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The Military Families Learning Network's personal finance team presented a webinar on Financial Ratios & SWOT Analysis, two important components of creating a manageable spending plan.
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Welcome to the Military Families Learning Network Webinar
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.
A few days after the presentation, we will send an evaluation and links to an archive and resources. We appreciate your feedback. To receive these emails, please enter your email address in the chat box before we start the recording. Once we start the recording, all chat will be recorded and archived.
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.
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Welcome to the Military Families Learning Network Webinar
Financial Ra)o and SWOT Analysis
Dr. Michael S. Gu;er, University of Florida
Find us online
• Facebook: h;p://www.facebook.com/#!/PersonalFinance4PFMs
• Blog: h;p://blogs.extension.org/militaryfamilies/category/personal-‐finance/
• Website: h;p://www.extension.org/militaryfamilies
• Twi;er: Follow #MFLN
CEU Informa)on
• AFC-‐creden)aled par)cipants will earn 1.5 CEUs by par)cipa)ng in this 90-‐minute web conference and following these instruc)ons: 1. Please make a note of TWO passwords that will be
presented during the presenta)on. 2. Send BOTH words to the email address given at the end
of the presenta)on, along with your first and last name.
Financial Ra)o and SWOT Analysis
Dr. Michael S. Gu;er, University of Florida
Recap: Why Do You Need Records?
• Records serve as a reference point • Records provide evidence of progress
– Track income, expenses, assets, liabilities, and achievement of objectives
• Records help consumers work more efficientyly with various financial services providers
Review Case Study Family
• Meet Bre; (28) and Bri;any Johnson (25). – Live off base – Son – Sam (2) – Dog – Fluffy (10)
• Bre; is on ac)ve duty, Bri;any is a nurse in local hospital
Our Key Statements
• Balance Sheet • Income and Expense Statement • Budget • Statement of Changes in Net Worth • Statement of Cash Flows
2005© University of Wisconsin-Madison
Board of Regents
So to recall: a Personal Balance Sheet
• Allows you to determine your net worth • Updating it periodically allows you
to monitor changes in your net worth over time
• Balance Sheet: Net Worth • Can NW be negative?
– What does this mean? Is it bad? • How do we increase net worth?
BREAKING THESE DOWN Suppor)ng statements
Chapter 4: Personal Financial Statements
The Statement of Cash Flows
• For a given period, the statement of cash flows: – Shows the inflows, oudlows and the net change in cash between two balance sheets
– Iden)fies the changes in some of the accounts from one balance sheet to the next
Chapter 4: Personal Financial Statements
Statement of Cash Flows Classifica)ons
• Cash Flows from Opera)ons • Cash Flows from Inves)ng Ac)vi)es • Cash Flows from Financing Ac)vi)es
Chapter 4: Personal Financial Statements
The Statement of Changes in Net Worth
• Summarizes noncash flow changes in net worth not recorded on either the income or the cash flow statements.
Chapter 4: Personal Financial Statements
Statement of Changes in Net Worth Transac)ons
• Changes in value for assets due to apprecia)on or deprecia)on
• If an asset other than cash is exchanged for some other assets
• If assets other than cash are received by gif or inheritance
• If assets other than cash are given to chari)es or noncharitable donees
Uses for Decomposi)on Statements
• Ideally – Balance Sheets are accurate based on statements – Income Por)on of IE is accurate because income is fixed and constant
• So if our statements do not align, it is likely that the error would be the expenses.
• Why do so many people fail to accurately account for their expenses?
Using Statements: What-‐Ifs?
• Budget – Deployment – Post deployment
• Helps one to envision needs for insurance or other benefits by having a benchmark budget
• Lets explore one of our submi;ed budgets for deployment for our family?
Deployment: So How Might the Budget Change?
• Of course, there will be the increase in Bre;'s pay due to the deployment. – These may include Imminent Danger Pay, Hardship Duty Pay,
Deployed Per Diem and Career Sea Pay. – He will receive FSA-‐T, Type II (Separa)on Pay) afer 31 days which will
be back dated. – While in a war zone, he will get his pay tax free and receive a refund
for his Combat SGLI and TSGLI.
• Perhaps he will re-‐enlist while deployed and get a tax free bonus.
• Bre; may lose special pays if he doesn't receive a waiver. Examples are Language pays, Diving Duty Pay and Halo Duty Pay.
Thank you Connie
Deployment: So How Might the Budget Change?
