small business management bus 402 creating a solid financial plan
TRANSCRIPT
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Small Business Management
BUS 402
Creating a Solid Financial Plan
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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
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Basic Financial Reports
• Balance sheet– Assets = Liabilities + Owner’s Equity
• Income statement– Profit and loss
• Cash flow– Sources and uses of funds
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Check Your Understanding
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Creating Projected Financial Statements
• Estimates funds needed for operations• Pick a number and work toward it• Guides decision-making• Anticipates cash flow
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Ratio Analysis
• Twelve key ratios
• Liquidity
• Leverage
• Operations
• Profitability
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Liquidity Ratios
• Current ratio– Current ratio = current assets/current liabilities
• Quick ratio– Quick ratio = (current assets –
inventory)/current liabilities
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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
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Check Your Understanding
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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
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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%
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Interpreting Business Ratios
• “Rules of thumb” for operating decisions
• Comparison to industry averages
• Subjective, but rational, judgment calls
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Breakeven Analysis
• Shows the level of sales to “break even”
• Gives guidance for management decisions
• Used as a “what if” tool
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Summary
• Basic financial reports
• Creating projected financial statements
• Ratio analysis
• Interpreting business ratios
• Breakeven analysis