C. Financing a Small Business 5.00 Explain the financial statements maintained in a small business. 5.02 Explain the use of sales projections.

Identify factors associated with making sales projections. Sales quota Product positioning Market share Sales Ratio Sales Forecast Break-even point Economic outlook

Sales Ratio: An expression of any component of the income statement as a percentage of total sales. The value of the component is divided by the value of sales.

SALES RATIO Example: Rent expenses $500 divided by sales $10,000 equals sales ratio of 5%.

Current Ratio: A comparison of current assets with current liabilities Current Ratio: A comparison of current assets with current liabilities. This is one indicator of the ability of the business to pay its debts. Assets/Liabilities=Current Ratio

CURRENT RATIO Ratio of 2:1 is usually considered sufficient. Example: Assets of $70,000 divided by liabilities of $35,000 equals a current ratio of 2:1 or $2 in assets for every $1 in liabilities.

Sales forecast: An estimate of sales for a specified period Sales forecast: An estimate of sales for a specified period. Current Sales + (% increase x the current sales) OR Current Sales x (100% + % increase)

EXAMPLE Current sales $5,000 and a projected increase of 7% yields a new sales forecast of $5,350. $5,000 multiplied by .07 = $350 $5,000 plus $350 = new sales forecast of $5,350

Break-even point: The point at which the money from product sales equals the costs of making and distributing the product. BEP=Total fixed expenses divided by (unit sales price minus unit variable expense)

Break-even Equation Example: With fixed costs of $4 per unit and variable cost of $2 per unit, a business expects to provide 4,000 units at a selling price of $12 per unit. $4 x 4,000 units= $16,000 total fixed costs $16,000/($12-$2)= 1600 units as break-even Fixed Expenses/Unit sales price-Variable expenses= BEP (Units)

Economic outlook: Trends associated with the economy that can impact your business’ sales.

EXAMPLE Lower airline fares equals increased travel and tourism. Higher airline fares equals decreased travel and tourism to farther destinations. Higher interest rates equals decreased housing sales. Lower interest rates equals increased housing sales.

Sales quota: A goal assigned to a sales person for a specified period.

Product positioning: Placing a product in a certain market to get a desired customer response.

Market share: The percentage of a product/service that is sold in the total market for that product/service.

Identify financial tools that utilize sales projections. Cash flow statement Repayment Plan Inventory

Cash flow statement: Shows the flow of cash in and out of the business Cash flow statement: Shows the flow of cash in and out of the business. Sales projection provides the income factor.

Repayment Plan: A plan for repaying the debt of a business Repayment Plan: A plan for repaying the debt of a business. The sales projection provides the information about potential income and helps determine how much and when the business can pay.

Inventory: It is necessary to forecast sales in order to ensure that the quantity of goods and materials on hand is adequate to meet the sales demand.