may take a little time the first couple of times you do it, but over time it will become easier and faster.

Set aside time to regularly look at your ratios and assess the health of your business. Doing that early and often can help you plan for and possibly avoid negative situations your business may experience.

Don’t Forget About KPIs, Here’s What You Need to Know (VIDEO)

This post was updated in May 2020.

Erica Gellerman

Written by Erica Gellerman , Freelance Contributor

Posted on September 29, 2016

Freshly picked for you

How to Be a Thought Leader and Win More Business cover image

Thanks for subscribing to the FreshBooks Blog Newsletter.

Expect the first one to arrive in your inbox in the next two weeks. Happy reading!

financial ratios of a business plan

10 Financial Ratios Every Small Business Owner Should Know

Janet Berry-Johnson, CPA

Reviewed by

July 15, 2022

This article is Tax Professional approved

Are you just starting out as a business owner? Or a seasoned entrepreneur who wants to take your company to the next level of growth? Either way, tracking financial ratios can help you analyze your company’s financial position and help you make more informed business decisions.

What's Bench?

I am the text that will be copied.

Of course, there are dozens—if not hundreds—of potential financial ratios to track. So which ones are most important for you? This article will help you decide.

Why are financial ratios important?

Financial ratios are important because they give business owners a way to evaluate financial performance beyond financial statements and compare it to similar businesses in their industry.

Your balance sheet , income statement, and cash flow statement are helpful, but they offer only limited insight. Financial ratios go beyond the numbers to reveal how efficiently your company is at funding itself, making a profit, growing through sales, and managing expenses. They can also provide a warning sign that things aren’t working, letting business owners and managers know when to make a change.

Most important financial ratios

There are dozens of financial ratios you can track, but the most important financial ratios fall into one of four broad categories:

  • Profitability
  • Asset management

We’ll look at 10 ratios across these four categories and provide a detailed walkthrough for each.

Liquidity ratios

Liquidity is a measure of your business’s ability to cover its short-term obligations, such as accounts payable, accrued expenses, and short-term debt. When a company has liquidity troubles, it may have trouble paying employees and suppliers and covering other daily operating expenses, leading to big problems.

Liquidity ratios typically compare the company’s current assets (cash, inventory, and receivables) with current liabilities.

1. Current ratio

Your current ratio , also known as your working capital ratio, estimates your ability to pay short-term obligations—liabilities and debts due within one year.

Current Ratio = Current Assets / Current Liabilities

Ideally, your current ratio will be greater than one, meaning you can settle every dollar owed for payables, accrued expenses, and short-term debts with your existing current assets.

2. Quick ratio

Your quick ratio, also known as your acid test ratio, is similar to current ratio in that it’s a gauge of your business’s ability to pay its debts. However, it looks at only the company’s most liquid assets (cash, marketable securities, and accounts receivables) rather than all current assets. It excludes prepaid expenses because you can’t use them to pay other short-term liabilities and excludes inventory because it could take too long to convert to cash.

Quick Ratio = (Cash & Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

A quick ratio above 1 means your business has enough liquid assets to cover short-term obligations and maintain your operations.

3. Days of working capital

Days working capital indicates the number of days required to convert your working capital into sales.

Days Working Capital = ((Current Assets - Current Liabilities) x 365) / Revenue from Sales

A high days working capital number means that your company takes longer to realize cash from its working capital. Companies with lower days working capital have less need for financing because they make efficient use of working capital.

The best way to evaluate your result is to compare it with those of other companies within the same industry.

Leverage ratios

Leverage is the amount of debt your company has in its capital structure, which includes both debt and shareholders’ equity. A company with more debt than average for its industry is considered highly leveraged.

Being highly leveraged isn’t necessarily a bad thing. A growing company might take advantage of low interest rates to seize market opportunities. Being highly leveraged could be a smart business decision as long as the company can comfortably afford to make debt payments. However, companies that struggle to make debt payments may fall behind and not be able to borrow additional money to stay afloat.

4. Debt to equity ratio

Your debt to equity ratio compares total debt to total equity to measure the riskiness of the company’s financial structure. Lenders and other creditors closely monitor this metric, as it can provide an early warning sign when companies are taking on too much debt and may have trouble meeting payment obligations.

Debt to Equity Ratio = (Long-Term Debt + Short Term Debt + Leases) / Shareholders’ Equity

A good debt to equity ratio varies by industry. A ratio around 2 or 2.5 is generally considered good for most companies. That means that for every dollar shareholders invest in the company, about 66 cents comes from debt while the other 33 cents come from equity.

However, companies with consistent cash flows might be able to sustain a higher ratio without running into problems.

5. Debt to total assets

Your debt to total assets ratio tells you the percentage of your company’s assets financed by creditors.

Debt to Total Assets = Total Debt / Total Assets

Companies with high debt to total assets ratios are risky to invest in because the company has to pay out a higher percentage of its profits in principalle and interest payments than a similar-sized company with a lower ratio.

Most investors prefer to put their money into companies with a debt to total assets ratio below 1. This shows the company has more assets than liabilities and could pay off its debts by selling assets if needed.

Profitability ratios

Profitability ratios evaluate your ability to generate income (profit) and create value for shareholders.

6. Profit margin

Your net profit margin ratio measures the amount of net income earned with each dollar of sales generated by the company. In other words, it shows what percentage of sales is left over after paying all business expenses.

Profit Margin Ratio = Net Income / Net Sales

A good profit margin ratio varies by industry, so it’s helpful to benchmark your results against your competitors using a database of profit margins by sector , like this one from the NYU Stern School of Business.

7. Return on assets

Return on assets (ROA) indicates how well your company is performing by comparing your profits to the capital you’ve invested in assets. The higher the ROA, the more efficiently you use your economic resources.

Return on Assets = Net Income / Average Total Assets

While comparing your ROA to other companies in your industry is helpful, it’s more helpful to look at how your return on assets changes over time. If this metric rises from year to year, it generally indicates that you’re squeezing more profits out of each dollar of assets on the balance sheet. However, if your ROA is declining, it could mean you’ve made some bad investments.

8. Return on equity

Your return on equity (ROE) measures the company’s ability to generate profits from shareholder investments into the business.

Return on Equity = Net Income / Shareholders’ Equity

A good ROE depends on your industry. For example, according to the NYU Stern School of Business , the ROE for electronics companies averages around 44%, while engineering and construction companies average just above 6%.

Asset management ratios

Asset management ratios analyze how efficiently a company uses its assets to generate sales. The following ratios are normally only used by businesses that carry inventory or sell to customers on credit.

9. Inventory turnover

Your inventory turnover ratio measures how efficiently you manage inventory.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

When evaluating your inventory turnover ratio, compare your metric to companies operating in the same industry. A low inventory turnover ratio compared to the industry average can indicate that your sales are poor or you’re carrying too much inventory.

10. Receivables turnover

Receivables turnover measures how quickly you collect sales made on credit.

Receivables Turnover = Net Annual Credit Sales / Average Accounts Receivable

Determining whether your receivables turnover ratio is good or bad involves comparing your metrics to your company’s credit policies and payment terms. For example, if your credit terms allow customers to pay invoices within 30 calendar days but your receivables turnover shows that it’s averaging 45 days to collect payments, you may have a problem with extending credit to customers who aren’t able to pay or need to tighten up your collection processes.

On the other hand, if you have a Net 60 policy, collecting payments within 45 days means you’re exceeding your goals.

How Bench can help

These key financial ratios are essential analysis tools that business owners can use to quickly evaluate your company’s profitability and performance. By tracking these metrics over time, you can spot risks before they become problems and make changes to improve your bottom line.

Of course, it all starts with solid bookkeeping. Bench helps you stay on top of your company’s performance by giving you all the information you need to calculate important financial ratios.

Each month, your transactions are automatically imported into our platform and categorized and reviewed by your personal bookkeeper. Explore our platform with a free tour today .

