1. Managing Finances and Financial Reporting
UNIT 2
In this Unit, we will look at different financial measuring tools for your business. This powerpoint will further help you understand how to complete the financial section of your Business Plan.

2. Balance Sheet
The balance sheet is a snapshot of how your company is doing at any given moment.
The balance sheet is a snapshot of how your company is doing at any given moment. We will further explore the parts of a balance sheet.

3. Example Balance Sheet ASSETS LIABILTIES AND OWNERS’S EQUITY
Cash $4,000
LIABILTIES
Accounts Receivable $6,000
Notes Payable $25,000
Equipment $25,000
Accounts Payable
Total Liabilities $25,000
OWNER’S EQUITY
Stock $8,000
Retained Earnings $2,000
Total Owner’s Equity $10,000
TOTAL $35,000
TOTAL $35,000
This is an example of a balance. You will be working with the balance sheet more throughout your Unit 2 Business Plan Coursework. As you can see, the assets of the company are displayed on the left of the sheet and the liabilities on the right. Notice how both sides always balance out to zero. This is why it is called a balance sheet.

4. Assets
Current assets
Normally converted to cash in 12 months, like crops, market livestock, prepaid expenses, cash, savings
Intermediate Assets
Useful life of one to 10 years -- machinery, breeding livestock, equipment, stocks, some buildings
Long Term Assets
Normal useful life of more than 10 years -- land, buildings, stocks
Selling would typically decrease volume or size of business
In terms of assets, current assets are normally converted to cash in 12 months, like crops, market livestock, prepaid expenses, cash, and savings.
Intermediate assets have a useful life of one to 10 years. Examples of which are machinery, breeding livestock, equipment, stocks, and some buildings.
Long Term assets have a normal useful life of more than 10 years and includes land, buildings, and stocks.

5. Parts of a Balance Sheet - Liabilities
Current Liabilities
What you are scheduled to pay in the next 12 months
Unpaid bills, accrued interest, property taxes
Operating loans
Principal payments on term debts to be made in the next 12 months
Current liabilities are expenses that your business will be paying in the next 12 months. This includes unpaid bills, accrued interest, property taxes, operating loans, and principal payments on loans.

6. Long Term Liabilties Long Term Liabilities
What was scheduled originally as 11 or more years
Land debt, house payments
Match up to the long term assets
Long Term Liabilities on a balance sheet are normally on the books for 11 or more years. They are usually debt owed on properties or structures.

7. Ratio Analysis

8. Ratio Analysis
Used to determine the health of a business by comparing one financial measurement to another.
Some ratios measure relationships within the business
Other ratios compare statistics to other firms in the same or similar industries.
Examples: inventory turnover, days sales outstanding, earnings per share.
Read Slide

9. Business Ratios
Liquidity ratios determine how much of a firm’s current assets are available to meet short-term creditors’ claims.
Activity ratios indicate how efficiently a business is using its assets.
Leverage (debt) ratios indicate what percentage of the business assets is financed with creditors’ dollars.
Our first three types of ratios are the liquidity, activity, and debt ratios. (Read Slide)

10. Types of Business Ratios (Continued)
Profitability ratios are used to determine how much of an investment will be returned from either earnings on revenues or appreciation of assets.
Market ratios are used to compare firms within the same industry.
Two additional types of business ratios are Profitability Ratios and Market Ratios. Profitability Ratios are used to determine how much of an investment will be returned from either earnings on revenues or appreciation of assets. Market Ratios are used to compare firms within the same industry.

11. Liquidity Ratios
Current Ratio: calculated by dividing total current assets by total current liabilities.
The Current Ratio is given by the following:
The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. It is expressed as current assets divided by current liabilities. Both current assets and liabilities can be found on a balance sheet.

12. Liquidity Ratios (Continued)
Quick, or Acid Test, Ratio: measures the ability of the firm to meet its short-term obligations without liquidating its inventory.
The acid test ratio is given by the following:
Another liquidity ratio is the quick, or Acid Test, ratio. This ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that can be quickly converted to cash at close to their book values. A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities with its current assets. It is the goal of any company to be able to have enough assets that can be sold to pay off its immediate debt. This would be represented by a quick ratio that is greater than 1.

13. Activity Ratios
Inventory turnover ratio: indicates how efficiently a firm is moving its inventory. It basically states how many times per year the firm moves it average inventory.
Inventory turnover is given as follows:
Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. This is important for businesses that sell things like food and merchandise. A company with a high inventory turnover show that they are able to sell their goods at a quick rate which is a healthy sign of possible profitability. On the other hand, that same type of business with a low inventory turnover may be an indicator of a struggling organization.

14. Activity Ratios (Continued)
Accounts receivable turnover ratio: Used to determine how fast a company is turning its credit sales into cash.
Accounts receivable turnover is given by the following:
Accounts Receivable Turnover Ratio measures how quickly a firm is able to turn its credit sales into cash. This is particularly important for firms that accept month payments in turn for its services.

15. Activity Ratios (Continued)
Days sales outstanding (DSO): the average number of days required to collect accounts receivable.
DSO is given by the following:
Days sales outstanding is a financial ratio that illustrates how well a company's accounts receivable are being managed.
As with all financial ratios, a company's DSO ratio should be considered alongside others in its industry. Examining the DSO ratio as it changes over time can often point out trends. Generally speaking a company with a higher DSO ratio can indicate a customer base with credit problems and/or a company that is not properly collecting money from its customers.  A low ratio may indicate the firm's credit policy is too firm, which may be hampering sales.

16. Activity Ratios (Continued)
Total asset turnover ratio indicates how efficiently a firm uses its total assets to generate revenue.
Total asset turnover is given by the following:
Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. Normally, companies with low profit margins have high ratios due to the fact that they tend to move inventory quickly.

17. Leverage Ratios
Debt-to-equity ratio indicates what percentage of the owner’s equity is debt.
Debt-to-equity is given by the following:
The Debt-to-equity ratio is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. It is your total liabilities divided by your total assets less total liabilities. This is good indicator how well the business is doing.

18. Profitability Ratios
Gross profit margin ratio is used to determine how much gross profit is generated by each dollar in net sales.
Gross profit margin is given by the following:
Just like it sounds, this ratio lets the owner know how much profit is generated on each dollar in net sales. This is important for determining the profitability and worthwhile of a product or service.

19. Profitability Ratios (Continued)
Return on equity (ROE) ratio tells the stockholder, or individual owner, what each dollar of his or her investment is generating in net income.
Return on equity (ROE) is given by the following:
The return on equity measures the rate of return on the ownership interest. This is a ratio that investors are particularly interested in. This ratio gives the investor or owner of a company an idea of how much money they will make off of their initial or ongoing investments.

20. Unit 2 Business Plan Work
Section: VII
Personal Financial Statement
Section: IX
Startup Expenses and Capitalization
Section X
Financial Plan
Here are your assignments for this week. These sections are not only the most important sections of the business plan but also the most difficult. Ensure that you devote plenty of time to completing these to the best of your abilities. When the business plan is complete, it is always a good idea to have your financial projections checked by a Certified Public Account or friend that is in finance or accounting to double check your numbers. Use the Excel worksheets provided to help make this process easier. Good Luck!

21. Additional Resources How to read financial ratios for dummies:
reports-for-dummies-cheat-sheet.html
How to read a balance sheet: zz1UkrbGCmA
Investopedia Ratios Explained

22. Works Citied
Parts of a Balance Sheet. Roger Betz, Sherrill Nott, Gerald Schwab. (