Outline: Chapter 7 Monitoring Financial Performance Tracking assumptions Establishing milestones Getting the numbers needed to manage Using numbers to manage Working with accountants Copyright 2009 Cornwall, Vang & Hartman

Table 7.1 Sample List of Assumptions AssumptionMeasurement Technique 30 calls per sales person per month.Sales staff will keep a log of sales calls. One in ten sales calls results in proposal. Enter proposals to prospective clients in the sales activity log. One third of proposals results in order.When a customer places an order, this will be noted in the sales log. Each order averages ten units.The size of each order will be noted in the sales log. Customers make an average of one order per month. The date of each order is noted in the sales log. An average of one customer will stop ordering each month. Contact to see if this client intends to make any future orders. Copyright 2009 Cornwall, Vang & Hartman

Using Numbers to Manage Financial Statement Analysis Ratio Analysis  Liquidity ratios  Activity ratios  Profitability ratios  Solvency and coverage ratios Copyright 2009 Cornwall, Vang & Hartman

Medical Products, Inc. Income Statement Exhibit Net Sales 10, % 9, % Cost of goods sold5, %4, % Gross Profit 5, % 4, % Research and Development 1, % % Selling Expense 1, % 1, % General and Administrative Expense2, %2, % Total Operating Expenses 5, % 4, % Operating Income (EBIT) % % Interest Expense (146.0)-1.3% (95.0)-1.0% Interest Income % % Total Other Income (Expense) (96.0)-0.9% (57.0)-0.6% Net Income before Taxes % % Income Taxes (124.1)-1.1% (13.6)-0.2% Net Income % % Copyright 2009 Cornwall, Vang & Hartman

Medical Products, Inc. Income Statement Exhibit 7.2 Increase $ Change% Change Net Sales $ 10,979.0 $ 9, , % Cost of goods sold 5, , % Gross Profit5, ,369.01, % Research and Development 1, % Selling Expense 1, , % General and Administrative Expense 2, , % Total Operating Expenses 5, , % Operating Income(EBIT) % Interest Expense (146.0) (95.0) (51.0)53.7% Interest Income % Total Other Income(Expense) (96.0) (57.0) (39.0)68.4% Net Income before Taxes % Income Taxes (124.1) (13.6) (110.5)812.5% Net Income $ $ % Copyright 2009 Cornwall, Vang & Hartman

Medical Products, Inc. Balance Sheet Exhibit 7.3 ASSETS Cash and cash equivalents $ $ Net Accounts Receivable 1, ,176.0 Inventories 1, ,310.0 Prepaid Expenses Total Current Assets 3, ,265.0 Property and Equipment 4, ,441.0 Less depreciation (2,854.0) (2,750.0) Net Property & Equip. 1, TOTAL $ 5,181.4 $ 3,956.0 Copyright 2009 Cornwall, Vang & Hartman LIABILITIES AND EQUITY Note payable to bank $ 1,551.0 $ 1,252.0 Accounts payable Accrued expenses lease obligations Income taxes payable Total current liabilities 2, ,004.6 Long-term liabilities Total Liabilities 3, ,051.6 Common Stock 41.0 Additional paid-in capital 1,677.0 Retained earnings Total shareholders' equity 2, ,904.4 TOTAL $ 5,181.4 $ 3,956.0

Working with Accountants Internal versus external accountants Internal accountants ◦ Bookkeeper ◦ Controller ◦ CFO Hiring external accountants ◦ Get referrals ◦ Judge compatibility with entrepreneur & staff ◦ Industry knowledge ◦ Clear billing policies ◦ Effective communication key once hired Copyright 2009 Cornwall, Vang & Hartman

Outline: Chapter 8 Day-to-Day Cash Flow Management and Forecasting Why is cash flow different from net income? How is cash flow measured? Interpreting a statement of cash flows Investors and creditors use of the cash flow statement Effective cash management Emotional side of cash flow management Copyright 2009 Cornwall, Vang & Hartman

Measuring Cash Flow Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Copyright 2009 Cornwall, Vang & Hartman

Medical Products, Inc. Statement of Cash Flows – Direct Method Exhibit Cash Flows – Operating Activities Collections from customers 10, ,000.0 Interest received Payments for inventories (5,503.0) (4,500.0) Payments for operating expenses (4,616.0) (4,000.0) Payments for taxes (13.6) (5.0) Payments for interest (146.0) (95.0) Net cash provided by operating activities Cash flows from Investing Activities Purchases of property and equipment (747.0) (525.0) Net cash used in investing activities (747.0) (525.0) Cash flows from Financing Activities Net change in capital lease obligations Borrowings on note payable to bank Dividends paid (17.0) (15.0) Net cash provided by financing activities Net change in cash Cash beginning of year Cash end of year Copyright 2009 Cornwall, Vang & Hartman

Medical Products, Inc. Statement of Cash Flows – Indirect Method Exhibit Cash Flows – Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in operating assets and liabilities: Accounts Receivable (396.4) Inventories (117.0) (125.0) Prepaid Expenses 24.0 (10.0) Accounts Payable Accrued Expenses Income Taxes Payable Net cash provided by operating activities Cash flows from Investing Activities Purchases of property and equipment (747.0) (525.0) Net cash used in investing activities (747.0) (525.0) Cash flows from Financing Activities Net change in capital lease obligations Borrowings on note payable to bank Dividends paid (17.0) (15.0) Net cash provided by financing activities Net change in cash Cash beginning of year Cash end of year Copyright 2009 Cornwall, Vang & Hartman

Example of Cash Flow Over Life Cycle of Business Figure 8.1 Profits Cash flow Start-up to Early StageGrowth StageMaturity 0 Copyright 2009 Cornwall, Vang & Hartman

Reasons for Cash Flow Problems Difficulty in collecting receivables Seasonality of sales Unexpected variation in sales Policies on how payments are made to suppliers Large expenditures up front for customer projects Capital projects Ineffective inventory management Copyright 2009 Cornwall, Vang & Hartman