Further reading: How to Calculate and Use Year-over-Year (YoY) Growth

  • Owner’s Equity: What It Is and How to Calculate It
  • How to Calculate and Use Year-Over-Year (YOY) Growth
  • What Are Liabilities in Accounting? (With Examples)
  • What is a Chart of Accounts? A How-To with Examples
  • Owner’s Draw vs. Salary: How to Pay Yourself
  • How to Calculate Net Income (Formula and Examples)
  • Cash Flow Statement: Explanation and Example
  • The Best Apps for Managing Receipts [2023]

Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances

Get a regular dose of educational guides and resources curated from the experts at Bench to help you confidently make the right decisions to grow your business. No spam. Unsubscribe at any time.

financial ratios of a business plan

Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

  • Share on Facebook
  • Share on Twitter
  • Share on LinkedIn

Link copied

In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

Startup Financial Projections Template

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

financial ratios of a business plan

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small Business Profit and Loss Template

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

3 Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

financial ratios of a business plan

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

financial ratios of a business plan

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

3 Year Cash Flow Statement Template

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

financial ratios of a business plan

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

financial ratios of a business plan

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

financial ratios of a business plan

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Basic Sales Forecast Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

financial ratios of a business plan

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

3 Year Sales Forecast Template

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Break Even Analysis

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

financial ratios of a business plan

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

financial ratios of a business plan

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

financial ratios of a business plan

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

  • Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
  • Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
  • Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
  • Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
  • Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
  • Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
  • Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

Discover a Better Way to Manage Business Plan Financials and Finance Operations

Empower your people to go above and beyond with a flexible platform designed to match the needs of your team — and adapt as those needs change. 

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. 

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time.  Try Smartsheet for free, today.

Discover why over 90% of Fortune 100 companies trust Smartsheet to get work done.

  • Search Search Please fill out this field.
  • 1. Working Capital Ratio

2. Quick Ratio

3. earnings per share (eps), 4. price-earnings ratio (p/e).

  • 5. Debt-to-Equity Ratio
  • 6. Return on Equity (ROE)

The Bottom Line

  • Corporate Finance
  • Financial Ratios

6 Basic Financial Ratios and What They Reveal

Natalya Yashina is a CPA, DASM with over 12 years of experience in accounting including public accounting, financial reporting, and accounting policies.

financial ratios of a business plan

Ratios track company performance. They can rate and compare one company against another that you might be considering investing in. The term "ratio" conjures up complex and frustrating high school math problems, but that need not be the case. Ratios can help make you a more informed investor when they're properly understood and applied .

Key Takeaways

  • Fundamental analysis relies on data from corporate financial statements to compute various ratios.
  • Fundamental analysis is used to determine a security's intrinsic or true value so it can be compared with the security's market value.
  • There are six basic ratios that are often used to pick stocks for investment portfolios.
  • Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE).
  • Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.

1. Working Capital Ratio 

Assessing the health of a company in which you want to invest involves measuring its liquidity . The term liquidity refers to how easily a company can turn assets into cash to pay short-term obligations. The working capital ratio can be useful in helping you measure liquidity. It represents a company's ability to pay its current liabilities with its current assets.

Working capital  is the difference between a firm’s current assets and current liabilities: current assets - current liabilities = working capital .

The working capital ratio, like working capital, compares current assets to current liabilities and is a metric used to measure liquidity. The working capital ratio is calculated by dividing current assets by current liabilities: current assets / current liabilities = working capital ratio .

Let's say that XYZ company has current assets of $8 million and current liabilities of $4 million. The working capital ratio is 2 ($8 million / $4 million) . That's an indication of healthy short-term liquidity. But what if two similar companies each had ratios of 2? The firm with more cash among its current assets would be able to pay off its debts more quickly than the other.

A working capital ratio of 1 can imply that a company may have liquidity troubles and not be able to pay its short-term liabilities. But the trouble could be temporary and later improve.

A working capital ratio of 2 or higher can indicate healthy liquidity and the ability to pay short-term liabilities, but it could also point to a company that has too much in short-term assets such as cash. Some of these assets might be better used to invest in the company or to pay shareholder dividends.

It can be a challenge to determine the proper category for the vast array of assets and liabilities on a corporate  balance sheet  to decipher the overall ability of a firm to meet its short-term commitments.

The quick ratio is also called the acid test. It's another measure of liquidity. It represents a company's ability to pay current liabilities with assets that can be converted to cash quickly.

The calculation for the quick ratio is current assets - inventory prepaid expenses / current liabilities (current assets minus inventory minus prepaid expenses divided by current liabilities). The formula removes inventory because it can take time to sell and convert inventory into liquid assets .

XYZ company has $8 million in current assets, $2 million in inventory and prepaid expenses, and $4 million in current liabilities. That means the quick ratio is 1.5 ($8 million - $2 million / $4 million) . It indicates that the company has enough to money to pay its bills and continue operating.

A quick ratio of less than 1 can indicate that there aren't enough liquid assets to pay short-term liabilities. The company may have to raise capital or take other actions. On the other hand, it may be a temporary situation.

When buying a stock, you participate in the future earnings or the risk of loss of the company. Earnings per share (EPS) is a measure of the profitability of a company. Investors use it to gain an understanding of company value.

The company's analysts calculate EPS by dividing net income by the weighted average number of common shares outstanding during the year: net income / weighted average = earnings per share . Earnings per share will also be zero or negative if a company has zero earnings or negative earnings representing a loss. A higher EPS indicates greater value.

Called P/E for short, this ratio is used by investors to determine a stock's potential for growth. It reflects how much they would pay to receive $1 of earnings. It's often used to compare the potential value of a selection of stocks.

To calculate the P/E ratio, divide a company's current stock price by its earnings-per-share to calculate the P/E ratio: current stock price / earning- per-share = price-earnings ratio .

A company's P/E ratio would be 9.49 ($46.51 / $4.90) if it closed trading at $46.51 a share and the EPS for the past 12 months averaged $4.90. Investors would spend $9.49 for every generated dollar of annual earnings. Investors have been willing to pay more than 20 times the EPS for certain stocks when they've felt that a future growth in earnings would give them adequate returns on their investments.

The P/E ratio will no longer make sense if a company has zero or negative earnings. It will appear as N/A for "not applicable."

Ratios can help improve your investing results when they're properly understood and applied.

5. Debt-to-Equity Ratio 

What if your prospective investment target is borrowing too much? This can increase fixed charges, reduce earnings available for dividends, and pose a risk to shareholders.

The debt-to-equity (D/E) ratio measures how much a company is funding its operations using borrowed money. It can indicate whether shareholder equity can cover all debts, if necessary. Investors often use it to compare the leverage used by different companies in the same industry. This can help them to determine which might be a lower-risk investment.

Divide total liabilities by total shareholders' equity to calculate the debt-to-equity ratio: total liabilities / total shareholders' equity = debt-to-equity ratio . Let's say that company XYZ has $3.1 million worth of loans and shareholders' equity of $13.3 million. That works out to a modest ratio of 0.23, which is acceptable under most circumstances. But like all other ratios, the metric must be analyzed in terms of industry norms and company-specific requirements.

6. Return on Equity (ROE)

Return on equity (ROE) measures profitability and how effectively a company uses shareholder money to make a profit. ROE is expressed as a percentage of common stock shareholders.

It's calculated by taking net income (income less expenses and taxes) figured before paying common share dividends and after paying preferred share dividends. Divide the result by total shareholders' equity: net income (expenses and taxes before paying common share dividends and after paying preferred share dividends) / total shareholders' equity = return on equity .

Let's say XYZ company's net income is $1.3 million. Its shareholder equity is $8 million. ROE is therefore 16.25%. The higher the ROE, the better the company is at generating profits using shareholder equity.

What's a Good ROE?

Return-on-equity or ROE is a metric used to analyze investment returns. It's a measure of how effectively a company uses shareholder equity to generate income. You might consider a good ROE to be one that increases steadily over time. This could indicate that a company does a good job using shareholder funds to increase profits. That can in turn increase shareholder value.

What Is Fundamental Analysis?

Fundamental analysis is the analysis of an investment or security to discover its true or intrinsic value . It involves the study of economic, industry, and company information. Fundamental analysis can be useful because an investor can determine if the security is fairly priced, overvalued, or undervalued by comparing its true value to its market value.

Fundamental analysis contrasts with technical analysis, which focuses on determining price action and uses different tools to do so, such as chart patterns and price trends.

Is a Higher or Lower P/E Ratio Better?

It depends on what you're looking for in an investment. A P/E ratio measures the relationship of a stock's price to earnings per share. A lower P/E ratio can indicate that a stock is undervalued and perhaps worth buying, but it could be low because the company isn't financially healthy.

A higher P/E can indicate that a stock is expensive, but that could be because the company is doing well and could continue to do so.

