FINANCIAL STATEMENTS

What kind of financial ratios do lenders look at?

Current Ratio:
The current ratio is your current assets (cash, receivables, inventory and prepaid expenses) divided by your current liabilities (accounts payable, credit cards and accrued expenses). Ideally, the resulting number should be more than 1.2. This figure shows whether you have sufficient assets on hand to cover payment of your current liabilities over the next twelve months. Anything under 1.2 gives your banker heartburn.

Debt to Equity Ratio:
The debt to equity ratio is your total liabilities (everything you owe, except to yourself) divided by your net worth (which is assets less liabilities). Ideally, the resulting number should be less than 2.8. The banker expects you to have more liabilities than equity, but the higher this number gets, the riskier your business is and the more vulnerable to a sudden downturn in the economy.

Gross Profit Percentage:
To be honest, most bankers do the first two ratios above and just stop, because accounting is not their forte. Most of them simply do not know how to read financial statements. However, the brighter lights in the banking community know that the Gross Profit Percentage is key to understanding your company's profitability.

The Gross Profit is your Gross Sales less your Cost of Sales. The Gross Profit Percentage is your Gross Profit divided by your Gross Sales. This GPP will vary from industry to industry, so I can't quote you any specific figure to shoot for, but it should be at least as much as the prior year. If your GPP is shrinking, you need to be able to show your banker that it is because of a change in market mix and that you are shooting for volume as opposed to margin.


Return On Assets:
This is your Net Income divided by your Total Assets. Some bankers also look at Return on Equity (Net Income divided by Net Worth) or even Return on Fixed Assets (Net Income divided by Fixed Assets). In all cases, the higher the better.

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