Chapter 10 Flashcards
(29 cards)
Give examples of a personal financial vision.
- to be financially independent
- to be able to afford to travel to other countries
- to be able to afford a new home and the furniture to fill it
- to have the financial ability to retire before turning 50
5 financial tables:
- Application of funds (start-up funding)
- Opening balance sheet
- Projected cash flow
- Projected or Pro Forma Income Statement
- End of period or year-end balance sheet
Start-up expenses or application of funds can be divided into 4 categories:
- General start-up costs
- Leasehold improvements
- Equipment costs
- Cash reserve funds
General start-up costs consists of…
- organizational costs
- prepaid expenses
- opening inventory/office supplies
Leasehold improvements consists of…
Carpeting, mirrors, light fixtures etc.
Equipment costs consists of…
Tables, chairs, desk, filing cabinet etc.
Cash reserve fund consists of…
Total cash on hand immediately before the business opens
Opening balance sheet:
A snapshot of the financial position of your business in the period immediately before you open your doors
3 major components of a balance sheet:
- Assets
- Liabilities
- Equity (what the business owes to the owner)
Assets are usually divided into 3 major categories:
- Current assets (can be converted to cash < 1 yr)
- Fixed assets (long term holdings not for sale)
- Other assets (intangibles)
Liabilities are normally divided into 2 major categories:
- Current liabilities (debts to be paid < 1 yr)
2. Long-term liabilities (debts to be paid > 1 yr)
The basic balance sheet equation:
Assets = liabilities + equity
Liquidity ratios measure…
The number of dollars of liquid assets available to cover current debt (short-term obligations)
2 basic liquidity indicators:
- current ratio (ability to pay short term obligations) = current assets/current liabilities
- quick ratio (ability to pay current debts using most liquid assets) = most liquid assets/current liabilities
Solvency ratios measure…
The ability of a company to meet its long-term obligations
2 standard solvency ratios:
- proprietorship ratio (> 0.5 recommended) = owner’s investment/total assets
- debt-to-equity ratio (< 1 recommended) = total liabilities (debt)/owner’s equity
Projected or pro forma cash flow:
A financial statement that helps you control the money that comes into your business and the money that is spent
Why is a cash flow so important?
- shows you can pay for day-to-day operations
- shows the lender you have the cash to make loan payments
- provides a format for planning the most effective use of cash
- provides a schedule of receipts and payments of accounts
- helps plan for unexpected changes in circumstances
5 steps to creating a cash flow:
- Calculate your opening balance sheet.
- Calculate projected sales for each month.
- Forecast receipts.
- Forecast disbursements.
- Summary of cash flow.
Projected or pro forma income statement:
- an itemized statement of sales (or revenues) and corresponding expenses over a period of time
- normally for a 1 year period (sometimes on a quarterly basis)
Major elements of an income statement include:
- sales
- cost of goods sold
- gross profit
- operating expenses
- other expenses
- net profit
Income statement ratios help to:
- Determine how healthy your business is
2. How it compares to other businesses in your selected industry
4 key income statement ratios:
- Gross profit margin = gross profit/total sales
- Profit margin = net profit/total sales
- Inventory turnover = costs of goods sold/average inventory
- Gross margin return on inventory investment (GMROI) = gross profit margin (%) x sales to stock ratio
Closing balance sheet:
Provides a final indicator of the financial health of your business