The best way to use P/E is often as a relative value comparison tool for stocks you're interested in, or you might want to compare the P/E of one or more stocks to an industry average.

Financial ratios can help you pick the best stocks for your portfolio and build your wealth. Dozens of financial ratios are used in fundamental analysis. We've briefly highlighted six of the most common and the easiest to calculate.

Remember that a company cannot be properly evaluated using just one ratio in isolation. Be sure to put a variety of ratios to use for more confident investment decision-making.

American Express. " Working Capital Formula & Ratio: How to Calculate Working Capital ."

Accounting for Management. " Quick Ratio or Acid Test Ratio ."

Carbon Collective. " Earnings Per Share ."

U.S. Securities and Exchange Commission. " Price-Earnings (P/E) Ratio ."

Robinhood. " What Is the Debt to Equity Ratio? "

Harvard Business Review. " A Refresher on Return on Assets and Return on Equity ."

Charles Schwab. " Stock Analysis Using the P/E Ratio ."

  • Valuing a Company: Business Valuation Defined With 6 Methods 1 of 37
  • What Is Valuation? 2 of 37
  • Valuation Analysis: Meaning, Examples and Use Cases 3 of 37
  • Financial Statements: List of Types and How to Read Them 4 of 37
  • Balance Sheet: Explanation, Components, and Examples 5 of 37
  • Cash Flow Statement: How to Read and Understand It 6 of 37
  • 6 Basic Financial Ratios and What They Reveal 7 of 37
  • 5 Must-Have Metrics for Value Investors 8 of 37
  • Earnings Per Share (EPS): What It Means and How to Calculate It 9 of 37
  • P/E Ratio Definition: Price-to-Earnings Ratio Formula and Examples 10 of 37
  • Price-to-Book (PB) Ratio: Meaning, Formula, and Example 11 of 37
  • Price/Earnings-to-Growth (PEG) Ratio: What It Is and the Formula 12 of 37
  • Fundamental Analysis: Principles, Types, and How to Use It 13 of 37
  • Absolute Value: Definition, Calculation Methods, Example 14 of 37
  • Relative Valuation Model: Definition, Steps, and Types of Models 15 of 37
  • Intrinsic Value of a Stock: What It Is and Formulas to Calculate It 16 of 37
  • Intrinsic Value vs. Current Market Value: What's the Difference? 17 of 37
  • The Comparables Approach to Equity Valuation 18 of 37
  • The 4 Basic Elements of Stock Value 19 of 37
  • How to Become Your Own Stock Analyst 20 of 37
  • Due Diligence in 10 Easy Steps 21 of 37
  • Determining the Value of a Preferred Stock 22 of 37
  • Qualitative Analysis 23 of 37
  • How to Choose the Best Stock Valuation Method 24 of 37
  • Bottom-Up Investing: Definition, Example, Vs. Top-Down 25 of 37
  • Financial Ratio Analysis: Definition, Types, Examples, and How to Use 26 of 37
  • What Book Value Means to Investors 27 of 37
  • Liquidation Value: Definition, What's Excluded, and Example 28 of 37
  • Market Capitalization: How Is It Calculated and What Does It Tell Investors? 29 of 37
  • Discounted Cash Flow (DCF) Explained With Formula and Examples 30 of 37
  • Enterprise Value (EV) Formula and What It Means 31 of 37
  • How to Use Enterprise Value to Compare Companies 32 of 37
  • How to Analyze Corporate Profit Margins 33 of 37
  • Return on Equity (ROE) Calculation and What It Means 34 of 37
  • Decoding DuPont Analysis 35 of 37
  • How to Value Private Companies 36 of 37
  • Valuing Startup Ventures 37 of 37

financial ratios of a business plan

  • Terms of Service
  • Editorial Policy
  • Privacy Policy
  • Your Privacy Choices

Plan Projections

ideas to numbers .. simple financial projections

Home > Financial Projections > Financial Ratios Analysis

financial ratios analysis

Financial Ratios Analysis

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.

What are Financial Ratios

One financial ratio viewed in isolation will not tell you a great deal about a business. The key to using financial ratios is to chose the ratios which are most critical to your business, decide on the formula to use, which should be the same as that used by comparable businesses in your industry, and consistently monitor the ratio over time relative to other ratios you have calculated.

Key Financial Ratios

Financial ratios can be split into six main categories

  • Profitability Ratios
  • Liquidity Ratios
  • Efficiency ratios
  • Leverage Ratios
  • Activity ratios
  • Investor ratios

Profitability Financial Ratios

The profitability ratios are used to measure the ability of a business and its management to generate profit and the following financial ratios are included and calculated for you in the financial projections template:

  • Gross margin percentage
  • Operating expenses ratio
  • Return on sales
  • Net profit ratio
  • Return on capital employed (ROCE)

Profitability Ratio Example – Gross margin Percentage

The numbers used in the calculation of the gross margin percentage are highlighted in the income statement shown above.

Efficiency Financial Ratios

Efficiency ratios are used to measure the ability of a business to control and manage its assets to produce the maximum amount of revenue and profit from them. The following financial ratios are included and calculated for you in the financial projections template:

  • Asset turnover ratio
  • Fixed asset turnover ratio
  • Working capital turnover ratio

Efficiency Ratio Example – Asset Turnover Ratio

The asset turnover ratio shows the revenue generated by the assets of your business. It is a measure of the efficiency with which the business uses its resources. It is calculated by dividing revenue by assets

The numbers used in the calculation of the gross margin percentage are highlighted in the income statement and balance sheet shown above.

Liquidity Financial Ratios

A liquidity ratio is used to measure the ability of a business to generate cash to meet its short term liabilities and debts. The following financial ratios are included and calculated for you in the financial projections template:

  • Current ratio
  • Quick ratio

Liquidity Ratio Example – Current Ratio

The current ratio measures the liquidity of a business and its ability to meet its short term liabilities and debts. It is calculated by dividing current assets by current liabilities.

The numbers used in the calculation of the current ratio are highlighted in the balance sheet shown above.

Leverage Financial Ratios

A leverage ratio is used to show the capital structure of the business and in particular the level of debt in relation to owners equity. A business with a high level of debt is considered to be more risky but will give greater returns to the owners provided cash and profit are managed correctly. The following financial ratios are included and calculated for you in the financial projections template:

  • Gearing ratio
  • Debt equity ratio
  • Times interest earned

Leverage Ratio Example – Debt Equity Ratio

The debt equity ratio is the ratio of how much a business owes (debt) compared to how much the owners have invested (equity). It is calculated by dividing debt by owners equity.

The numbers used in the calculation of the debt equity ratio are highlighted in the balance sheet shown above.

Note in this example there is only long term debt shown in the balance sheet, in practice all forms of debt should be included in the calculation.

Leverage ratios assess a businesses ability to pay off long-term debt including obligations to creditors, bondholders, and banks and for this reason are sometimes referred to as solvency ratios .

Activity Financial Ratios

Activity ratios are used to measure the ability of a business to convert different balance sheet accounts such as inventory, accounts receivable, and accounts payable into cash or sales. The following financial ratios are included and calculated for you in the financial projections template:

  • Accounts receivable days ratio
  • Accounts payable days ratio
  • Inventory days

Activity Ratio Example – Accounts Receivable Days Ratio

The accounts receivable days ratio shows the average number of days your customers are taking to pay you. It is calculated by dividing accounts receivable by average daily sales.

Note: In this example the closing balance sheet is used to obtain the value of accounts receivable. If available, it is good practice to use values from both the opening and closing balance sheets to give an average value fro accounts receivable.

Investor Financial Ratios Analysis

Investor ratios are used to measure the ability of a business to earn an adequate return for the owners of the business. The owners have money tied up in the business and need a return commensurate with the risk involved. The following financial ratios are included and calculated for you in the financial projections template:

  • Return on Equity (ROE)
  • Dividend cover

Investor Ratio Example – Return on Equity (ROE)

The return on equity measures the percentage rate of return the owner of a business gets on their investment. It is calculated by dividing the net income by the owners equity.

The numbers used in the calculation of the return on equity are highlighted in the income statement and balance sheet shown above.

Financial ratios are derived from information included in the income statements and balance sheets of the business plan financial projections. The ratios are used as indicators of the the financial health of the business and for comparing the performance of the business with other businesses in the same sector, and can be used to fine tune the financial projections.

