The Power of Numbers 10-1Copyright © 2011 Nelson Education Ltd. Explore Your Financial Vision chapter 1010 Prepared by Ron Knowles Algonquin College &

The Power of Numbers

10-1Copyright © 2011 Nelson Education Ltd.

Explore Your Financial VisionExplore Your Financial Vision

chap

t er

chap

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10101010

Prepared byRon KnowlesAlgonquin College

& Jennifer Rouse BarbeauCanadore College

Chapter OverviewChapter 10 will: Describe financial statements and ratios

important to the financial health of a start-up business.

Define cash flow as a key financial statement.

Build a financial plan. Help you stay in control.


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Learning OpportunitiesFormulate a personal financial vision.Test your financial fitness.Assemble a team of financial advisers.Estimate your start-up costs.Create your own balance sheet.Project monthly sales and propose a sales

forecast.


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Learning OpportunitiesUnderstand that cash is the lifeblood of

your business.Understand that bills are paid with cash,

not profit.Create a cash flow projection and a pro

forma income statement.Use ratios to measure the financial health

of your business.


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Begin Your Financial Journey

10-5

Check out your personal financial fitness (Box 10.1)

Formulate a personal financial vision Examples are: To be financially independent. To be able to afford to travel to other countries. To be able to afford a new home and the furniture to fill it. To have the financial ability to retire and smell the roses before

turning 50.

Put your financial vision in writing Complete Action Step 45.

Copyright © 2011 Nelson Education Ltd.

Get Advice If finance is not your strength, you do not have to

do it yourself. Network to find people who can provide financial

help. Make a list of possible financial advisors (Table 10.1)

a mentor a business guru—how about a banker, real estate broker or a

retired business person a financial advisor or business broker personal financial coach

Assemble a financial team (Action Step 46).


5 Financial Tables

10-7

1. Application of Funds (start-up funding)

2. Opening Balance Sheet

3. Projected Cash Flow

4. Projected or Pro Forma Income Statement

5. End of Period or Year-End Balance Sheet

1. Application of Funds (start-up funding)

2. Opening Balance Sheet

3. Projected Cash Flow

4. Projected or Pro Forma Income Statement

5. End of Period or Year-End Balance Sheet


Application of Funds

10-8

How much start-up money do you need? Complete an application of funds table (See

Table 10.3).

Start-up expenses or application of funds can be divided into 4 categories:

1. General Start-up Costs2. Leasehold Improvements3. Equipment Costs 4. Cash Reserve Funds


Start-Up Expenses

10-9

1. General Start-up Costs• Organizational costs• Prepaid Expenses• Opening Inventory/Office Supplies

2. Leasehold Improvements•Carpeting, mirrors, light fixtures, etc.

3. Equipment Costs•Tables, chairs, desk, filing cabinet, etc.

4. Cash Reserve Fund•Total cash on hand immediately before the business opens (Table 10.2).


Opening Balance SheetAn opening balance sheet is a

snapshot of the financial position of your business in the period immediately before you open your doors

See Table 10.4


Opening Balance SheetA balance sheet is normally divided into 3 major components:

1. Assets are usually divided in 3 major categories: current assets fixed assets other assets

2. Liabilities are normally divided into 2 major categories: current liabilities long-term liabilities

3. Equity The basic balance sheet equation:

• Assets = Liabilities + Equity


Balance Sheet Ratios:LiquidityLiquidity

10-12

Liquidity ratios measure the number of dollars of liquid

assets available to cover each dollar of current debt.

Two basic liquidity indicators are the current ratiocurrent ratio and

the quick ratio.quick ratio. Current ratio =

Current liabilities

Most liquid assets

Current assets

Quick ratio = Current liabilities


10-13

Total Assets

Total Liabilities (debt)

Owner’s Investment1. Proprietorship ratio =

2. Debt-to-equity ratio =Owner’s Equity


Solvency ratios measure the ability of a company to meet its long term obligations.

