Managing Financial Operations Patterns of Entrepreneurship Chapter 11

Session Outline Understanding Financial Statements –The Value of the Balance Sheet –The Value of the Income Statement –The Value of the Statement of cash flows Preparing financial projections Preparing Budget projections Prepare a Forecast of cash Flow

Three basic financial documents used by most businesses: 1. The balance sheet (also called the statement of financial position). 2. An income statement or profit-and-loss (P&L) statement. 3. The statement of cash flows (also called source and use of funds).

 Balance sheet equals= Liabilities + Shareholders equity  Book Value= total of the tangible assets less subtracting all the liabilities  Book value doe not include intangible assets – like patents and Intellectual Property  Goodwill- includes factors like brand, market share, and human capital Value of the Balance Sheet

How to use Ratios for Financial Analysis  Current Ratio= total current assets divided by the current liabilities  Quick Ratio= Only current assets,cash and account receivables divided by current liabilities

 Current Liabilities to Net Worth  Total Liabilities to Net Worth  Fixed Assets to Net Worth Solvency Ratios

 1.). This ratio compares the net profit of the business to the investment (net worth) of the business. It is calculated as net income after taxes (From the income statement) divided by total owner’s equity (from the balance sheet).6  Return on investment =Net Income Shareholders’ equity Return on Investment (ROI)

This is the earnings before interest expense, interest income, income taxes, depreciation and amortization. It measures the profitability of a company’s operations without the impact of its debt, investments and long-term assets. EBITDA

Month to month projection of receipts and disbursements.activity. 1. Receipts from Sales. The detail from sales, the payment terms the company extends its customers, and the company’s collection history 2. Other Receipts. Other receipts include bank loans, equity investments, tax refunds or any other inflows of cash 3. Disbursements from Expenses. The detail from expenses and the payment terms 4. Other Disbursements. This includes capital equipment acquisitions and payment of debt. Prepare a Forecast of Cash Flow

 The break-even technique is a decision- making model that helps the entrepreneur to determine whether a certain volume of output will result in a profit or loss. Preparing a Break-Even Analysis

this formula, the price per unit (P) multiplied by the number of units sold (X) is equal to the fixed costs (F) plus the variable costs (V) multiplied by the number of units produced expressed as the following formula:  P(X) = F + V(X) Use the Break-even Formula

 As an example, if fixed costs (F) are $40,000, the variable costs per unit (V) are $15 and the price per unit (P) is $20, the break-even point (X) can be calculated by plugging these values into the equation:  20(X) = 40, (X)  20X – 15X = 40,000  5X = 40,000  X = 8,000 units Example of Break Even

 The annual budget presents a month- by-month projection of revenues and expenses over a one-year period. The budget is the foundation for projecting the other financial statements How to Prepare an Annual Budget