When the financial projections have been prepared, equity investors , providers of debt finance, and many trade credit suppliers will use financial ratios analysis to assess the business to decide whether or not to invest, provide loan facilities or to extend credit to the business.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

You May Also Like

Home > Blog > 5 key Financial Ratios and How to use them

5 key Financial Ratios and How to use them

by Datarails

5 key Financial Ratios and How to use them

What are financial ratios?

Financial ratios are basic calculations using quantitative data from a company’s financial statements . They are used to get insights and important information on the company’s performance, profitability , and financial health.

Common financial ratios come from a company’s balance sheet, income statement, and cash flow statement.

Businesses use financial ratios to determine liquidity, debt concentration, growth, profitability, and market value.

Why are financial ratios so important?

Financial ratios are sometimes referred to as accounting ratios or finance ratios. These ratios are important for assessing how a company generates revenue and profits using business expenses and assets in a given period. Internal and external stakeholders use financial ratios for competitor analysis, market valuation, benchmarking, and performance management.

Financial Ratios inside a business

Financial planning and analysis professionals calculate financial ratios for the following reasons for internal reasons.

● To measure return on capital investments

● To calculate profit margins

● To assess a company’s efficiency and how costs are allocated

● To determine how much debt is used to finance operations

● To identify trends in profitability

● To manage working capital and short-term funding requirements

● To identify operating bottlenecks and assess inventory management systems

● To measure a company’s ability to settle debt and liabilities

How analysts and external stakeholders use Financial Ratios

External stakeholders use financial ratios to:

● Carry out competitor analysis

● Determine whether to finance a company in the form of debt

● Assess how profitable a company is

● Determine whether to provide equity financing or buy shares in the company

● Calculate tax liabilities

● Measure a company’s market value

● Calculate return on shareholders’ equity

● Perform market analysis

Financial Ratios Excel Template

Below is an Excel template with all of the formulas needed for calculating each of the 5 financial ratios. Plug in your company’s numbers and get a quick and accurate picture of where you stand on liquidity, debt concentration, growth, profitability, and market value.

5 Essential Financial Ratios for Every Business 

The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.

1)   Liquidity ratios

Companies use liquidity ratios to measure working capital performance – the money available to meet your current, short-term obligations .

Simply put, companies need liquidity to pay their bills. Liquidity ratios measure a company’s capacity to meet its short-term obligations and are a vital indicator of its financial health. Liquidity is different from solvency, which measures a company’s ability to pay all its debts. In the sporting world, Italian football club Lazio faces a now-infamous liquidity ratio preventing it from signing new players. Italian clubs are required to communicate their liquidity indicator to the football authorities twice a year. This indicator cannot be any lower than a certain threshold set by the football authorities.

There are different forms of liquidity ratio.

  Current ratio: Current Assets / Current Liabilities

The current ratio measures how a business’s current assets, such as cash, cash equivalents, accounts receivable, and inventories, are used to settle current liabilities such as accounts payable.

Quick ratio (Acid-test ratio): (Current Assets – Inventories – Prepaid Expenses) / Current Liabilities

Also known as the acid-test ratio, the quick ratio measures how a business’s more liquid assets, such as cash, cash equivalents, and accounts receivable can cover current liabilities. This ratio excludes inventories from current assets. A quick ratio of 1 is considered the industry average. A quick ratio below 1 shows that a company may not be in a position to meet its current obligations because it has insufficient assets to be liquidated. (Acid test refers to a quick and simple test gold miners used to determine whether samples of metal were true gold or not. Acid would be added to a sample; if it dissolved, it wasn’t gold. If it stood up to the acid, it likely was). From a great real example on the Street.com see how Apple’s Quick Ratio stacks up:

Quick Ratio Example: Apple (NASDAQ: AAPL)

The following figures are as of March 27th, 2021, and come from Apple’s balance sheet. Numbers are in millions of dollars.

Cash and cash equivalents: $38,466

Accounts receivable: $18,503

Marketable securities: $31,368

Current liabilities: $106,385

QR = Liquid Assets / Current Liabilities

QR = ($38,466 + $18,503 +$31,368) / $106,385

QR = $88,337 / $106,385

Based on this calculation, Apple’s quick ratio was 0.83 as of the end of March 2021. This number could be higher if more assets were included in its calculations.

Cash ratio: Cash and cash equivalents / Current Liabilities

The cash ratio measures a business’s ability to use cash and cash equivalent to pay off short-term liabilities. This ratio shows how quickly a company can settle current obligations.

2)    Leverage ratios

Companies often use short and long-term debt to finance business operations. Leverage ratios measure how much debt a company has. Molson Coors Beverage Co. , the maker of Coors Light and Miller Lite beer for instance, had been saddled with debt, after an acquisition in the industry according to the Wall Street Journal . Its CFO Tracey Joubert signaled to the market the company’s plans “reduce its leverage ratio to below 3 times by the end of this year.” The types of leverage ratio to consider are:

Debt ratio: Total Debt / Total Assets

The debt ratio measures the proportion of debt a company has to its total assets. A high debt ratio indicates that a company is highly leveraged.

Debt to equity ratio: Total Debt / Total Equity

The debt-to-equity ratio measures a company’s debt liability compared to shareholders’ equity. This ratio is important for investors because debt obligations often have a higher priority if a company goes bankrupt.

Interest coverage ratio: EBIT / Interest expenses

Companies generally pay interest on corporate debt. The interest coverage ratio shows if a company’s revenue after operating expenses can cover interest liabilities.

3)   Efficiency ratios

Efficiency ratios show how effectively a company uses working capital to generate sales. For instance an analyst reported that Seattle-based bank Washington Federal’s company’s efficiency ratio was 58.65%, down from 59.02% recorded a year ago. A fall in efficiency ratio indicates improved profitability. There are several ways to analyze efficiency ratios:

Asset turnover ratio: Net sales / Average total assets

Companies use assets to generate sales. The asset turnover ratio measures how much net sales are made from average assets.

Inventory turnover: Cost of goods sold / Average value of inventory

For companies in the manufacturing and production industries with high inventory levels, inventory turnover is an important ratio that measures how often inventory is used and replaced for operations.

Days sales in inventory ratio: Value of Inventory / Cost of goods sold x (no. of days in the period)

Holding inventory for too long may not be efficient. The day sales in inventory ratio calculates how long a business holds inventories before they are converted to finished products or sold to customers.

Payables turnover ratio: Cost of Goods sold (or net credit purchases) / Average Accounts Payable

The payables turnover ratio calculates how quickly a business pays its suppliers and creditors.

Days payables outstanding (DPO): (Average Accounts Payable / Cost of Goods Sold) x Number of Days in Accounting Period (or year)

This ratio shows how many days it takes a company to pay off suppliers and vendors. A lower days payables outstanding implies that a business is letting go of cash too quickly and may not be taking advantage of longer credit terms. On the other hand, when the DPO is too high, it means a company delays paying its suppliers, which can lead to disputes.

Receivables turnover ratio: Net credit sales / Average accounts receivable

Accounts receivables are credit sales made to customers. It is important that companies can readily convert account receivables to cash. Slow paying customers reduce a business’s ability to generate cash from their accounts receivable.

The receivables turnover ratio helps companies measure how quickly they turn customers’ invoices into cash. A high receivables turnover ratio shows that a company quickly generates cash from accounts receivables.

4)    Profitability ratios

A business’s profit is calculated as net sales less expenses. Profitability ratios measure how a company generates profits using available resources over a given period. Higher ratio results are often more favorable, but these ratios provide much more information when compared to results of similar companies, the company’s own historical performance, or the industry average. Some of the most common profitability ratios are:

Gross margin: Gross profit / Net sales

The gross margin ratio measures how much profit a business makes after the cost of goods and services compared to net sales. Comparing companies can be illustrative – such as finding that Home Depot has a 33.6% gross profit margin versus Walmart’s 25.1%.

Operating margin: Operating income / Net sales

The operating margin measures how much profit a company generates from net sales after accounting for the cost of goods sold and operating expenses.

Return on assets (ROA): Net income / Total assets

Companies use the return on assets ratio to determine how much profits they generate from total assets or resources, including current and noncurrent assets.

