NEWSInstagram – bought by Facebook for 1 billion

USD (9 employees)

Apple Inc. – 653% increase since March 2009 (second to Cisco in 1998-2000)

#THTH - Tony Hawk Treasure Hunt3 million followers. Once a year (15th april

2012)

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MAN 470 – Berk TMAN 470 – Berk TUNCALIUNCALI2

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It is better to solve problems than crisis. (John Guinther)

Financial management: a process that provides entrepreneurs with relevant financial information in an

easy to read format on a timely basis.

It allows entrepreneurs to know not only how their business is doing but financially but also why they are performing

that way.

Do not forget, the financial statements are not just for accountants and financial officers. They can also help entrepreneurs map out the financial future of a company

and plan for profit.

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Basic Financial Statements

There are three basic financial statements. These are;

1. The Balance Sheet

2. The Income Statement

3. The Statement of Cash Flows

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The Balance SheetBalance Sheet provides a snapshot of a

business’s

financial position on a given date. It relies on the basic

accounting equation of ‘’Assets = Liabilities + Owner’s

Equity’’

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AssetsLiabilities + Owner’s

Equity

The balance sheet is usually prepared at the end of each

month.

Current Assets: assets such as cash and other items that can be converted into cash within one year.

Fixed Assets: assets acquired for long term use in a business.

Liabilities: creditors claims against a company’s assets.

Current liabilities: debts that must be paid within a year.

Long term liabilities: debts that are due after one year.

Owner’s Equity: the value of the owners investment in the business.

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The Income StatementIt is also known as a Profit and Loss statement

(P&L)

Income statement represents a “moving picture” of a

business, comparing its expenses against its revenue over

a period of time to show its net profit or loss.

They are usually prepared at the end of the year.

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An entrepreneur records all the sales revenues in a year in

order to calcualte net profit or loss. This means all inflow to

the business for its products and services.

Cost of goods sold: The total cost, including shipping of the merchandise sold during the accounting period. (service companies typically have no cost of goods sold)

Gross Profit Margin:10

Gross Profit Margin = Gross Profit

Net sales revenue

The outcome of the gross profit margin should be monitored

closely. Sometimes managers assume the problem is with the

sales volume but usually it is in regard to the cost of goods

sold.

Cost of goods sold: The total cost, including shipping of the merchandise sold during the accounting period. (service companies typically have no cost of goods sold)

Operating expenses: Costs that contribute directly to the manufacture and distribution of goods.

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Profitability of Small Businesses

The Statement of Cash FlowsStatement of Cash flows: shows the changes in a

compay’s working capital from the beginning of the year

by listing both the sources and the uses of those funds.

Many small businesses never need to prepare such a

statement. To prepare this statement, both the balance

sheet and the income statement must be completed and

used in the preparation of this statement.

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Pro-forma StatementsExamples uploaded onto the website. We will go over

it in class.

Please bring the examples versions of Income statement

and Balance sheet with you to class.

These two are the ones required for your project. Those

of you who wish to expand the years into seperate months are welcome and encouraged.

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Base your estimations on reality. Otherwise it will be nothing more than a dream.

Decide the amount you will start a business with. (this depends on location, sales volume, type of operation and other factors)

Try and have an optimistic, pessimistic and a most likely scenarios for your predictions. This way you will be prepared for any of the three alternatives.

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Ratio AnalysisOnce the entrepreneur gets the business up and running, it needs to be made sure that the business is moving in the right direction. The ratio analysis helps

by providing information for the entrepreneur.

Financial ratios are method of expressing the relationship between any two accounting elements

that allows business owners to analyze their companies’ financial performanceand encouraged.

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Ratio Analysis Liquidity Ratios: tell whether a small business will be able to meet its short-term obligations as they come

due.

Current Ratio: measures a small firm’s solvency by indicating its ability to pay current liabilities out of current assets

=Current Assets/Current Liabilities =$686,985/$367,850

=1.87:1

Good: 2:1 Industry: 1.5:1

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Ratio Analysis Quick Ratio: a conservative measure of a

firm’s liquidity, measuring the extent to which its most liquid assets (minus inventory) cover its current liabilities

=(Current Assets-Inventory)/Current Liabilities

=($686,750-$455,555)/$367,850 =0.61:1 Good: 1:1 Industry: 0.50:1

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Ratio Analysis Leverage Ratios: measure the financing

supplied by a firm’s owners against that supplied by its creditors; they are a gauge of the depth of a company’s debt