The two standard solvency ratios solvency ratios are:

Balance Sheet Ratios:SolvencySolvency

Projected Cash FlowA projected or pro forma cash flow pro forma cash flow is:

A financial statement which helps you control the money that comes into your business and the money that is spent.

Why is a cash flow so important? Shows you can pay for day-to-day operations. Shows the lender you have the cash to make loan

payments. Provides a format for planning the most effective use of

cash. Provides a schedule of receipts and payments of accounts. Helps plan for of unexpected changes in circumstances.


Creating a Cash Flow

Five steps to creating a cash flow:Five steps to creating a cash flow:1. Calculate your opening balance sheet2. Calculate projected sales for each

month3. Forecast receipts4. Forecast disbursements5. Summary of cash flow


Income StatementA projected or pro forma income statement pro forma income statement is:

An itemized statement of sales (or revenues) and corresponding expenses over a period of time.

Normally for a 1 year period (sometimes on a quarterly basis)

Major elements of an income statement include: - sales - cost of goods sold- gross profit - operating expenses - other expenses - net profit

Remember: Profit is not Remember: Profit is not cash.cash.

Action Step 49 will help you project Action Step 49 will help you project your own income statement.your own income statement.


Key Income Statement Ratios

Income statement ratios Income statement ratios help to: determine how healthy your

business is and how it compares to other

businesses in your selected industry.


4 key income statement ratios:4 key income statement ratios:

1.1. Gross profit margin Gross profit margin = Gross Profit / Total Sales

2.2. Profit margin Profit margin

= Net Profit / Total Sales

Inventory turnover Inventory turnover = Cost of Goods Sold / Average Inventory

4.4. Gross margin return on inventory Gross margin return on inventory investment (GMROI) investment (GMROI) = Gross Profit Margin (%) x Sales to Stock Ratio


Key Income Statement Ratios

Ending Balance Sheet & Key Ratios The closing balance sheet provides a final

indicator of the financial health of your business.

A closing balance is shown in Table 10.10. Two key ratios based on the ending balance

sheet and income statement are:1. Return on Investment (ROI) = net profit / total

assets2. Return on owner investment = net profit / owners’

equity


What is a Break-Even AnalysisA break-even level of salesbreak-even level of sales occurs when

the sales (revenues) equals total expenses or costs (fixed and variable).

To calculate break-even you will have to know the value of your fixed and variable costs and your output capacity.

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Break-Even Analysis Two ways to calculate break-even are:

unit method. unit method. revenue method.revenue method.

For many businesses the projected break-even is the first step in establishing its viability.

10-21


Chapter 10 helps you prepare Parts H, I & J of your business plan:

Financial SectionFinancial Section Financial statements Financial ratios Cash Flow


Business Plan Business Plan Building Block

Do you have a financial vision? What are your estimated start-up costs? Validate your sales forecast. Identify all your cost and pricing

assumptions. Prepare an opening balance sheet. Prepare a monthly cash flow.


Checklist for Your Business PlanYour Business Plan

What is your fallback position if your sales forecast and cash flow do not reach expectations?

Prepare a projected income statement and closing balance sheet.

What concerns might a banker have? What would be your response?

Is your break-even within range of your minimum sales forecast?

How do your financial ratios compare to industry averages?


Checklist for Your Business PlanYour Business Plan

Financing A Business Case Study 1: Your Business

If you are ready with the financial information for your business, prepare:An opening balance sheet.A projected monthly cash flow for the first year

of operation.A projected income statement for the first year. An ending balance sheet after the first year of

operation.


CaseStudy

Case Study 2: DISCovery Books and Magazines Inc.

If you’re not ready to do a financial plan: complete the financial statements for

DISCovery Books and Magazines Inc.


Financing A Business CaseStudy

Documents

The Power of Numbers 10-1Copyright © 2011 Nelson Education Ltd. Explore Your Financial Vision chapter 1010 Prepared by Ron Knowles Algonquin College &