Return on equity (ROE): Net income / Total equity

Shareholders’ equity is capital investments. The return on equity measures how much profit a business generates from shareholders’ equity. For instance a company with a declining ROE could be seen as having more risk than a company in the same industry with an increasing ROI .

5)   Market Value ratios

Market value ratios are used to measure how valuable a company is. These ratios are usually used by external stakeholders such as investors or market analysts but can also be used by internal management to monitor value per company share.

Earnings per share ratio (EPS) : (Net Income – Preferred Dividends) / End-of-Period Common Shares Outstanding

The earnings per share ratio, also known as EPS, shows how much profit is attributable to each company share.

Price earnings ratio (P/E): Share price / Earnings per share

The PE ratio is a key investor ratio that measures how valuable a company is relative to its book value earnings per share.

Book value per share ratio: (Total Equity – Preferred Equity) / Total shares outstanding

A company’s common equity is what common shareholders own after all liabilities and preference shares have been settled from total assets.

The book value per share measures the value per share for common equity owners based on the balance sheet value of assets less liabilities and preference shares.

Dividend yield ratio: Dividend per share / Share price

The dividend yield ratio measures the value of a company’s dividend per share compared to the market share price.

When companies pay out dividends to shareholders, the value of dividends received for each share owned is known as the dividend per share. Shareholders and analysts compare the dividend per share to the company’s share price using the dividend yield ratio.

Best Practices For Using Financial Ratios

Financial ratios help senior management and external stakeholders measure a company’s performance. These best practices will drive effective decision-making.

● Compute financial ratios with accurate financial numbers

● Compare ratios across periods to identify performance trends

● Use relative competitor and industry benchmarks to measure performance

● Calculate ratios using balance sheet averages where applicable

● Interpret financial ratios correctly to support key business decisions

● Calculate and analyze ratios using the balance sheet , income statement , and cash flow statement to get a holistic view of the business’s performance

Final Thoughts

Financial ratios are good key performance indicators used to measure a company’s performance over time compared to competitors and the industry. Calculating accurate financial ratios and interpreting the ratios help business leaders and investors make the right decisions. 

Drive Business Performance With Datarails

Become a partner.

Banner

Business Plan Research Guide

  • Competitors
  • Financial Ratios
  • Going Global
  • Sample Plans

For margin analysis and developing financial statements and projections:

  • Benchmark with a key publicly-held company. Look up the annual 10-K or registration statements for companies similar to yours. Use the competitor sources to identify companies - especially Mergent  and Capital IQ
  • Use Biz Miner database (below) to find the aggregate financials of all of the companies in a specific NAICS industry and sales size and use these to estimate your firm's expenses and margins. 
  • Consult the U.S. Census monthly, annual and Economic Census reports described on the Market Share/Size page for seasonality, sales/wages ratios and other data.

Electronic Resources

Tips & Tutorials

  • << Previous: Competitors
  • Next: Going Global >>
  • Last Updated: Jan 31, 2024 9:42 AM
  • URL: https://libguides.babson.edu/businessplans

 FourWeekMBA

The Leading Source of Insights On Business Model Strategy & Tech Business Models

what-is-the-return-on-equity

15 Financial Ratios Formulas To Analyse Any Business

These are the most important financial ratios formulas you can use to analyze any business :

  • current ratio
  • absolute ratio
  • quick ratio
  • the accounts receivable turnover ratio
  • the accounts payable turnover ratio
  • inventory turnover ratio
  • debt to assets ratio
  • debt to equity ratio
  • interest coverage ratio
  • gross profit margin ratio
  • operating profit margin ratio
  • return on capital employed ratio
  • return on equity ratio
  • Earnings Per Share
  • Price/Earnings Ratio

Table of Contents

What is a current ratio?

what-is-acurrent-ratio

What is a quick ratio?

financial ratios of a business plan

What is the absolute ratio?

what-is-absolute-ratio

What is the accounts receivable turnover ratio?

financial ratios of a business plan

What is the accounts payable turnover ratio?

what-is-accounts-payable-turnover-ratio

What is the inventory turnover ratio?

financial ratios of a business plan

What is a debt to assets ratio?

financial ratios of a business plan

What is a debt to equity ratio?

financial ratios of a business plan

What is the interest coverage ratio?

financial ratios of a business plan

What is a gross profit margin?

financial ratios of a business plan

What is an operating profit margin?

financial ratios of a business plan

What is a return on capital employed?

financial ratios of a business plan

What is the return on equity?

what-is-the-return-on-equity

What is the earning per share ratio formula?

This is given by:

(Net Income – Preferred Dividends) /  Weighted Average Number of Common Shares

What is the price/earnings ratio formula?

Financial ratios table.

Read Next: 

  • The Three Most Important Financial Ratios for the Manager
  • What Is a Financial Ratio? The Complete Beginner’s Guide to Financial Ratios
  • What Is the Inventory Turnover Ratio? How Inventory Efficiency Can Fuel Business Growth

Resources for your business : 

  • What Is a Business Model? Successful Types of Business Models You Need to Know
  • What Is a Business Model Canvas? Business Model Canvas Explained

More Resources

financial-ratio-formulas

About The Author

' src=

Gennaro Cuofano

Leave a reply cancel reply, discover more from fourweekmba.

Subscribe now to keep reading and get access to the full archive.

Type your email…

Continue reading

  • 70+ Business Models
  • Airbnb Business Model
  • Amazon Business Model
  • Apple Business Model
  • Google Business Model
  • Facebook [Meta] Business Model
  • Microsoft Business Model
  • Netflix Business Model
  • Uber Business Model

5 Financial Ratios Used To Measure Business Risk and How To Use Them

' src=

Kiara Taylor

7 min. read

Updated October 24, 2023

As your business continues to scale and expand , it becomes more and more important to keep track of your business risk. But it can be tough to measure risk without keeping a close eye on a few key financial ratios. 

Managing business risk without a clear financial picture is like going on a road trip without a map and hoping you’ll end up at your planned destination. When the business risk is effectively managed, you can determine a clear path forward according to your financial situation. 

Using financial ratios can be intimidating and confusing if you don’t have a technical understanding of business accounting. Familiarizing yourself with helpful financial ratios to measure business risk is a great place to start. 

Let’s take a closer look at why you should measure risk and how you can use five financial ratios to gain insights into your business risk profile. 

  • Why measure business risk?

When you run a business, you typically know your destination and what you want to achieve . And there will be financial and business roadblocks that detour your path to success. 

There are numerous instances where an in-depth view of your business finances can help avoid risks. Everyday business events such as expansion projects, acquisitions, low cash on hand, increased fixed expenses, increased borrowing, and even an increase in sales can be signs that it’s time to reevaluate your business risk. 

There’s no room for gut feelings and leaps of faith in business. Business owners and managers must use financial ratios to manage business risk effectively and avoid financial setbacks.

According to a study by author Steve Martin, the number one quality of successful business people is resourcefulness. This list of financial ratios is an excellent resource for business owners who are ready to take their organization to the next level. 

What do financial ratios measure?

Financial ratios are used to ensure that executives, financial institutions, and stakeholders have an accurate picture of risks associated with an organization. They measure different aspects of your company’s financial health for financial management, market risks, and risks related to investing in a company. 

Financial ratios can also help navigate the risks of selling a particular product or service for small business owners. According to a study, 60 percent of small business owners admit that they don’t feel knowledgeable about their finances. 

While financial ratios are primarily useful for those already in business, they can benefit someone looking to start a business as well (such as using benchmarks and hypotheticals to determine if an idea is viable or too risky).

  • Financial ratios to measure business risk

To effectively measure business risk, it’s crucial to calculate some key financial ratios. Here is a list of some commonly used ratios that can help you measure your business and financial risk to better manage the health of your organization. 

What’s your biggest business challenge right now?

1. contribution margin ratio.

The contribution margin ratio shows the contribution margin (sales – variable costs) as a percentage of your total sales. This formula will tell you how much income there is to cover fixed and variable costs and help your company set profit targets.

Contribution margin ratio = contribution margin / sales

For example, let’s say you have a product that costs $20 retail, and you have about $30,000 of fixed expenses, including machinery, office expenses, and loan interest. It costs about $8 for labor and manufacturing to make each unit. 

