Financial Report / Ratio Comprehensive User Guide

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Table of Contents

 

Overview of Financial Report Screen

The CaFE Financial Report offers a comprehensive view of your company's financial health, including Balance Sheet (BS), Profit and Loss (PL), and Financial Ratios. This screen is designed to provide clear comparisons between current and historical financial data, allowing for both month-to-month and year-on-year analysis.

 

Balance Sheet (BS) Section

The Balance Sheet section displays financial data for four periods:

  1. Current month
  2. Three months ago
  3. Same month last year
  4. Three months before last year's data point

This layout allows for both quarter-on-quarter and year-on-year comparisons, providing insight into short-term changes and long-term trends.

Detailed View in BS Section

  • Click the ▶ icon next to any line item to view a breakdown of that category.
  • This feature allows you to drill down into specific areas of assets, liabilities, and equity for more detailed analysis.

 

Profit and Loss (PL) Section

The Profit and Loss section shows:

  1. Data for the most recent three-month period
  2. Data for the same three-month period in the previous year

This comparison helps you understand how your business performance has changed over the past year.

Detailed View in PL Section

  • Click the ▶ icon next to any line item to view a breakdown of that category.
  • This feature allows you to drill down into specific areas of income or expenditure for more detailed analysis.

 

Financial Ratios Section

The Financial Ratios section provides quick insights into various aspects of your company's financial health. Each ratio is calculated using both the most recent month-end BS/PL figures and the figures from the same month in the previous year, allowing for year-on-year comparison.

 

Financial Ratio Sections: Quick Overview

CaFE's financial ratios are grouped into five key sections, each focusing on a different aspect of your company's financial health:

Survival

Measures how long your company can sustain operations using only current cash reserves.

Liquidity

Assesses ability to meet short-term obligations and convert assets to cash quickly.

Solvency

Evaluates long-term financial stability and ability to meet long-term obligations.

Profitability

Measures ability to generate earnings relative to revenue, costs, and assets.

Cash Flow

Assesses ability to generate cash and meet financial obligations.

These sections together provide a comprehensive view of your company's financial health, from immediate concerns to long-term stability and profitability.

 

Understanding the Ratio Table

The Financial Ratio table consists of the following columns:

  • Name: Lists the names of different financial ratios.
  • Unit: Displays the unit of measurement for the ratio value (may be empty if not applicable).
  • Current Year Value: Shows the ratio value calculated using the most recent month-end figures.
  • Previous Year Value: Displays the ratio value calculated using the figures from the same month in the previous year.
  • Health: Indicates the current health status of the ratio using color-coded icons:
    • Green (😊): Good performance
    • Amber (😐): Neutral or cautionary performance
    • Red (😞): Poor performance or area needing attention
  • Info Icon (?): Reveals detailed information about the ratio when clicked.

 

Detailed Explanation of Financial Ratios

Below, we provide a comprehensive breakdown of each financial ratio in CaFE. These explanations will help you understand what each ratio measures, how it's calculated, and how to interpret the results for your business decision-making.

 

Interval Measure (Cash Only)

This survival metric indicates how long your company can continue operations using only its available cash reserves.

What it measures: Days in which cash covers current payment with cash on hand

Formula:

[Bank] / ([Operating Expenses] / ([To Date] - [From Date] + 1))

Health Definition:

  • Green: If the value in the current year is higher than the previous year and also lower threshold.
  • Amber: If the value in the current year is lower than the previous year but does not exceed or is not equal to lower threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to lower threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Higher is good

Upper Threshold: N/A

Lower Threshold: 0

Interpretation: Higher is better. A higher value indicates better short-term liquidity.

Example: If the value is 30, it means the company can cover 30 days of operating expenses with its current cash balance. If this year's value is 35 and last year's was 28, it would be shown in green, indicating improved liquidity.

 

Quick Ratio

A key liquidity indicator, the Quick Ratio assesses your company's ability to meet its total current liabilities with its highly liquid assets.

What it measures: How much cash and AR (open receiving invoice) covers current liability

Formula:

([Bank] + [Accounts Receivable]) / [Current Liabilities]

Health Definition:

  • Green: If the value in the current year is higher than the previous year and also lower threshold.
  • Amber: If the value in the current year is lower than the previous year but does not exceed or is not equal to lower threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to lower threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Higher is good

Upper Threshold: N/A

Lower Threshold: N/A

Interpretation: A ratio above 1 indicates good short-term liquidity. Below 1 may indicate potential cash flow issues.