Debt Ratio: measures the percentage of total assets financed by a company’s creditors compared to its owners

=Total Debt (Liabilities)/Total Assets =($367,850+$212,150)/$847,655 =0.681:1 Good: 1:1 Industry: 0.64:1

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Ratio Analysis Debt to Net Worth Ratio: expresses the

relationship between the capital contributions from creditors and those from owners and measures how highly leveraged the company is

=Total Debt (Liabilities)/Tangible Net Worth (capital, retained earnings, capital stock – except good will)

=($367,850+$212,150)/($267,655-$3,500)=2.20:1 Industry: 1.90:1

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Ratio Analysis Times Interest Earned Ratio: measures a

small firm’s ability to make the interest payments on its debt. It tells how many times a company’s earnings cover the interest payments on the debt its carrying.

Times Interest Earned Ratio =EBIT/Total Interest Expense =($60,629+$39,850)/$39,850 =2.52:1 Industry: 2.0:1

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Ratio Analysis Operating Ratios: help an entrepreneur evaluate a

small company’s overall performance and indicate how

effectively the business employs its resourcesAverage Inventory Turnover Ratio: measures

the number of times its average inventory is sold out, or turned over during an accounting period

=Cost of Goods Sold/Average Inventory=$1,290,117/($805,745+$455,455)/2 (beginning and ending

inventory)

=2.05 times/year

Industry: 4.0 times/year

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Ratio Analysis Average Collection Period Ratio: measures the number of

days it takes to collect accounts receivable

=Days in Accounting period/Receivables Turnover Ratio

Receivables Turnover Ratio= Credit sales/Account receivables

=$1,309,589/$179,225 =7.31 times/year

=365/7.31=50 days

Industry: 19.3 days24

Ratio Analysis Average Payable Period Ratio: measures the number of

days it takes a company to pay its accounts payable.

=Days in Accounting period/Payables Turnover Ratio

Payables Turnover Ratio= Purchases / Accounts payable =$939,827/$152,580

=6.16 times/year

=365/6.16=59.3 days

Industry: 43 days

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Ratio Analysis Net Sales to Total Assets Ratio: measures a

company’s ability to generate sales in relation to its asset base

=Net Sales/Net Total Assets=$1,870,841/$847,655=2.21:1

Industry: 2.7:1

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Ratio Analysis Profitability Ratios: indicate how efficiently a

small company is being managed

Net Profit on Sales Ratio: measures a company’s profit per

dollar of sales=Net Profit/Net Sales=$60,629/$1,870,841=3.24%

Industry: 7.6%27

Ratio Analysis Net Profit to Assets Ratio: measures how much

profit a company generates for each dollar of assets that it

owns

=Net Profit/Total Assets=$60,629/$847,655=7.15%

Industry: 5.5%

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Ratio Analysis Net Profit to Equity Ratio: measures the owner’s

rate ofreturn on investment

=Net Profit/Owner’s Equity=$60,629/$267,655=22.65%

Industry:12.6%

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Break-even AnalysisBreak-even point: the level of operation (sales

dollars or production quantity) at which a company neither earns a profit or incurs a loss

Fixed expenses: expenses that do not vary with changes in the volume of sales or production

Variable expenses: expenses that vary directly with changes in the volume of sales or production

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Calculating the Break-Even Point

Step 1: Determine Expenses expected to be incurred (646,000+$236,500)

Step 2: Categorize the expenses into fixed and variable ($177,375+$705,125)

Step 3: Calculate ratio of variable expenses to net sales ($705,125/$950,000)=74%, Contribution margin is 26%

Step 4: Compute Break-even Sales:

=Total Fixed Cost/Contribution Margin as % of sales

=$177,375/0.26=$686,212

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To add profit you need to:=(Total Fixed Expenses + Desired

Profit)/Contribution Margin as % of sales=($177,375+$80,000)/0.26=$989,904 in annual sales

Break-even point in units (page 353)=Total Fixed Costs/(Sale Price/unit-Variable

cost/unit)=$390,000/($17.50-$12.10)=$390,000/$5.40=72,222 units

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Break Even ChartConstructing a Break-even Chart

Step 1: Horizontal axis, mark a scale to plot sales volume

Step 2: Vertical axis, mark a scale to plot income and expense in dollars

Step 3: Draw fixed expense line Step 4: Draw a total expense lineStep 5: Draw the revenue lineStep 6: Locate break-even point: intersection of

revenue line and total expense line

Eg. Mirage Hotel&Casino in Las Vegas – 1$ mil/day

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THANK YOU

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