1. First, calculate your contribution margin:

(Sales – Variable Costs) = ($20 – $8) = $12

2. Now, calculate your contribution margin ratio:

(Contribution Margin/Sales) = ($12/$20) = 60 percent

The result of this contribution margin ratio in this example tells us that 60 percent of the sales from each product is available to contribute to your $30,000 of fixed expenses. Now you can quickly determine how many units you need to sell each month to keep your business up and running. 

In a perfect world, your contribution ratio would be 100 percent. But a good contribution margin is subjective and depends on how much your fixed expenses cost and the number of units you can sell in a given month. 

2. Operating leverage effect (OLE) ratio

The operating leverage effect ratio can help you analyze your contribution margin ratio. Use the OLE ratio to measure how your income increases or drops depending on the changes in sales volume to show how much revenue is available to cover non-operating costs. This can help you decide if you need to change your prices and get a glimpse into your company’s future profitability. 

OLE ratio = contribution margin ratio/operating margin

Let’s say that your organization earned $1 million in revenue last year, and it cost you about $300,000 to operate your business. 

You already know your contribution margin ratio from the previous formula. 

So let’s start by calculating your operating margin:

(Revenue – Operating Costs)/Revenue = ($1 million – $300,000)/$1 million = 70 percent 

Calculating your operating leverage effect ratio can help you better understand how much of your costs are going towards operations and how much you have to cover variable expenses. A high OLE indicates a higher profit potential, while a low OLE shows low profitability potential. 

3. Financial leverage ratio

The financial leverage ratio is used to measure overall financial risk. By measuring the amount of debt held by your company against its income, you can glean a picture of how investors see your business in terms of financial risk. 

Financial leverage = operating income/net income

For example, if your gross income last year was $3 million, net income was $4 million, and your operating expenses added up to $2 million, this is how you would calculate your financial leverage ratio.

1. First, let’s calculate your operating income:

(Gross Income – Operating Expenses) = $1 million

2. Next, find your financial leverage:

(Operating Income)/(Net Income) = $1 million/$4 million = 25 percent 

This value shows that your business has financial obligations and may not be ready to take on additional debt until your company can generate more income. 

4. Degree of combined leverage ratio

Separately calculating operating and financial leverage is most common. Still, if you want to see how the two ratios relate to each other, you should also calculate a combined leverage ratio. This ratio measures business and financial risk in one balance to get an idea of your total risk. 

Combined leverage ratio = operating leverage ratio X financial leverage ratio

To calculate your company’s combined leverage ratio, simply input your figures for your operating leverage ratio and financial leverage ratio and multiply to get your result. For this example, let’s say that your business has no debt and a financial leverage ratio of 80 percent: 

(Operating Leverage Ratio) x (Financial Leverage Ratio) = (1) x (0.8) = 80 percent 

It doesn’t give the entire picture, but it does provide a simple at-a-glance look at your business and financial risk. 

5. Debt-to-equity ratio

Banks, financial institutions, and investors typically use the debt-to-equity ratio to determine the risk of loaning money to an organization. Knowing your debt to capital ratio is essential for a business owner to see the distribution of resources and adjust spending and borrowing as needed. 

Debt-to-equity ratio = (total liabilities)/(shareholders’ equity)

You can find these values on your corporate balance sheet, or you can calculate them on your own. What’s more important than knowing how to calculate this ratio is interpreting it. 

Let’s say your total liabilities, including current and long-term liabilities add up to $1,865,000, and your shareholders’ equity adds up to $620,000. Now, let’s determine your debt-to-capital ratio:

(Total Liabilities)/(Shareholders’ Equity) = $1,865,000/$620,000 = 3.01

The goal isn’t necessarily to have a low debt-to-equity ratio. It can be a sign that your allocation of resources isn’t optimized and could generate more revenue or spend less in certain areas. It could also show investors that your business is not taking advantage of growth opportunities. 

However, a significantly high debt-to-equity ratio can mean that your company is borrowing too much and unable to keep pace with your spending. 

  • Use financial ratios to manage business risk

There are numerous risks that business owners face. Data from the Bureau of Labor Statistics shows that only 25 percent of new businesses survive 15 years or more. 

Keep track of the health of your business and gain insight into your financial and business risk using financial ratios such as contribution margin ratio, operating leverage effect ratio, financial leverage ratio, combined leverage ratio, and debt-to-equity. Each ratio will give you insight into another aspect of your company’s financials and potential risks. 

Small business owners have to wear many hats, and it can be difficult to learn all the ins and outs of your finances. Learning how to calculate these financial ratios can help you manage business risks without extensive accounting knowledge. 

Explore our Business Growth and Management Guide to learn how to leverage these financial ratios along with your business plan and financial forecasts to strategically grow your business.

LivePlan Logo

Make confident decisions by following a 4-step growth planning process

Content Author: Kiara Taylor

Kiara Taylor has worked as a financial analyst for more than a decade. Her career has involved a number of financial firms, including Fifth Third Bank, JPMorgan, and Citibank. She has filled a number of roles, including equity research analyst, emerging markets strategist, and risk management specialist.

financial ratios of a business plan

Table of Contents

Related Articles

financial ratios of a business plan

7 Min. Read

How to read and analyze your income statement

financial ratios of a business plan

5 Min. Read

How to set team goals that actually work

financial ratios of a business plan

6 Min. Read

5 signs it’s time to scale up your business

financial ratios of a business plan

How to expand beyond your core industry

The LivePlan Newsletter

Become a smarter, more strategic entrepreneur.

Your first monthly newsetter will be delivered soon..

Unsubscribe anytime. Privacy policy .

LivePlan pitch example

Discover the world’s #1 plan building software

financial ratios of a business plan

  • Skip to Guides Search
  • Skip to breadcrumb
  • Skip to main content
  • Skip to footer
  • Skip to chat link
  • Report accessibility issues and get help
  • Go to Penn Libraries Home
  • Go to Franklin catalog

Engineering Entrepreneurship: Business Planning & Financial Ratios

  • Market Research & Industry Analysis
  • Company Information
  • News & Articles
  • Business Planning & Financial Ratios

Financial Intelligence for Entrepreneurs eBook available through The Penn Libraries

Cover Art

Financial Ratios

  • IndustriusCFO Industry Metrics Provides financial ratio benchmarking, profitability, case liquidity, sustainable growth rate, business valuation, square footage analyis, etc. for over 900,000 firms in 900 industries. Provides standard and unique ratio comparisons such as profits and sales per employee and spread between earnings on debt and cost of debt. Provides median income statements, balance sheets and financial ratios for U.S. industries, by both SIC and NAICS industrial classifications.
  • RMA eStatement Studies Online version of RMA's Annual Statement Studies, for financial and industrial ratios. Source of composite financial data, including balance sheet and income statement information and ratios, provided by member institutions. Arranged by industry and business size.
  • Mergent Archives In Mergent Archives, select D&B Manuals > Key Business Ratios.
  • Business Expenses Program From the Core Expenses Group, a collaboration between the U.S. Census Bureau and the Bureau of Economic Analysis.

Print versions of RMA and Key Business Ratios:

  • RMA annual statement studies. by Robert Morris Associates Call Number: HA214 .R54 Most recent edition at Lippincott Library Information Desk.
  • Industry Norms and Key Business Ratios by Dun & Bradstreet Call Number: HA214 .D815 Most recent edition at the Lippincott Library Information Desk.

For historical through 2017, also see:

  • Almanac of Business and Industrial Financial Ratios by Leo Troy Call Number: HF5681.R25 T68 Most recent edition at Lippincott Library Information Desk.

Supply Chain

  • Eora Global Supply Chain Database Eora Global Supply Chain Database represents the structure of the global economy through a complete account of monetary transactions between the industrial sectors of 187 countries. Eora has three components : (1) Datasets of annual environmentally extended multiregional input-output (MRIO) tables showing the multidimensional relationship between 15,000 industry sectors in 187 countries. (2) Complimentary datasets of multipliers for modeling the imposition of exogenous variables on the input-output model. (3) The Eora Supply Chain Explorer, a web visualization tracing specific foreign-country industry inputs into a country’s industry and that country-industry’s output to the specific foreign-country industries. more... less... Penn’s Eora purchase provides access to annual Eora data releases covering 2017-2021. Annual Eora data releases for 1990-2016 are free.
  • ImportGenius Search global import/export records at the bill of lading level from Customs agencies in the U.S. and several other countries. Register for an account using your Penn email address. On campus access only.
  • LSEG Workspace (formerly Refinitiv Workspace) The Value Chains (VCHAINS) app on the platform exposes supply chain relationships, indicating whether each related company is a supplier or customer. To access Value Chains, enter a company's name or ticker symbol followed by VCHAINS (e.g. Boeing VCHAINS), then select the item from the dropdown list. Or from within a company's record, select Peers & Valuation --> Value Chains.
  • Procurement Research Reports Supply chain information for a variety of U.S. industries

For additional resources, refer to our two-part Datapoints blog posts on supply chain research:

  • Datapoints Blog, Part 1
  • Datapoints Blog, Part 2

Business Planning eBooks available through The Penn Libraries

Cover art

Business Plans

  • How to Write a Great Business Plan (series from Inc.) A series to help you craft a business plan for your startup.

