1. Small Business Management BUS 402 Creating a Solid Financial Plan

2. Objectives Upon completion of this lesson, you will be able to: –Analyze the key financial management considerations in operating a small business including financial planning, use of equity and debt financing, and managing cash flow –Use technology and information resources to research issues in small business management

3. Basic Financial Reports Balance sheet –Assets = Liabilities + Owner’s Equity Income statement –Profit and loss Cash flow –Sources and uses of funds

4. Check Your Understanding

5. Creating Projected Financial Statements Estimates funds needed for operations Pick a number and work toward it Guides decision-making Anticipates cash flow

6. Ratio Analysis Twelve key ratios Liquidity Leverage Operations Profitability

7. Liquidity Ratios Current ratio –Current ratio = current assets/current liabilities Quick ratio –Quick ratio = (current assets – inventory)/current liabilities

8. Leverage Ratios Debt ratio –Debt ratio = Total liabilities/Total assets Debt to net worth ratio –Debt to net worth ratio = Total liabilities/Tangible net worth Times interest earned ratio –TIE ratio = EBIT/Total interest expense

9. Check Your Understanding

10. Operating Ratios Average inventory turns –Average inventory turns = Cost of goods sold/Average inventory Average collection period –Average collection period = Days in account period/Receivables turnover ratio Average payable period –Average payable period = Days in account period/Payables turnover ratio

11. Profitability ratios Net profit on sales ratio –Net profit on sales = (Net income/net sales) X 100% Net profit to assets ratio –Net profit to assets = (Net income/Total assets) X 100% Net profit to equity ratio –Net profit to equity = (Net income/Owner’s equity) X 100%

12. Interpreting Business Ratios “Rules of thumb” for operating decisions Comparison to industry averages Subjective, but rational, judgment calls

13. Breakeven Analysis Shows the level of sales to “break even” Gives guidance for management decisions Used as a “what if” tool

14. Summary Basic financial reports Creating projected financial statements Ratio analysis Interpreting business ratios Breakeven analysis