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Entrepreneurship

Entrepreneurship . Chapter 8 Using Financial Statements to Guide a Business. Entrepreneurs Use Financial Statements. Income statement Cash flow statement Balance sheet Data for the financial statements comes from the accounting journal.

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Entrepreneurship

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  1. Entrepreneurship Chapter 8 Using Financial Statements to Guide a Business

  2. Entrepreneurs Use Financial Statements • Income statement • Cash flow statement • Balance sheet • Data for the financial statements comes from the accounting journal. • The statements show the health of the business at a glance.

  3. Income Statement: Scorecard for the Entrepreneur • Prepared monthly and at end of fiscal year • Also called “profit and loss statement” • Shows whether or not business is making a profit • Profit is entrepreneur’s reward for adding value to scarce resources

  4. Eight Parts of the Income Statement • Revenue • Cost of Goods Sold (COGS) • Other Variable Costs • Contribution Margin (Gross Profit) • Fixed Operating Costs (USAIIRD) • Pre-Tax Profit • Taxes • Net Profit/(Loss)

  5. Income Statement

  6. A Simple Income Statement

  7. Income Statement for a More Complex Business

  8. Return on Investment (ROI) • Entrepreneurs “invest” time, energy, or money into something because they expect a “return” of money or satisfaction. • Return on investment (ROI) measures return as a percentage of the original investment. Net Profit/Investment x 100 = ROI% What is made over what is paid, times 100.

  9. To Calculate ROI for a Business, You Need 3 Things: • Net Profit: found on bottom line of the income statement. • Investment: all money used to start the business (Start-Up Investment) plus additional money invested later. • The period of time for which you are calculating ROI (typically one month or one year).

  10. Income Statement Ratios • Express each line of the income statement as a percentage by dividing sales into it and multiplying by 100. • This makes it easy to see how each item is affecting the business’s profit. • Return on Sales (ROS) = Net Income/Sales • Operating Ratio = Fixed Operating Costs/Sales

  11. Same Size Analysis: Used to Compare Income Statements

  12. The Balance Sheet • A “point-in-time” statement • Shows how a business is financed • Prepared at end of fiscal year 3 items • Assets = things a company owns that are worth money • Liabilities = debts a company must pay, including unpaid bills • Owner’s Equity (OE) = Assets-Liabilities, also called “net worth”

  13. Balance Sheet

  14. Short and Long-Term Assets Assets are all items worth money owned by the business: • Current assets—cash or items that can be quickly turned into cash • Accounts receivables • Inventory • Supplies • Long-term assets—items that would take the business more than one year to use • Equipment • Furniture • Machinery • Real estate

  15. Current and Long-Term Liabilities Liabilities are all debts owed by the business. • Current liabilities—debts that must be paid within one year • Bills • Lines of credit • Short-term loans • Long-term liabilities—debts that will be paid over more than one year • Bank loans • Mortgages

  16. The Balance Sheet Equation Assets – Liabilities = Owner’s Equity or Assets = Owner’s Equity – Liabilities Owner’s Equity is also called: • Net worth • Capital

  17. Assets Must Equal (“Balance”) Liabilities + O.E. • If an item was financed with debt, the loan is a liability. • If an item was purchased with the owner’s money, it was financed with equity. • Liabilities and owner’s equity pay for all items owned by the business (assets).

  18. Analyzing a Balance Sheet • The balance sheet shows how a business is financed. • Investors use ratios and “same-size” analysis to analyze a balance sheet.

  19. “Same-Size” Balance Sheet Analysis

  20. Quick and Current Ratios Quick Ratio: Cash + marketable securities Current Liabilities • Should always be greater than 1 • Shows whether there is enough cash to cover all bills within 24 hours Current Ratio:Current Assets Current Liabilities • Should always be greater than 1 • Shows whether a business could sell some assets to pay off its debts

  21. Debt Ratios Debt ratios show at a glance how much of the company is financed with debt and how much with equity. Debt-to-Equity Ratio: Debt/Equity Example: ratio of 1 means for every $1 of debt the company owns $1 of assets. Debt Ratio: Debt/Assets Example: ratio of 0.5 means company is in debt for 50% of its assets. Entrepreneurs like to have a fairly high debt ratio, because it means they are financing the business not with their own money but with credit from creditors and suppliers.

  22. Operating Efficiency Ratios • Collection Period Ratio: Average accounts receivable (Balance Sheet) Average daily sales (Income Statement) • Receivable Turnover Ratio: Total Sales (Income Statement) Average Accounts Receivables (Balance Sheet) • Inventory Turnover Ratio: Cost of Goods Sold (Income Statement) Average Inventory (Balance Sheet) = # of days = # of times = # of times

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