• Bri;any may have to reduce work hours or leave her employment. – She may have to pay more for child care. Quality evening and weekend child
care can be very difficult to secure for a decent price. She may have to hire a nanny. She may have to secure a pet si;er.
• Depending on where the couple is residing, Bri;any may decide to move home with her parents. – That may reduce housing costs such as u)li)es but, they will have moving fees
(twice) and, perhaps, storage fees. Perhaps they will decide to rent their home while he is deployed. This can boost income but, has expenses of it's own.
• Food may vary. With Bre; gone, the family grocery bill will be less.
However, ea)ng out may increase because of it's convenience. If she hires a nanny, food costs may stay the same. Entertainment costs may alter.
Deployment: So How Might the Budget Change?
• Auto costs may decrease. – Since they are a two car family, they may put one car on a deployed status for
the insurance. The gas and maintenance will also be lowered. Or Bri;any may provide one of the cars for a nanny. Which may increase insurance premiums, gas and maintenance costs. Perhaps they will sell a car before the deployment with the thought of buying something new when Bre; returns.
• Added expenses will be care package items and shipping for care packages, ship phone cards/calling cards, and ship/internet purchases by Bre;.
• An expense they should budget for is the Savings Deposit Program.
• Pre-‐deployment and/or post-‐deployment trip home to visit Bre;'s family
CEU Password #1
Net Worth
Using Statements
• Is there sufficient room for savings? – Compare with goals
Savings situa)on
Adequate savings • Con)nue to treat savings as
a fixed expense • Explore any opportuni)es
for tax savings • Monitor progress toward
goal over )me
Inadequate savings • Reduce expenses
– If possible • Increase income
– If possible • Adjust tax situa)on
– Keep more income • Adjust goal
– Amount – Timing – At all?
Chapter 4: Personal Financial Statements
Ra)o Analysis
• The key to ra)o analysis is: – Does the ra)o get to the answer for the ques)on asked?
– Is there some standard or benchmark to determine whether the result is appropriate for this par)cular client?
Chapter 4: Personal Financial Statements
Ra)o Analysis—The Objec)ve
• The objec)ve of ra)o analysis is twofold: – To gain addi)onal insight into the financial situa)on and behavior of the client
– To generate ques)ons for the client to answer to further gain such insight
Chapter 4: Personal Financial Statements
Types of Ra)o Analysis
• Liquidity ra)os – emergency fund ra)o and current ra)o
• Debt ra)os – total debt to net worth, long-‐term debt to net worth, debt to total assets, long-‐term debt to total assets, housing costs to gross income, housing and debt payments to gross income
• Performance ra)os – savings ra)os and investment performance ra)os
Chapter 4: Personal Financial Statements
Emergency Fund Ra)o
EFR = Current Assets Monthly Nondiscre)onary Expenses Target of 3 to 6 months
For Our Case Study
EMF = 1600 / (1/12 X (6920+3816+4000+1,920+6540+7080+2820+390+4056+1200+168+600+624) = = 1600 / (40134/12) = 1600 / 3344.5 = 0.478 Less than a month, this is cri)cally low. Lower resiliency for this family to a resource shock
Chapter 4: Personal Financial Statements
Current Ra)o
CR = Current Assets Current Liabili)es Target of 1.0 to 2.0
For Our Case Study
CR = 1600 / 10275 CR = 0.156 CR = 1600 / 4045 CR = 0.395 Either way it is too low. How do we interpret this?
Debt Ra)o
= Total Liabili)es Total Assets
This should be less than 0.4 or 40%
For Our Case Study
DR 2012=210364/260828 DR 2012=0.80 or 80% DR 2013= 215535/330534 DR 2013= 0.652 or 65% This is also too high, should be 0.4 or less, but it is geung be;er…
Long-‐Term Debt Coverage Ra)o
= Annual gross income Total annual long term debt payments Should exceed 2.5
For Our Case Study
LTDCR = 83,593.36 / (6540+7080+2820+4056) 83,593.36/20496 = 4.08 With CC debt it is 83593.36/(20496+6230) = 3.13 In either care, the debt coverage is reasonable.
Debt-‐to-‐Income Ra)o
= Annual consumer credit payment Annual afer-‐tax income
Should be less than 15%
For Our Case Study
• So here we will count car loans, credit cards. Now I include student loans too so we capture debt burden but Not the mortgage.
