Balance Sheet, Risk, Financing, and Diversification

1. Financial Planning and Investment Balance Sheet, Risk, Financing, and Diversification

2. Can Money Work for You? • What’s your plan for making that first million? • What’s the secret of wealthy people? • How do you use your money to make you more money?

3. 1. Here’s to Good Health… Financial Health Finding the right balance of revenues and spending can mean all the difference between success and failure.

4. Establishing Value Assets Assets • Cash • Accounts Receivable • Notes Receivable • Fixed Assets • Intangible Assets • Inventory

5. How Do You Build Assets? • “There are plenty of ways to get ahead. The first is so basic I’m almost embarrassed to say it: spend less than you earn.” • Paul Clitheroe • Chairman of Money Magazine

6. Current vs. Long-Term Assets • Assets vary by their liquidity Most liquid • Cash • Checking Account • Accounts Receivable • Notes Receivable

7. Another Way to Evaluate Assets • Some assets earn money • Others do not generate income immediately, e.g., paintings, stocks & bonds, long-term investments

8. Payback Time: Liabilities Liabilities • Accounts Payable • Unpaid Employee Liabilities

9. Current vs. Long-Term Liabilities • Current Liability = paid within 1 year • Long-Term Liability = paid over >1years

10. What’s It Worth? Net Worth and Owners’ Equity Net Worth • Owners’ Equity • Shareholders’ Equity • Retained Earnings

11. A Balancing Act: The Balance Sheet • Fundamental Accounting Equation Assets = Liabilities + Owners’ Equity

12. Apple Inc. Balance SheetAssets

13. Apple Inc. Balance SheetLiabilities & Owners Equity

14. Why the Balance Sheet Matters • Income & Cash Flow Statements show incomplete picture • Useful to: • Financial managers • Accountants • Company leaders • Employees • Investors

15. Balance Sheets Answers Questions • Can the business afford to expand? • Can the business afford to pay its immediate bills? • How is the balance sheet changing, and what do these trends suggest?

16. In-Class Exercise Create a Simple Balance Sheet • Accounts Receivable: $5,000 • Accounts Payable: $7,500 • Owners’ Equity: $17,000 • Inventory: $4,500 • Cash: $15,000

17. 2. Risky Business: Assessing and Balancing Risk “Every business and every product has risks. You can’t get around it.” -Lee Iacocca President & CEO Chrysler, 1978 - 1992

18. 2. Risky Business: Assessing and Balancing Risk The goal is to seek opportunities, assess threats, and enjoy rewards.

19. Identifying Risk • Risk- any circumstance when the outcome of a decision is uncertain. • People vary in evaluating risk. • What can go wrong? Worth it? • Probability? • Cost of occurrence?

20. Identifying Risk Business Risk • Too much debt • Excess inventory • Plan strategy to reduce or manage risk

21. Identifying Risk Business Risk • Too much debt • Excess inventory • Plan strategy to reduce or manage risk

22. SWOT Analysis: Assessing Risk

23. SWOT: Caketime vs. Holiland

24. Internal & External Factors:

25. SWOT Strategy Companies use SWOT to analyze risks and benefits and create effective strategies to drive their business objectives.

26. Opportunity Cost:Evaluating the Cost of Each Option • Opportunity Cost- cost of passing up another option

27. Do It… Apply SWOT & Opportunity Cost Decision Work College

28. 3. Managing Risk: Diversification, Mergers, and Acquisitions “Take calculated risks. That is quite different from being rash.” -George S. Patton United States Army General

29. 3. Managing Risk: Diversification, Mergers, and Acquisitions

30. 3. Managing Risk: Diversification, Mergers, and Acquisitions • Merger- two companies agree to go forward as one • Acquisition- one company takes over another and sets up as new owner • Reasons for joining: • Increase diversity of product line • Enter other geographical areas • Take over competitor to get competitive advantage

31. Thriving in Diversification:When Less Can Be More • The “Long Tail” (coined by Chris Anderson) • Instead of selling millions of a single product, some successful companies sell a few units of millions of products. • Particularly effective for digital inventory, e.g. Rhapsody, Apple’s App Store.

32. Do It… Identify How Diversification Reduces Risk • Recently acquired privately held Web security company • Reduced Risk? • Research & Explain.

33. 4. Making Financial Decisions

34. 4. Making Financial Decisions • Financing for the Short Term • Friends, Family, and Credit Cards • Bank Sources • Secured Loan • Unsecured Loan • Line of Credit • Pledging/Factoring Accounts Receivable

35. 4. Making Financial Decisions Financing for the LongTerm • Long-Term Bank Loan • 3 to 7 years • 15 to 30 years • Bond • Equity Financing • Sell Stock to Investors • Withdrawing from Owners’ Retained Earnings

36. Do It… Rank Financing Options • Short-Term • Long-Term • Highest Interest? • Explain Trade-offs • Why Choose Higher Rates?

37. 5. Wise Investing • “The poor and middle class work for money. The rich have money work for them.” Measuring risk versus return is the key to any investment decision. • Robert Kiyosaki • Author of Rich Dad, Poor Dad

38. 5. Wise InvestingInvestment Options • Portfolio- collection of investments • Stocks- dividend • Bonds- pay in full by set date with interest • Mutual Funds- pool money and buy variety of stocks and bonds

39. 5. What should your portfolio look like? • Diversification • Vertical = variation across the types of assets • Horizontal = variation within the same type of assets • Liquidity- include a mix of short and long-term investments

40. Do It… Invest Your Money • $100,000 to invest • Split investment? • No need for it for 20 years • Change if needed in 5 years? • Difference between portfolios?