Example: A Quick Ratio of 2.0 means that the total current liabilities can be covered by only half of cash in bank account(s) and AR (Account Receivables). If this year's ratio is 2.0 and last year's was 1.5, it would be shown in green, indicating improved liquidity.

 

Current Ratio

Another important liquidity measure, the Current Ratio provides insight into your company's ability to pay off its current liabilities with total current assets.

What it measures: How much current asset covers current liability

Formula:

 ([Bank] + [Current Assets (w/o Bank)]) / [Current Liabilities]

Health Definition:

  • Green: If the value in the current year is higher than the previous year and also lower threshold.
  • Amber: If the value in the current year is lower than the previous year but does not exceed or is not equal to lower threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to lower threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Higher is good

Upper Threshold: N/A

Lower Threshold: 1

Interpretation: For SMEs, a value greater than 1 is usually required. It indicates the ability to pay current liabilities (Account Payables, loans due in 1 year, etc).

Example: A Current Ratio of 2.0 means that the total current liabilities can be covered by only half of total current liabilities. If this year's ratio is 2 and last year's was 1.8, it would be shown in green, indicating improved short-term solvency.

 

Debt Ratio

This solvency metric helps you understand how the total liabilities is covered by the total assets.

What it measures: How much total liability is covered by total assets

Formula:

[Liabilities] / [Assets]

Health Definition:

  • Green: If the value in the current year is lower than the previous year and also upper threshold.
  • Amber: If the value in the current year is higher than the previous year but does not exceed or is not equal to upper threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to upper threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Lower is good

Upper Threshold: 1

Lower Threshold: N/A

Interpretation: Lower is better. If over 1, the company is over-indebted.

Example: A Debt Ratio of 0.7 means 70% of the total assets covers the total liabilities. If this year's ratio is 0.7 and last year's was 0.8, it would be shown in green, indicating improved financial leverage.

 

Interest Coverage Ratio

An important solvency measure, the Interest Coverage Ratio shows how easily your company can pay interest on its outstanding debt.

What it measures: How much EBIT (Earnings Before Interest and Tax) covers the interest payment

Formula:

([Net Profit] + [Interest Expenses] + [Tax Expenses]) / [Interest Expenses]

Health Definition:

  • Green: If the value in the current year is higher than the previous year and also lower threshold.
  • Amber: If the value in the current year is lower than the previous year but does not exceed or is not equal to lower threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to lower threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Higher is good

Upper Threshold: N/A

Lower Threshold: 1

Interpretation: Shows how easily a company can pay interest on outstanding debt. N/A typically indicates no interest-bearing debt.

Example: An Interest Coverage Ratio of 3 means the company's income is 3 times higher than its interest payments. If this year's ratio is 3 and last year's was 2.5, it would be shown in green, indicating improved ability to cover interest expenses.

 

Operating Profit Margin

A crucial profitability measure, the Operating Profit Margin shows how much profit your company makes on a pound of sales from operations.

What it measures: How much operating profit is produced relative to total sales

Formula:

[Operating Profit] / [Sales Income]

Health Definition:

  • Green: If the value in the current year is higher than the previous year and also lower threshold.
  • Amber: If the value in the current year is lower than the previous year but does not exceed or is not equal to lower threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to lower threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Higher is good

Upper Threshold: N/A

Lower Threshold: 0

Interpretation: Shows the percentage of sales turned into profits, before interest and taxes. Higher values indicate better operational efficiency.

Example: An Operating Profit Margin of 0.15 means the company keeps £0.15 as operating profit for every £1 of sales. If this year's margin is 0.15 and last year's was 0.12, it would be shown in green, indicating improved operational efficiency.

 

Net Profit Margin

This profitability ratio indicates how much of each pound earned by your company is translated into profits.

What it measures: How much net profit is produced relative to total sales

Formula:

[Net Profit] / [Sales Income]

Health Definition:

  • Green: If the value in the current year is higher than the previous year and also lower threshold.
  • Amber: If the value in the current year is lower than the previous year but does not exceed or is not equal to lower threshold, or no value in previous year.
  • Red: If the value in the current year exceeds or is equal to lower threshold.
  • N/A: If the denominator in the current year is zero.

Comparison with the previous year: Higher is good

Upper Threshold: N/A

Lower Threshold: 0

Interpretation: Indicates the percentage of sales that become profit after all expenses are deducted. Higher values suggest better overall profitability.