DIR = (6230+2820+4056)/(83593.36-‐23839.31) DIR = 13106/72860.05 = 17.99% Debt is not overwhelming but becoming burdensome
Credit Usage Ra)o
= Total Credit Used Total Credit Available
Should be less than 30% (Consistent with FICO measure)
For Our Case Study
So since you now know our family has a credit limit of $15,000 on their credit, what is their usage? CUR 2012= 7980/15000 = 0.532 or 53.2% CUR 2013= 6230/15000 = 0.415 or 41.5% So it is improving but s)ll rela)ve to FICO benchmark of 30%
Chapter 4: Personal Financial Statements
Lending Ra)os – Front End
• Housing Costs (Mortgage payment + Property tax + Homeowners insurance) to Gross Income – Target of ≤ 28%
For Our Case Study
FER = (6540+7080+4692)/83593.36 FER = 18312/83593.36 = 21.9%
Lending Ra)o – Back-‐End
• Housing and Debt Payments (i.e. credit card, auto loan) to Gross Income – Target of ≤ 36%
For Our Case Study
BER = (6540+7080+4692+4056+6230)/83593.36 BER = 28598/83593.36 = 34.2% So housing wise our family is not in too bad of shape, other debt yes…
Chapter 4: Personal Financial Statements
Savings Ra)os
• Rate of Savings = Annual Savings Annual Gross Income Target of ≥ 10% (age dependent)
• Includes Personal and Employer Contribu)ons
For Our Case Study
SR = (2731+1488+2000)/83593.36 SR = 6219/83593.36 SR = 0.074 or 7.4% Is this okay?
Chapter 4: Personal Financial Statements
Investment Ra)os
• Income on Investments = Income from Investments Average Invested Assets • ROI = EI – BI – Addi)onal Investments Average Invested Assets Target of 9 to 12% • Investment Assets to Gross Income
For Our Case Study
ROI = (33871+1727)/[(24598+4591+2000+61200+8699+2000)/2] ROI = 35598 / 51544 = 69% WOW what a return…
So let’s summarize
• Liquidity – Family has insufficient capital to meet current obliga)ons
– Family is not adequately prepared for an emergency without addi)onal support or resources from others
• Debt – This family has a high debt load
• It presents issues for level of debt and amount of debt payments
So let’s summarize
• Housing – Housing is not too burdensome for this family
• Savings/Inves)ng – Investments did great, but they probably need to be saving more
Chapter 4: Personal Financial Statements
Ver)cal & Growth Analysis
• Ver)cal analysis: – Balance sheet – each item presented as a percent of total assets
– Income statement – each item presented as a percent of total income
• Growth analysis: – Calculates the growth rate of certain financial variables over )me using TVM tools
For Our Case Study
• We have seen – Income not dras)cally change – Expenses change – Loss of value on the home – Increase of value on investments – Deprecia)on on tangible assets
CEU Password #2
Ra)o
SO BASED ON FINANCIAL POSITION…
What would we tell a family interested in some of the following issues?
So let’s explore various strategies
• Refinance a mortgage with FRM • Obtain an ARM • Use HELOC to consolidate debts • Use HELOC for emergency fund
So let’s explore various strategies
• Payoff unsecured debt with assets earning lower rates of return
• Reduce expenses
Chapter 4: Personal Financial Statements
Limita)ons of Financial Statement Analysis
• Infla)on • Use of es)mates • Few benchmarks for individuals
Chapter 4: Personal Financial Statements
Sensi)vity Analysis & Risk Analysis
• Sensi)vity analysis allows manipula)on of input variables by small increments to determine the impact on the ra)o
• Risk analysis examines the uncertainty of cash flows to the individual – Business or investment risk – Financial risk
Iden)fying SWOT
• Strengths • Weaknesses • Opportuni)es • Threats
Iden)fying SWOT
• Think in terms of the ques)ons we asked earlier in our analysis – Cash flow constraints – Liquidity – Savings – Debt burden
• Cash flows • Net worth • Credit worthiness
– Housing burden
Strengths
• Produc)ve investments • Commitment to saving
Weaknesses
• Carrying consumer debt • Li;le Discre)onary Cash Flow to address debt issue
• Earnings growth is minimal
Opportuni)es
• Invest more • Trim expenses to improve DCF • Stable income currently
Threats
• Heavy debt load • Lack of liquidity creates vulnerability to income and resource shocks
CEU Informa)on
• Send an email to: [email protected] • Include:
– Both CEU Passwords given in this presenta)on – Your first and last name
• Emails must be received by: Wednesday, April 17, 2013 at 5 p.m. ET