Finances 2 Flashcards
Cash Flow
Important to have access to cash to support the business
- If business is not profitable it can go bankrupt because it can not support its operation
How to improve cash flow
- Get paid fast
- Pay as late as possible
- Minimize inventory
- Cautious of capital spending (Improper planning and spending too much on assets can decrease cash flow)
- Minimize dividend payout
- Longer amortization on loans
How to improve cash flow
- Pay as late as possible
Dont’ have to pay back distribution companies right away, they allow payments up to 3 months
How to improve cash flow
- Minimize dividend payout
Try to minimize the amount paid back to shareholders
How to improve cash flow
- Longer amortization on loans
Increase the time to pay back loans
- Reduces the amount of money owed each month but paid over a longer period of time
Cash Flow Statement
Positives
- Cash from Operating Statements
- Cash from Investing Activities
- Cash from Financing Activities
Net Change in Cash Position
Should cash be left sitting?
No
- Without moving it out for investments or improvements the cash can not help you make more money
- Cash will depreciate over time if not used
- Puts you at more risk as lawyers can sue you for money
Cash Flow Analysis
Look at more than just profit
- Historical Performance (Ideal to see growth)
- Projections (Into the future)
- Performance issues in different areas
Helps sets benchmarks for business performance to other businesses
Cash Flow Analysis
- Resources for Comparison
- Government of Canada
- Accountant
- Franchise
- Chains
Net Profit
Revenues - Expenses (before tax)
Operating Expenses
- Wages
12-14% of sales
45-50% of gross profits
Operating Expenses
- Occupancy
1-3% of sales
10% of gross profits
Operating Expenses
- Other Expenses
6-9% of sales
20% of gross profits
Liquidity
How easy it is to turn assets into cash without affecting its price
-Can the business meet its short term debt obligations
Current Ratio
- Formula
Current Ratio = Current Assets / Current Liabilities
- Includes ALL assets
Current Ratio
- Meaning
Higher is better
- Should not be too high as it means you are not maximizing the use of current assets (May be sitting on too much cash)
<1 = Insolvent
- Can lead to bankruptcy if cash is needed
Quick Ratio
- Formula
Quick Ratio = Current Assets (minus inventory and prepaid expenses) / Current Liabilities
Quick Ratio
- Meaning
Represents if the pharmacy can pay its bill
- Most businesses can not do a quick turn over of there inventory or other assets so those are not included in quick ratio
Goal is 1:1 ratio
Typically we use current ratio more than quick ratio as pharmacies have high turn over rates
Number of Days of Accounts Receivable
- Meaning
How long it takes to get paid (turnover time)
- Lower value is better (Means more money is going into the account faster)
- Usually good if you are getting paid before you have to pay out
Leverage
- Meaning
Measurement of debt to shareholder equity
Debt to Equity Ratio
- Meaning
Higher the number the more the business that is financed by creditors debt
- High Risk (>2) = We owe twice as much money what the shareholders equity is
- Low Risk (<1)
Gross Profit Return on Inventory
- Meaning
How much money we make back on each inventory
Goal: $2 for every 1$ of inventory (200%)
Return on Operating Assets
- Normalized Net Income Meaning
Normalized means adjustments are made to reflect true income and expenses if ran without the owner’s involvement
- No Investment income
- No long term interest expenses
- Ensure expenses meet market rate
Return on Operating Assets
- Operating Assets Meaning
Remove any assets not linked to the operation of the business
Return on Equity
- Meaning
Higher it is the better (Means more earnings)
Includes:
- Income from Income Statement
- Shareholder’s Equity from Balance Sheet
–> Includes Retained Earnings (Things that still have to be deducted from profit)
3 Types of Business Set-Ups in Canada
- Sole Proprietor
- Partnership
- Corporation
Sole Proprietor
You are solely responsible for the pharmacy and its successes and losses
- May have to use personal resources
Taxed on operations as a person
Partnership
You are solely responsible for the pharmacy and its successes and losses
Taxed on operations as a person
Corporation
- Creates its own identity
- Run by a Board of Directors
- Shareholders own shares (equity) within the corporation
- More extensive roles, reporting, and costs of operations
Taxed as their stand alone entity
- Different tax rates than personal income taxes
Monitor your Business
- Income Statement
Monthly
Monitor your Business
- Balance Sheets
Monthly
Monitor your Business
- Ratios
Monthly
Monitor your Business
- Compare to Budget
Monthly
Monitor your Business
- Rectify Issues
ASAP