Example: A Net Profit Margin of 0.10 means the company keeps £0.10 as net profit for every £1 of sales. If this year's margin is 0.10 and last year's was 0.08, it would be shown in green, indicating improved overall profitability.

 

Debt to Cash Flow Ratio

This cash flow metric indicates how long it would take your company to pay off its debt using its cash flow from operations.

What it measures: Years to pay all debt with cash flow

Formula:

([Debt] - ([Current Assets (w/o Bank)] - [Current Liabilities] + [Debt in Current Liabilities])) / ((([Operating Profit] + [Depreciation]) / ([To Date] - [From Date] + 1)) * 365 - [Tax Expenses])

Health Definition:

  • Green: If the value in the current year is lower than the previous year and also upper threshold.
  • Amber: If the value in the current year is higher than the previous year but does not exceed or is not equal to upper threshold, or no value in previous year.
  • Red: If the denominator in the current year is zero or negative.

Comparison with the previous year: Lower is good

Upper Threshold: N/A

Lower Threshold: N/A

Interpretation: Lower is better. Shows how many years it would take to pay off all debt if all cash flow was devoted to debt repayment. If the denominator zero or negative, this indicates that the company is currently not generating positive cash flow to repay its debt.

Example: A ratio of 3 means it would take 3 years to repay all debt using all available cash flow. If this year's ratio is 3 and last year's was 3.5, it would be shown in green, indicating improved ability to repay debt.

 

Additional Features in Financial Report / Ratio

Settings for Ratio Calculations

For certain ratios (e.g., Interest Coverage Ratio and Debt to Cash Flow Ratio), there is a Settings area with buttons to configure specific accounts:

  • Click on these buttons to select the appropriate accounts for accurate ratio calculations.
  • Note1: Please sync data again if you change any settings to ensure the most up-to-date calculations.
  • Note2: The Settings area is only available when you are a QuickBooks user or use the Full Budget  feature. Otherwise, the settings are fixed based on your current budget (Quick Cash Flow Plan or Basic Budget).

 

Export Functionality

Located in the top-right corner of the screen, the Export button allows you to download all reports in Excel format:

  • Useful for offline analysis or for sharing reports with team members who don't have direct access to CaFE.
  • Provides a comprehensive view of all financial data in a familiar spreadsheet format, allowing for further custom analysis.
  • Includes all the data from the Balance Sheet, Profit and Loss, and Financial Ratios sections.

 

Effectively Using the Financial Report / Ratio

  • Regularly review this report to stay informed about your company's financial position. Monthly reviews are recommended for most businesses.
  • Pay attention to trends in both BS and PL figures over time. Look for consistent improvements or concerning patterns.
  • Use the Financial Ratios to quickly identify areas of strength or concern in your financial structure. Green indicators are positive, while red indicators may require immediate attention.
  • When ratios show amber or red health indicators, investigate further using the detailed BS and PL data. The Detailed View feature can help pinpoint specific areas of concern.
  • Compare current year figures with previous year figures to understand your company's financial trajectory.
  • Remember that this report is based on data synced from your accounting system. Ensure your accounting data is up-to-date for the most accurate insights.
  • Make use of the Export functionality to perform more detailed analyses or to share reports with your team or financial advisors.
  • Consider the context of your industry and business cycle when interpreting these ratios. Some industries naturally have different benchmarks for what's considered healthy.

 

Frequently Asked Questions about Financial Report/Ratio

Q: How often should I review the CaFE Financial Report?

A: It's recommended to review the report at least monthly. However, for businesses with high transaction volumes or in volatile markets, more frequent reviews may be beneficial.

Q: What does it mean if a ratio shows N/A?

A: N/A usually appears when the denominator in the ratio calculation is zero. For example, in the Interest Coverage Ratio, N/A might indicate that your company has no interest-bearing debt.

Q: How do I interpret changes in ratios over time?

A: Generally, improvements in ratios (indicated by green health indicators) suggest better financial health. However, it's important to consider the broader context of your business and industry when interpreting these changes.

Q: Can I customize the thresholds for the health indicators?

A: Currently, the thresholds are set based on general financial principles. 

Q: How do I ensure the accuracy of the data in the CaFE Financial Report?

A: The accuracy of the report depends on the data in your accounting system. Ensure all transactions are recorded accurately and in a timely manner, and regularly reconcile your accounts.

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