The Financial Analysis section of the Financial Plan, is part of writing a Business Plan looking at how your business is actually performing through a number of financial ratios. This is a crucial part of the Business Plan, especially for a small business.
Financial Analysis
Once you have drawn up your Financial Position, Financial Performance and Cash Flow Projection you will have a really good picture financially of your business. The next step is to establish what these figures are telling you. To do that, many companies use Financial Ratios. By dividing one number by another, you are creating a ratio, which negates any potential problems in comparing numbers on different scales.
There is a range of ratios that you can use. Depending on what information you are looking for and its purpose (e.g. sourcing funding) will decide which ratio analysis you would use.
Some key ratios include:
Leverage Ratios – these are relevant more to investors as they look at your liabilities. The tell investors how well you are going to manage your debt.
Liquidity Ratios – look at how effectively you can manage your day-to-day cash flow
Efficiency Ratios – these indicate how efficient you are in your business.
Return on Investment Ratios – Investors are keen to look at these, as they will see how much they as an investor will get in return.
Activity Ratios – how well you manage your debtors and your stock.
Profitability Ratios – look at your profitability. For example:
Net Profit Margin = Net Profit/Net Sales (this shows how much net profit you make on your sales)
Gross Profit Margin = Gross Profit/Net Sales (This shows how much money is made on the sale of the stock itself.)
Return to the top of the
Financial Analysis
page, return to the
Financial Plan
page, or return to
Writing a Business Plan
