This document discusses key financial documents and concepts for businesses: the balance sheet, income statement, statement of cash flows, financial projections, budgets, forecasts, and break-even analysis. It explains how to calculate and use ratios from the balance sheet to analyze a company's financial health. Preparing budgets, forecasts, and break-even analysis can help entrepreneurs understand their business's financial requirements and determine if a certain output level will be profitable.

1. Managing Financial
Operations
Patterns of Entrepreneurship
Chapter 11

2. Session Outline
• Understanding Financial Statements
– The Value of the Balance Sheet
– The Value of the Income Statement
– The Value of the Statement of cash flows
• Preparing financial projections
• Preparing Budget projections
• Prepare a Forecast of cash Flow

3. Three basic financial documents
used by most businesses:
• 1. The balance sheet (also called the statement of
financial position)
• .
• 2. An income statement or profit-and-loss (P&L)
statement.
• 3. The statement of cash flows (also called source
and use of funds).
•

4.  Balance sheet equals= Liabilities + Shareholders
equity
 Book Value= total of the tangible assets less
subtracting all the liabilities
 Book value doe not include intangible assets –
like patents and Intellectual Property
 Goodwill- includes factors like brand, market
share, and human capital
Value of the Balance Sheet

5. How to use Ratios for Financial
Analysis
Current Ratio= total current assets divided
by the current liabilities
Quick Ratio= Only current assets ,cash and
account receivables divided by current
liabilities

6.  Current Liabilities to Net Worth
 Total Liabilities to Net Worth
 Fixed Assets to Net Worth
Solvency Ratios

7.  1.). This ratio compares the net profit of the
business to the investment (net worth) of the
business. It is calculated as net income after
taxes (From the income statement) divided by
total owner’s equity (from the balance sheet).6
 Return on investment =Net Income
Shareholders’ equity
Return on Investment (ROI)

8. This is the earnings before interest
expense, interest income, income taxes,
depreciation and amortization. It
measures the profitability of a
company’s operations without the
impact of its debt, investments and
long-term assets.
EBITDA

9. • Month to month projection of receipts and
disbursements.activity.
• 1. Receipts from Sales. The detail from sales, the
payment terms the company extends its customers,
and the company’s collection history
• 2. Other Receipts. Other receipts include bank
loans, equity investments, tax refunds or any other
inflows of cash
• 3. Disbursements from Expenses. The detail from
expenses and the payment terms
• 4. Other Disbursements. This includes capital
equipment acquisitions and payment of debt.
•
Prepare a Forecast of Cash Flow

10.  The break-even technique is a decision-
making model that helps the entrepreneur to
determine whether a certain volume of
output will result in a profit or loss.
Preparing a Break-Even
Analysis

11. this formula, the price per unit (P)
multiplied by the number of units sold
(X) is equal to the fixed costs (F) plus the
variable costs (V) multiplied by the
number of units produced expressed as
the following formula:
 P(X) = F + V(X)
Use the Break-even Formula

12.  As an example, if fixed costs (F) are $40,000, the
variable costs per unit (V) are $15 and the price
per unit (P) is $20, the break-even point (X) can
be calculated by plugging these values into the
equation:
 20(X) = 40,000 + 15(X)
 20X – 15X = 40,000
 5X = 40,000
 X = 8,000 units
Example of Break Even

13.  The annual budget presents a month-
by-month projection of revenues and
expenses over a one-year period. The
budget is the foundation for projecting
the other financial statements
How to Prepare an Annual
Budget