1. 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

2. 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

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

4. Medical Products, Inc. Income Statement Exhibit 7.1 20092008 Net Sales 10,979.0100.0% 9,013.0100.0% Cost of goods sold5,440.049.5%4,644.051.5% Gross Profit 5,539.050.5% 4,369.048.5% Research and Development 1,053.09.6% 914.010.1% Selling Expense 1,200.010.9% 1,000.011.1% General and Administrative Expense2,825.025.7%2,358.026.2% Total Operating Expenses 5,078.046.3% 4,272.047.4% Operating Income (EBIT) 461.04.2% 97.01.1% Interest Expense (146.0)-1.3% (95.0)-1.0% Interest Income 50.00.4% 38.00.4% Total Other Income (Expense) (96.0)-0.9% (57.0)-0.6% Net Income before Taxes 365.03.3% 40.00.5% Income Taxes (124.1)-1.1% (13.6)-0.2% Net Income 240.92.2% 26.40.3% Copyright 2009 Cornwall, Vang & Hartman

5. Medical Products, Inc. Income Statement Exhibit 7.2 Increase 20092008$ Change% Change Net Sales $ 10,979.0 $ 9,013.0 1,966.021.8% Cost of goods sold 5,440.0 4,644.0 796.017.1% Gross Profit5,539.0 4,369.01,170.026.8% Research and Development 1,053.0 914.0 139.015.2% Selling Expense 1,200.0 1,000.0 200.020.0% General and Administrative Expense 2,825.0 2,358.0 467.019.8% Total Operating Expenses 5,078.0 4,272.0 806.018.9% Operating Income(EBIT) 461.0 97.0 364.0375.3% Interest Expense (146.0) (95.0) (51.0)53.7% Interest Income 50.0 38.0 12.031.6% Total Other Income(Expense) (96.0) (57.0) (39.0)68.4% Net Income before Taxes 365.0 40.0 325.0812.5% Income Taxes (124.1) (13.6) (110.5)812.5% Net Income $ 240.9 $ 26.4 214.5812.5% Copyright 2009 Cornwall, Vang & Hartman

6. Medical Products, Inc. Balance Sheet Exhibit 7.3 ASSETS20092008 Cash and cash equivalents $ 799.0 $ 706.0 Net Accounts Receivable 1,572.4 1,176.0 Inventories 1,427.0 1,310.0 Prepaid Expenses 49.0 73.0 Total Current Assets 3,847.4 3,265.0 Property and Equipment 4,188.0 3,441.0 Less depreciation (2,854.0) (2,750.0) Net Property & Equip. 1,334.0 691.0 TOTAL $ 5,181.4 $ 3,956.0 Copyright 2009 Cornwall, Vang & Hartman LIABILITIES AND EQUITY20092008 Note payable to bank $ 1,551.0 $ 1,252.0 Accounts payable 437.0 383.0 Accrued expenses 668.0 334.0 lease obligations 58.0 22.0 Income taxes payable 124.1 13.6 Total current liabilities 2,838.1 2,004.6 Long-term liabilities 215.0 47.0 Total Liabilities 3,053.1 2,051.6 Common Stock 41.0 Additional paid-in capital 1,677.0 Retained earnings 410.3 186.4 Total shareholders' equity 2,128.3 1,904.4 TOTAL $ 5,181.4 $ 3,956.0

7. 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

8. 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

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

10. Medical Products, Inc. Statement of Cash Flows – Direct Method Exhibit 8.2 20082009 Cash Flows – Operating Activities Collections from customers 10,582.6 9,000.0 Interest received 50.0 38.0 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 354.0 438.0 Cash flows from Investing Activities Purchases of property and equipment (747.0) (525.0) Net cash used in investing activities (747.0) (525.0) 20082009 Cash flows from Financing Activities Net change in capital lease obligations 204.0 10.0 Borrowings on note payable to bank 299.0 100.0 Dividends paid (17.0) (15.0) Net cash provided by financing activities 486.0 95.0 Net change in cash 93.0 8.0 Cash beginning of year 706.0 698.0 Cash end of year 799.0 706.0 Copyright 2009 Cornwall, Vang & Hartman

11. Medical Products, Inc. Statement of Cash Flows – Indirect Method Exhibit 8.3 20082009 Cash Flows – Operating Activities Net Income 240.9 26.4 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 104.0 100.0 Changes in operating assets and liabilities: Accounts Receivable (396.4) 177.6 Inventories (117.0) (125.0) Prepaid Expenses 24.0 (10.0) Accounts Payable 54.0 40.0 Accrued Expenses 334.0 224.0 Income Taxes Payable 110.5 5.0 Net cash provided by operating activities 354.0 438.0 20082009 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 204.0 10.0 Borrowings on note payable to bank 299.0 100.0 Dividends paid (17.0) (15.0) Net cash provided by financing activities 486.0 95.0 Net change in cash 93.0 8.0 Cash beginning of year 706.0 698.0 Cash end of year 799.0 706.0 Copyright 2009 Cornwall, Vang & Hartman

12. 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

13. 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