Creating Ratios and Forecasts
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Creating Your Forecasted Ratio Analysis
After completing your Financial Budgets (step 1), your First Year Forecasted Cash Flow Statement (step 2), your First Year Forecasted Income Statement (step 3), and First Year Forecasted Balance Sheet (step 4), the next step is to develop your First Year Forecasted Ratio Calculations (remember to create your forecasted financial statements and analysis one year at a time).
Recall from previous discussions, a general technique for analyzing business performance or its potential performance is known as Ratio Analysis. Ratios involve dividing numbers from a company's Balance Sheet and Income Statement to create percentages and decimals.
When existing businesses apply for a loan, for example, bankers generally look at the company's ratios and compare them to ratios of other businesses within the same industry. This will determine how "stable" the company currently is; compared to other businesses within the same industry. In addition, bankers and educated investors will compare Forecasted Ratios of non-existing businesses (aspiring entrepreneurs planning on establishing a business) to ratios of businesses already operating within the industry. Such a comparison will provide an indication on whether the aspiring entrepreneur's proposed business venture is expected to be competitive and stable; - relative to others currently operating within the industry.
Below summaries the Forecasted Financial Statements that need to be completed before you can calculate your Ratios. Following this summary, you will find Murray's 200X and 200Y Forecasted Ratio Calculations (IE Scholarship Information Services).
| Budget Name | Required to Determine Your Forecasted |
| Forecasted Balance Sheet | Various Asset, Liability, & Equity Values |
| Forecasted Income Statement | Sales and Net Income Values |
| SCHOLARSHIP INFORMATION SERVICES RATIO CALCULATIONS FOR YEARS ENDING DECEMBER 31, 200X & 200Y |
|||
| RATIOS THAT MEASURE CURRENT POSITION: | |||
| Current Ratio : | 200X |
200Y |
|
| Total Current Assets Total Current Liabilities |
= | $12,965 $5,085 |
$28,469 $11,256 |
| = | $2.55 | $2.53 | |
| Quick Ratio: | |||
| Total Current Assets - Inventory Total Current Liabilities |
= | $10,373 $5,085 |
$24,905 $11,256 |
| = | $2.04 | $2.21 | |
| RATIOS THAT MEASURE EQUITY POSITION: | |||
| Debt to Equity Ratio: | |||
| Total Liabilities Total Owners Equity |
= | $5,085 $19,880 |
$11,256 $25,213 |
| = | $0.26 | $0.45 | |
| Owners Equity to Total Assets: | |||
| Total Owners Equity Total Assets |
= | $19,880 $24,965 |
$25,213 $36,469 |
| = | $0.80 | $0.69 | |
| Creditors Equity to Total Assets | |||
| Total Liabilities Total Assets |
= | $5,085 $24,965 |
$11,256 $36,469 |
| = | $0.20 | $0.31 | |
| RATIOS THAT MEASURE OPERATING RESULTS: | |||
| Profit Margin Ratio: | |||
| Net income after Tax Net Sales |
= | $5,480 $104,000 |
$17,333 $192,000 |
| = | $0.05 | $0.09 | |
| Return on Total Assets: | |||
| Net Income after Tax Total Assets |
= | $5,480 $24,965 |
$17,333 $36,469 |
| = | $0.22 | $0.48 | |
| Return on Owners Equity: | |||
| Net Income after Tax Owners Equity |
= | $5,480 $19,880 |
$17,333 $25,213 |
| = | $0.28 | $0.69 | |
| Investment Turnover Ratio: | |||
| Net Sales Total Assets |
= | $104,000 $24,965 |
$192,000 $36,469 |
| = | $4.17 | $5.26 | |
| * A COMPLETE ANALYSIS IS AVAILABLE UPON REQUEST! | |||
Murray would use his 200X Forecasted Income Statement and 200X Forecasted Balance Sheet to calculate the above 200X Forecasted Ratios. Similarly, Murray would use his 200Y Forecasted Income Statement and 200Y Forecasted Balance Sheet to calculate the above 200Y Forecasted Ratios.
As you can see, Murray has decided to simply calculate a variety of ratios for each forecasted business year. Moreover, he has elected not to explain the meaning behind each; stating that "A Complete Analysis is Available upon Request". Some business plan writers, however, like to compliment their ratio calculations with a brief overall summary; - usually one or two paragraphs. Other business plan writers, on the other hand, prefer to explain each ratio calculation in great detail. If you choose to use Murray's approach, be sure that you understand the meaning behind your Forecasted Ratios, on an individual basis, as well as on a collective basis.
ADDITIONAL EXAMPLES OF RATIO CALCULATIONS
J&B Incorporated
The Internet Company
To learn more about ratios and their meaning, please refer to the section entitled "Ratio Analysis".