EE507 Entrepreneurship for Engineers Session 12 Financial Communication and Decision Making
Introduction <ul><li>What financial information is needed to control a small firm? </li></ul><ul><ul><li>You need to be ab...
Topics <ul><li>Cash flow and Death Valley </li></ul><ul><li>The Profit and Loss Statement </li></ul><ul><li>The Balance Sh...
Cash Flow and Death Valley <ul><li>Cash flow is the lifeblood of a business </li></ul><ul><li>A start-up spends cash on lo...
Cash Flow and Death Valley <ul><li>Death Valley needs to be mapped out to see what cash is needed to take the business to ...
The Death Valley Curve Positive Negative Max capital or borrowing First Sale Sales Cash Flow time
Prepare example cash flow statement
The profit and loss statement <ul><li>Profit is the difference between sales and expenses or unit selling price and unit c...
The flow of money Obtain Finance : Owners Capital Share Capital Loans Retained Profits Net Profit Operating Profit Sales B...
Prepare example profit and loss statement
The Balance Sheet <ul><li>The balance sheet is a snap shot at a point in time that shows </li></ul><ul><ul><li>Where the m...
Financial Drivers <ul><li>Cash </li></ul><ul><li>Sales </li></ul><ul><li>Profit Margins </li></ul><ul><li>Margin of safety...
Break-even <ul><li>Keep fixed overheads as low as possible </li></ul><ul><li>Keep contribution margins as high as possible...
Ratio Analysis <ul><li>Used to judge whether or not a company is healthy relative to industry standards </li></ul><ul><li>...
Things to Consider On-Start-Up
 
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Session 12- Financial Commnication and Decision Making.ppt

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Session 12- Financial Commnication and Decision Making.ppt

  1. 1. EE507 Entrepreneurship for Engineers Session 12 Financial Communication and Decision Making
  2. 2. Introduction <ul><li>What financial information is needed to control a small firm? </li></ul><ul><ul><li>You need to be able to record and collect it </li></ul></ul><ul><li>How can financial information can be used to help decision making </li></ul><ul><li>It’s essential for a start-up to minimise its fixed overhead costs and maximise its contribution margin </li></ul>
  3. 3. Topics <ul><li>Cash flow and Death Valley </li></ul><ul><li>The Profit and Loss Statement </li></ul><ul><li>The Balance Sheet </li></ul><ul><li>Financial Drivers </li></ul><ul><li>Break-even </li></ul><ul><li>Decision-making </li></ul>
  4. 4. Cash Flow and Death Valley <ul><li>Cash flow is the lifeblood of a business </li></ul><ul><li>A start-up spends cash on lots of things prior to the first sale </li></ul><ul><li>The business will have a negative cash flow before debts are collected and income exceeds expenditure </li></ul><ul><li>Many firms do not survive to come through the death valley curve </li></ul>
  5. 5. Cash Flow and Death Valley <ul><li>Death Valley needs to be mapped out to see what cash is needed to take the business to positive cash flow </li></ul><ul><li>Death Valley can be longer and deeper than you expect so prepare well </li></ul><ul><li>The way to chart a path through Death Valley is by preparing a cash flow forecast </li></ul><ul><li>In a cash flow statement, cash flow is added or subtracted to show the bank balance at the end of the period </li></ul>
  6. 6. The Death Valley Curve Positive Negative Max capital or borrowing First Sale Sales Cash Flow time
  7. 7. Prepare example cash flow statement
  8. 8. The profit and loss statement <ul><li>Profit is the difference between sales and expenses or unit selling price and unit cost </li></ul><ul><li>A profit and loss statement can tell you how much the assets of a business have grown or shrunk through trading; It does not tell you about cash </li></ul><ul><li>You can make a profit but have no cash! And possibly go out of business as a result </li></ul>
  9. 9. The flow of money Obtain Finance : Owners Capital Share Capital Loans Retained Profits Net Profit Operating Profit Sales Buy Assets: Fixed Assets Current Assets Withdrawals or dividends Taxation Day-to-day operating costs Loan interest and other non routine cosys Money leaving the business Money retained in business
  10. 10. Prepare example profit and loss statement
  11. 11. The Balance Sheet <ul><li>The balance sheet is a snap shot at a point in time that shows </li></ul><ul><ul><li>Where the money in a business is invested </li></ul></ul><ul><ul><li>Where this money came from </li></ul></ul><ul><ul><li>Distribution of assets, liabilities, and ownership (net worth or equity) </li></ul></ul>Assets = Liabilities + Owners Equity
  12. 12. Financial Drivers <ul><li>Cash </li></ul><ul><li>Sales </li></ul><ul><li>Profit Margins </li></ul><ul><li>Margin of safety or break-even </li></ul><ul><li>Productivity </li></ul><ul><li>Debtor or stock turnover </li></ul>
  13. 13. Break-even <ul><li>Keep fixed overheads as low as possible </li></ul><ul><li>Keep contribution margins as high as possible </li></ul>Cost or Revenue Output Volume Fixed Costs Total Costs Total Revenue Breakeven Point Profit
  14. 14. Ratio Analysis <ul><li>Used to judge whether or not a company is healthy relative to industry standards </li></ul><ul><li>Price-to earnings (P/E) ratio = current market price / earnings per share </li></ul><ul><ul><li>Used to judge if stock is good value </li></ul></ul><ul><li>Return-on-sales (ROS) ratio = Net Income / Sales Revenue </li></ul><ul><li>Return-on-equity (ROE) ratio = Net Income / Shareholders Revenue </li></ul>
  15. 15. Things to Consider On-Start-Up

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