Overall Flashcards
Time Value of money
dollar today is worth more tomorrow
Starting a business - where to get money
Loan/mortgage (debt)
shareholder (equity)(investor)
Risk and Reward Relation
Higher the risk the higher the reward
no risk, no reward
External Factors
Economic Political Global and open world economics Faster technological changes shorter product life pressure for innovation and quality
Financial Objective
- Efficiency – How does your business leverage assets and investor money to make money?
- Liquidity – Are you able to cover your short-term obligations (i.e. things you owe soon)?
- Prosperity – How’s the growth of the business? Is revenue increasing?
- Stability – How is your company funded? Two main ways – Debt (borrowed money) and Equity (money invested in the business)
Efficiency
Productivity of assets- How does your business leverage assets and investor money to make money?
Return on Assets (R.O.A) %
Return on Equity (R.O.E) %
Liquidity
Ability to meet short-term commitments - Are you able to cover your short-term obligations (i.e. things you owe soon)?
Current Assets - Current Liabilities = Working Capital
Prosperity
Ability to grow – How’s the growth of the business? Is revenue increasing?
Rev, working capital, non-CA, profit for year
Stability
Financial Structure of Firm – How is your company funded? Two main ways – Debt (borrowed money) and Equity (money invested in the business)
Assets = Equity/Debt = %
Triple Bottom Line
Aligning goals of the firm and financial decisions with investors, community, etc.
Econ, Social, Enviro.
Operating Decisions
Can be found on Balance Sheet and Statement of Income
deals with daily operating/functioning of business (CA, CL, some Exp and Rev - income statement)
Investing Decisions
deal with non-CA on balance sheet
Financing Decisions
what pays for everything else
Risk?
How Statements Connect
Balance sheet done at start and end of term. gives/takes info from other statements.
net income = retained earning
ending cash = CA = Beginning cash
Financial Analysis
Statement of cash flows Horizontal analysis Vertical analysis Ratio analysis Break-even analysis Operational analysis
Cash flow activity by category
Operating - related to income
Investing - related to non-CA
Financing - related to non-CL and OE
Vertical Analysis
portion of assets funded by X
Amount of COGS – growth
listed as %
Horizontal Analysis
Compares historical data - annual changes
new-old)/old*100 (balance
Market-Value Ratios
Based on ‘stock’
Investment analysis
profit/share = earning/share (low=less/share)
over/under value = value of share = above outcome/# shares
Limits to Financial Ratios
only gives signals - not super detailed
ensure numbers are similar
business size makes diff
Nature of Operat. Diff
Operating Leverage
Sensitivity of Net Income to changes in Sale Revenues (Variable and Fixed Costs)
Higher = higher variable cost - not great - lots of debt? risk high Lower = higher fixed costs - typically better - risk low
cal: Earn before income tax/% in sale out put
Contribution Margin (CM)
How much is ‘cash/rev’
Contribution margin = Revenue – Variable Costs
Break-even Analysis
Where Sales meet Expense
Get CM
Get FC
$ = FC/CM% # to sell = FC/CM$
Budgeting and Financial Projections
First: Sales projections with Sensitivity Analysis! Then: Operating Budgets: Production/Merchandising projections; Sales and Administrative expenses projections; Capital expenses projections Next: Cash Flow projections Identify short-term financing needs After: Pro-forma Income Statement Finally: Pro-forma Balance Sheet
