Financial Essentials for Growing Your Business


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Financial Essentials for Growing Your Business

  1. 1. “ Financial Essentials for Growing Your Business”
  2. 2. Understanding Financial Statements <ul><li>Objectives </li></ul><ul><ul><li>Describe the 3 primary financial statements and what they mean to a business </li></ul></ul><ul><ul><li>Introduce ratios & proportions </li></ul></ul><ul><ul><li>How to get better productivity from your expenses </li></ul></ul>
  3. 3. Understanding Financial Statements <ul><li>3 Basic Financial Statements </li></ul><ul><li>1. The Balance Sheet </li></ul><ul><li>2. The Income Statement </li></ul><ul><li>3. The Cash Flow Statement </li></ul>
  4. 4. Understanding Financial Statements Balance Sheet
  5. 5. Understanding Financial Statements
  6. 6. Understanding Financial Statements
  7. 7. Understanding Financial Statements
  8. 8. Understanding Financial Statements <ul><li>Ratios </li></ul><ul><ul><li>Liquidity Ratios – measure the amount of cash available to cover expenses current and long term </li></ul></ul><ul><ul><li>Current Ratio – should be 2 x or 200% of current liabilities </li></ul></ul><ul><ul><li>Quick Ratio = cash + A/R </li></ul></ul><ul><ul><li>Current Liab. (B/S & IS) </li></ul></ul><ul><ul><li>Turnover of Cash Ratio – or working capital, if maintained at adequate levels this is what can finance sales </li></ul></ul><ul><ul><li>Sales should be 5 or 6 times working capital </li></ul></ul><ul><ul><li>Turnover of Cash Ratio = Net Sales </li></ul></ul><ul><ul><li>Working Capital ( B/S & IS) </li></ul></ul><ul><ul><li> </li></ul></ul>
  9. 9. <ul><ul><li>Debt to Equity Ratio – the relationship between capital contributed by creditors (banks) that loan cash and owners equity remaining in the business </li></ul></ul><ul><ul><ul><li>CL to net worth should not exceed 80% & LT debt should not exceed 50% or creditors may want to have a say in how the business is operated or an ownership interest </li></ul></ul></ul><ul><ul><ul><li>Debt to Equity Ratio = Total Debt </li></ul></ul></ul><ul><ul><ul><li>Equity </li></ul></ul></ul>Understanding Financial Statements
  10. 10. <ul><li>Summary </li></ul><ul><li>Liquidity ratios – ability to pay debts </li></ul><ul><li>Current ratios – ability to pay immediate bills </li></ul><ul><li>Working capitol – difference between CA and CL </li></ul><ul><li>Total LT debt should not exceed 45% of NW </li></ul>Understanding Financial Statements
  11. 11. <ul><li>Rate of Return on Sales Ratio </li></ul><ul><ul><li>Operating income/Net profit – indicates if sales can cover cost and leave an acceptable profit </li></ul></ul><ul><ul><li>Rate of Return on Sales Ratio = Operating Income </li></ul></ul><ul><ul><li>Net Sales </li></ul></ul><ul><li>Rate of Return on Assets Ratio (ROA) </li></ul><ul><ul><li>Income/Profit - generated by the assets </li></ul></ul><ul><ul><li>ROA = Income Before Taxes </li></ul></ul><ul><ul><li>Total Assets </li></ul></ul><ul><li>Rate of Return on Investments (ROI) </li></ul><ul><ul><li>Used to determine whether or not to invest in a company </li></ul></ul><ul><ul><li>ROI = Income Before Taxes </li></ul></ul><ul><ul><li>Net Worth </li></ul></ul>Understanding Financial Statements
  12. 12. <ul><li>Summary of Profitability Ratios </li></ul><ul><li>Profitability ratios - measure return on sales, return on assets and return on investments </li></ul><ul><li>Profitability – your price structure, sales, and controlling expenses. </li></ul><ul><li>Ratios- used to compare with industry average </li></ul><ul><li>ROI- may be compared as RONW to total assets </li></ul>Understanding Financial Statements
  13. 13. <ul><li>How to get better productivity from your expenses </li></ul><ul><ul><li>Understand Sales – why made or not made </li></ul></ul><ul><ul><li>Understand COGS – increase or decrease % of net sales </li></ul></ul><ul><ul><li>Credit & Collections – reduce time (commitment of cash & collection of cash) </li></ul></ul><ul><ul><li>Fixed Expenses – occurs if sales made or not </li></ul></ul><ul><ul><li>Variable Expenses – Tied to sales volume </li></ul></ul>Understanding Financial Statements