Cover art

  • Business Plans Handbook Volume 39 (2017) and more recent volumes are available through Gale Virtual Reference Library.
  • Business Plans Handbook by Gale Cengage Learning (Editor) Call Number: HD62.7 B865 ISBN: 1410328236 Volumes 1-38 held in print in the Lippincott Library Stacks.
  • << Previous: News & Articles
  • Next: Marketing >>
  • Last Updated: Feb 8, 2024 5:10 PM
  • URL: https://guides.library.upenn.edu/EngineeringEntrepreneurship

Everything that you need to know to start your own business. From business ideas to researching the competition.

Practical and real-world advice on how to run your business — from managing employees to keeping the books.

Our best expert advice on how to grow your business — from attracting new customers to keeping existing customers happy and having the capital to do it.

Entrepreneurs and industry leaders share their best advice on how to take your company to the next level.

  • Business Ideas
  • Human Resources
  • Business Financing
  • Growth Studio
  • Ask the Board

Looking for your local chamber?

Interested in partnering with us?

Run » finance, 4 simple steps to smart financial planning for small businesses.

Financial planning often involves looking for funding to help take your business performance to the next level. Here are some strategies to explore.

 A young woman sits at a wooden table in a cafe and types something on a digital tablet. On the table next to the tablet are several receipts, a pair of glasses, a small brown paper bag, and a calculator. The woman has long dark hair in braids with gold beads, and she wears a pale pink sweater and a gold necklace with a small pendant.

Financial planning is an iterative, ongoing process that helps your business reach its long-term goals. Financial planning strategies assess your business’s current financial position and allow you to adapt to market changes, forecast business growth, and achieve higher returns.

A typical financial strategy combines two key elements to help you reach your short- and long-term financial benchmarks. These elements are debt and investments. As you think about your financial strategy for the next year and beyond, here’s how to evaluate these options for fueling growth.

Start with goal-setting

Before you can determine whether to take on debt or pitch to investors, you must know the result toward which you are working. Set a SMART goal — one that’s Specific, Measurable, Achievable, Relevant, and Time-Bound — that you can break down into smaller financial targets.

For instance, most business owners aim to increase profit. However, there are more manageable goals that you can set along the way to earning more profit, such as:

  • Increase revenue.
  • Streamline operating expenses.
  • Improve customer retention.
  • Optimize pricing.

Set numerical targets and deadlines for these smaller benchmarks to get a clear picture of the resources and financial strategy that will help you make progress toward your larger objective.

[Read more: CO— Roadmap for Rebuilding: Planning Your Financial Future ]

How to use debt as a financial strategy

Loans are the most common form of debt that a company can use in its financial planning strategy. Loans from financial institutions, credit card companies, or even friends and family can be a good way to get the cash you need for short-term investments.

As a financial planning strategy, the appeal of using debt is that it’s relatively flexible. “Banks offer a range of different business loan products, including term loans, business lines of credit, equipment financing and commercial real estate loans, among other options,” wrote NerdWallet . “Unless you opt for a product that has a specific use case, like a business auto loan, for example, you can generally use a bank loan in a variety of ways to grow and expand your business.”

However, loans have strict eligibility requirements and can be slow to fund, involving a lot of paperwork and a strong credit score. New businesses may struggle to use debt in their financial planning strategy.

Loans are the most common form of debt that a company can use in its financial planning strategy.

How to use equity or investments in financial planning

Issuing equity (stock) is another way to fund your financial plan. Startups in particular can sell shares of ownership to investors to raise capital for growth, expansion, or acquisitions. This allows you to avoid taking on debt and can bring on partners with mentorship and advice to offer.

“With equity financing, there is no loan to repay. The business doesn’t have to make a monthly loan payment which can be particularly important if the business doesn’t initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business,” wrote The Hartford .

The downside of equity financing is that you will need to share a part of your profit with your equity partners. Equity is best suited for financial strategies that require significant capital quickly.

[Read more: 4 Financial Forecasting Models for Small Businesses ]

Final tips for financial planning

Debt and equity are the key ways to ensure you have the cash flow to reach your financial goals, but there are other elements to consider in your strategy. Make sure you plan a safety net for unforeseen risks; build an emergency fund and get insurance to protect your business. In addition, review your financial results quarterly and annually to ensure your projections are realistic.

“As you look over your annual income reports, you can gain insight into the activities that led to improved revenue and double down on them to raise profits as part of your financial plan,” wrote FundKite , a business funding platform.

Revisit your financial plan frequently to make sure the funding options you explore are still serving your business goals. There are plenty of alternative funding sources — such as grants and crowdfunding — that can help you reach short-term benchmarks along the way.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here .

financial ratios of a business plan

Subscribe to our newsletter, Midnight Oil

Expert business advice, news, and trends, delivered weekly

By signing up you agree to the CO— Privacy Policy. You can opt out anytime.

For more financial tips

E-commerce credit card processing: the ultimate guide to accepting payments, what you need to know about credit card processing, a guide to understanding credit card processing.

By continuing on our website, you agree to our use of cookies for statistical and personalisation purposes. Know More

Welcome to CO—

Designed for business owners, CO— is a site that connects like minds and delivers actionable insights for next-level growth.

U.S. Chamber of Commerce 1615 H Street, NW Washington, DC 20062

Social links

Looking for local chamber, stay in touch.

Great, you have saved this article to you My Learn Profile page.

Clicking a link will open a new window.

4 things you may not know about 529 plans

Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some juristictions to falsely identify yourself in an email. All information you provide will be used solely for the purpose of sending the email on your behalf. The subject line of the email you send will be “Fidelity.com”.

Thanks for you sent email.

Steps to help achieve your financial goals

To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video.

Key Takeaways

  • Get clarity on your financial goals by mapping out potential scenarios
  • Formalize your financial plan and check in on it several times per year
  • Be sure you are maximizing tax-deferred and tax-free savings

Start a conversation

Already working 1-on-1 with us? Schedule an appointment Log In Required

More to explore

Explore wealth management, get the latest insights, subscribe to insights from fidelity wealth management ℠, looking for more ideas and insights, thanks for subscribing.

  • Tell us the topics you want to learn more about
  • View content you've saved for later
  • Subscribe to our newsletters

We're on our way, but not quite there yet

Oh, hello again, thanks for subscribing to looking for more ideas and insights you might like these too:, looking for more ideas and insights you might like these too:, fidelity viewpoints ® timely news and insights from our pros on markets, investing, and personal finance. (debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. fidelity viewpoints ® timely news and insights from our pros on markets, investing, and personal finance. (debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. done add subscriptions no, thanks. saving and budgeting finding stock and sector ideas investing for beginners managing taxes investing for income preparing for retirement saving for retirement living in retirement investing involves risk, including risk of loss. views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of fidelity investments or its affiliates. fidelity does not assume any duty to update any of the information. fidelity does not provide legal or tax advice. the information herein is general and educational in nature and should not be considered legal or tax advice. tax laws and regulations are complex and subject to change, which can materially impact investment results. fidelity cannot guarantee that the information herein is accurate, complete, or timely. fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. consult an attorney or tax professional regarding your specific situation. fidelity brokerage services llc, member nyse, sipc , 900 salem street, smithfield, ri 02917 1131111.2.0 mutual funds etfs fixed income bonds cds options active trader pro investor centers stocks online trading annuities life insurance & long term care small business retirement plans 529 plans iras retirement products retirement planning charitable giving fidsafe , (opens in a new window) finra's brokercheck , (opens in a new window) health savings account stay connected.

