The Financial Ratios Table in QuickBooks' Business Plan Workbook - dummies

The Financial Ratios Table in QuickBooks’ Business Plan Workbook

By Stephen L. Nelson

The Financial Ratios Table has 11 rows of calculated data. As in other schedules, the period identifier numbers the periods for which values are calculated. The first period is stored in cell C165 as the integer 1, and periods that follow are stored as the previous period plus 1. The other values in the Financial Ratios Table are calculated as described here.

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Current Ratio

The Current Ratio figures show the ratio of current assets to current liabilities. The current ratio provides one measure of a business’s capability to meet its short-term obligations. The Current Ratio figure for each period is the Total Current Assets figure from the Balance Sheet schedule divided by the Total Current Liabilities figure. For example, the formula for the first period is

=C47/C60

The formula for the second period is

=D47/D60

and so on.

Quick Ratio

The Quick Ratio figures show the ratio of the sum of the cash and equivalents plus the accounts receivable to the current liabilities. The quick ratio provides a more stringent measure of a business’s capability to meet its short-term financial obligations than other ratios.

The Quick Ratio figure for each period is the sum of the Cash & Equivalents figure and the Accounts Receivable figure divided by the Total Current Liabilities figure. For example, the formula for the first period is

=(C43+C44)/C60

The formula for the second period is

=(D43+D44)/D60

and so on.

Working Capital to Total Assets

The Working Capital to Total Assets figures show the ratio of working capital (the current assets minus the current liabilities) to the total assets. The Working Capital to Total Assets ratio is another measure of a business’s capability to meet its financial obligations and gives an indication as to the distribution of a business’s assets into liquid and nonliquid resources.

The Working Capital to Total Assets ratio for each period is calculated by dividing the difference between the Current Assets and Current Liabilities figures by the Total Assets figure. For example, the formula for the first period is

=(C47 – C60)/C52

The formula for the second period is

=(D47 – D60)/D52

and so on.

Receivables Turnover

The Receivables Turnover figures show the ratio of sales to the accounts receivable balance. The Receivables Turnover ratio indicates the efficiency of sales collections. One problem with the measure as it’s usually applied is that both credit and cash sales may be included in the ratio denominator. Two potential shortcomings exist with this approach.

First, the presence of the cash sales may make the receivables collections appear more efficient than is the case. Also, mere changes in the mix of credit and cash sales may affect the ratio, even though the efficiency of the receivables collections process hasn’t changed.

The Receivables Turnover figure for each period is calculated by dividing the Sales Revenue figure for the period by the Accounts Receivable balance outstanding at the end of the period. For example, the formula for the first period is

=C100/C44

The formula for the second period is

=D100/D44

and so on.

Inventory Turnover

The Inventory Turnover row shows the ratio of the cost of sales to the inventory balance. The Inventory Turnover ratio calculates how long inventory is held. It can indicate depleted or excessive inventory balances. The Inventory Turnover ratio for each period is calculated by dividing the Cost of Sales figure for the period by the inventory held at the end of the period. For example, the formula for the first period is

= – C101/C45

The formula for the second period is

= – D101/D45

and so on.

Times Interest Earned

The Times Interest Earned row shows the ratio of the sum of the net income after taxes plus the interest income to the interest expense. The ratio indicates the relative ease with which the business is paying its financing costs.

The Times Interest Earned ratio for each period is calculated by dividing the sum of the Operating Income and Interest Income figures from the Income Statement schedule by the Interest Expense figure. For example, the formula for the first period is

=(C109+C111)/C112

The formula for the second period is

=(D109+D111)/D112

and so on.

Sales to Operational Assets

The Sales to Operational Assets row shows the ratio of sales revenue to net plant, property, and equipment. The ratio indicates the efficiency with which a business uses its operational assets to generate sales revenue.

The Sales to Operational Assets ratio for each period is the Sales Revenue figure that you enter in the inputs area of the business planning starter workbook divided by the Net Plant, Property, & Equipment figure from the Balance Sheet schedule. For example, the formula for the first period is

=C100/C50

The formula for the second period is

=D100/D50

and so on.

Return on Total Assets

The Return on Total Assets row shows the ratio of the sum of the net income after taxes plus the interest expense to the total assets for each period. The ratio indicates the overall operating profitability of the business, expressed as a rate of return on the business assets. The formula for the first period is

=(C16+C112)/C52

The formula for the second period is

=(D116+D112)/D52

and so on.

Return on Equity

The Return on Equity row shows the ratio of the net income after taxes to the owner’s equity for each period. The ratio indicates the profitability of the business as an investment of the owners. The Return on Equity ratio for each period is the Net Income (Loss) After Taxes figure from the Income Statement schedule divided by the Owner Equity figure from the Balance Sheet schedule. For example, the formula for the first period is

=C116/C65

The formula for the second period is

=D116/D65

and so on.

Investment Turnover

The Investment Turnover row shows the ratio of the sales revenue to the total assets. The ratio, like the Sales to Operational Assets ratio, indicates the efficiency with which a business uses its assets (in this case, its total assets) to generate sales.

The Investment Turnover ratio for each period is the Sales Revenue figure that you enter in the inputs area of the business planning starter workbook divided by the Total Assets figure from the Balance Sheet schedule. For example, the formula for the first period is

=C100/C52

The formula for the second period is

=D100/D52

and so on.

Financial Leverage

The Financial Leverage row shows the difference between the return on the owner’s equity and the return on the total assets. The ratio indicates the increase or decrease in an equity return as a result of borrowing. A positive value indicates an improvement in the return on owner’s equity by using financial leverage; a negative value indicates deterioration in the return on owner’s equity.

The Financial Leverage figure for each period is the Return on Total Assets figure minus the Return on Equity figure. For example, the formula for the first period is

=C176 – C175

The formula for the second period is

=D176 – D175

and so on.