This preview shows page 1. Sign up to view the full content.
Unformatted text preview: le table compares the plan to industry standard ﬁnancial proﬁles.
Don’t expect your business to ﬁt exactly into any standard category. For example, is the corner
service station also a convenience store? Which category should it use? General proﬁles are based on
averages, and no real business is ever average. As you include standard ratios in your plan, it is more
important to explain how your company is different than to be able to match your company exactly
to industry averages. Chapter 9: The Business You’re In lists sources for more information on business
ratios, including standards for your type of business.
Our sample company, for instance, has much higher Accounts Receivable than average, but less
Inventory, and also lower Other Current Assets. Its Gross Margin is lower than the rest of the
industry, but Proﬁt Before Interest and Taxes is higher. In this case the plan text should explain why
a well-run company might vary from average numbers. Some readers might worry about unrealistic
ﬁnancial forecasts. CHAPTER 17: FINISH THE FINANCIALS 17.3 Business Ratios
Aside from proﬁles, there are also standard business ratios that people use to evaluate a speciﬁc
business, regardless of its relationship to other businesses of the same kind. Gross margin, debt
to equity, return on investment, and other ratios are widely used as general indicators of business
performance or business health. After you’ve developed projections for sales, proﬁts, cash, assets,
liabilities, and capital, then you can generate many standard business ratios automatically.
Business ratios are often misunderstood. They aren’t magic. Appropriate results vary from industry to
industry. For example, a large manufacturing plant is going to have enormous assets compared to a
small consulting company. Generally, the most important insight gained from ratios is the change in a
ratio over time, rather than the speciﬁc number at any given time.
While we do explain the standard ﬁnancial ratios used...
View Full Document
- Winter '09