financial ratios of a business plan

  • News Releases
  • About Fidelity
  • International
  • Terms of Use
  • Accessibility
  • Contact Us , (Opens in a new window)
  • Disclosures , (Opens in a new window)

IMAGES

  1. What Is a Financial Ratio? The Complete Beginner's Guide to Financial

    financial ratios of a business plan

  2. 10 Financial Ratios for Business

    financial ratios of a business plan

  3. What Is a Financial Ratio? The Complete Beginner's Guide to Financial

    financial ratios of a business plan

  4. Financial Ratios: How to Calculate and Analyze

    financial ratios of a business plan

  5. Financial Statement Ratios Template

    financial ratios of a business plan

  6. How To Use Financial Ratios In Financial Analysis

    financial ratios of a business plan

VIDEO

  1. Financial Ratios (Profitability Ratios)

  2. Principles of Finance: Unit 2, Investment Ratios

  3. A review of Financial Ratios Application and Meaning

  4. Financial Ratio Analysis Part III

  5. Financial Ratios CMA COACHING / TUTORIALS Part 1

COMMENTS

  1. 19 Key Small Business Financial Ratios to Track

    A financial ratio is a measure of the relationship between two or more components on the company's financial statements. These ratios give you a quick and straightforward way to track performance, benchmark against those within an industry, spot trouble and proactively put solutions in place.

  2. Financial Ratios

    1. Track company performance Determining individual financial ratios per period and tracking the change in their values over time is done to spot trends that may be developing in a company. For example, an increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk. 2.

  3. How to Use Common Business Ratios

    What business ratios should you know and be using? Here's a breakdown of common ratios, how they're used, and in some cases how you'll calculate them. Main ratios Current. Measures company's ability to meet financial obligations. Expressed as the number of times current assets exceed current liabilities.

  4. How to Write the Financial Section of a Business Plan

    The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even...

  5. The Financial Analysis for a Small Business Plan

    Financial Analysis of a Business Plan The financial analysis section should be based on estimates for new businesses or recent data for established businesses. It should include these elements: Balance sheet: Your assumed and anticipated business financials, including assets, liabilities, and equity.

  6. 4 types of financial ratios to assess your business performance

    Debt-to-asset ratio. Debt-to-asset ratio is similar to debt-to-equity ratio. It determines a company's level of indebtedness, in other words, the proportion of its assets that is owned by its creditors. This ratio shows that most of the assets are financed by debt when the ratio is greater than 1.0.

  7. How to Calculate Financial Ratios for Your Business Plan

    Introduction Financial ratios are variables used to measure a company's financial performance. They provide valuable insight into a business's liquidity, debt, profitability and other essential aspects. A business plan is a strategic document prepared by entrepreneurs to secure funding or other resources.

  8. 4 Key Business Financial Ratios You Need to Know

    The ratios fall into four categories: liquidity ratios efficiency ratios profitability ratios solvency ratios Financial Ratio Interactive Calculator Tool The liquidity ratio is generally the best place to start. Understanding liquidity ratios These ratios are probably the most commonly used of all the business ratios.

  9. The 7 Best Financial Ratios for a Small Business

    1. Cash Flow to Debt (Net Income + Depreciation) ÷ Total Debt = Cash Flow to Debt Ratio Small businesses make money every month but still have cash flow problems. Why? Much of their cash is going towards debt repayment.

  10. Financial Ratio Analysis: Definition, Types, Examples, and How to Use

    A ratio is the relation between two amounts showing the number of times one value contains or is contained within the other. Types of Ratio Analysis The various kinds of financial ratios...

  11. 10 Financial Ratios Every Small Business Owner Should Know

    Financial ratios are important because they give business owners a way to evaluate financial performance beyond financial statements and compare it to similar businesses in their industry. Your balance sheet, income statement, and cash flow statement are helpful, but they offer only limited insight.

  12. How to Write a Financial Plan: Budget and Forecasts

    A sound financial plan is made up of six key components that help you easily track and forecast your business financials. They include your: Sales forecast What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type. Read More Subscription sales forecast

  13. 19 Key Small Business Financial Ratios to Track

    19 Key Small Business Financial Ratios to Track. Key performance indicators (KPIs) were top of mind for finance teams surveyed for NetSuite's Winter Outlook report. Finance teams said they're focused on using data more effectively, producing better reports on KPIs and finding ways to save money.

  14. Business Plan Financial Templates

    Free Financial Templates for a Business Plan Get free Smartsheet templates By Andy Marker | July 29, 2020 In this article, we've rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

  15. Financial ratios to evaluate business performance

    Home > Articles and tools > Entrepreneur's toolkit > Financial tools Financial tools Financial ratios are a way to evaluate the performance of your business and identify potential problems. Each ratio informs you about factors such as the earning power, solvency, efficiency and debt load of your business. Leverage ratios

  16. 6 Basic Financial Ratios and What They Reveal

    Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in...

  17. Financial Ratios Analysis

    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 0.45 or as a percentage e.g. 45%. Financial ratios are used to analyse business trends and measure performance of both the business and the management.

  18. 5 Financial Ratios for Business Analysis

    Financial ratios are basic calculations using quantitative data from a company's financial statements. They are used to get insights and important information on the company's performance, profitability, and financial health. Common financial ratios come from a company's balance sheet, income statement, and cash flow statement.

  19. LibGuides: Business Plan Research Guide: Financial Ratios

    This is a guide to some of the most helpful sources for developing a business plan. Try these resources and meet with a Research Librarian who can direct you to the resources specific to your industry and market. ... Competitors; Financial Ratios; Going Global; Customers; Sample Plans; Overview. For margin analysis and developing financial ...

  20. 15 Financial Ratios Formulas To Analyse Any Business

    These are the most important financial ratios formulas you can use to analyze any business: current ratio absolute ratio quick ratio the accounts receivable turnover ratio the accounts payable turnover ratio inventory turnover ratio debt to assets ratio debt to equity ratio interest coverage ratio gross profit margin ratio

  21. What Are Financial Ratios and Why Are They Important?

    Profitability ratios. Profitability ratios are used to measure how much income a company is able to generate after accounting for factors such as operating costs, taxes and debt payments. These ratios are crucial for business owners as well as potential investors who may be researching your company. Gross profit margin.

  22. 5 Financial Ratios Used To Measure Business Risk and How To ...

    5. Debt-to-equity ratio. Banks, financial institutions, and investors typically use the debt-to-equity ratio to determine the risk of loaning money to an organization. Knowing your debt to capital ratio is essential for a business owner to see the distribution of resources and adjust spending and borrowing as needed.

  23. Business Plan: What It Is + How to Write One

    What is a business plan? A business plan is a written document that defines your business goals and the tactics to achieve those goals. A business plan typically explores the competitive landscape of an industry, analyzes a market and different customer segments within it, describes the products and services, lists business strategies for success, and outlines financial planning.

  24. Business Planning & Financial Ratios

    Financial Ratios. Provides financial ratio benchmarking, profitability, case liquidity, sustainable growth rate, business valuation, square footage analyis, etc. for over 900,000 firms in 900 industries. Provides standard and unique ratio comparisons such as profits and sales per employee and spread between earnings on debt and cost of debt.

  25. Is Your Busines Efficient? Calculate Your Operating Ratio Today

    Operating Ratio - Key Takeaways. The operating ratio is a financial metric that determines a company's operational efficiency by expressing operating expenses as a percentage of net revenue ...

  26. Financial Planning Strategies to Reach your Money Goals

    Financial planning is an iterative, ongoing process that helps your business reach its long-term goals. Financial planning strategies assess your business's current financial position and allow you to adapt to market changes, forecast business growth, and achieve higher returns. A typical financial strategy combines two key elements to help ...

  27. How to make a financial plan

    Fidelity Viewpoints ® Timely news and insights from our pros on markets, investing, and personal finance. Decode Crypto Clarity on crypto every month. Build your knowledge with education for all levels. Fidelity Smart Money ℠ What the news means for your money, plus tips to help you spend, save, and invest. Active Investor Our most advanced investment insights, strategies, and tools.

  28. How to Create a Five-Year Financial Plan

    A five-year financial plan hones in on just one area: your money. Creating a financial five-year plan can help you gauge where you're at now, get clear on where you want to go, chart your course and stay motivated to get there. Here are five steps you can follow to create your own five-year financial plan.