Small Business Management

BUS 402

Creating a Solid Financial Plan

Objectives

• Upon completion of this lesson, you will be able to:

– Analyze the key financial management considerations in operating a small business including financial planning, use of equity and debt financing, and managing cash flow

– Use technology and information resources to research issues in small business management

Basic Financial Reports

• Balance sheet– Assets = Liabilities + Owner’s Equity

• Income statement– Profit and loss

• Cash flow– Sources and uses of funds

Check Your Understanding

Creating Projected Financial Statements

• Estimates funds needed for operations• Pick a number and work toward it• Guides decision-making• Anticipates cash flow

Ratio Analysis

• Twelve key ratios

• Liquidity

• Leverage

• Operations

• Profitability

Liquidity Ratios

• Current ratio– Current ratio = current assets/current liabilities

• Quick ratio– Quick ratio = (current assets –

inventory)/current liabilities

Leverage Ratios

• Debt ratio– Debt ratio = Total liabilities/Total assets

• Debt to net worth ratio– Debt to net worth ratio = Total

liabilities/Tangible net worth

• Times interest earned ratio– TIE ratio = EBIT/Total interest expense

Check Your Understanding

Operating Ratios

• Average inventory turns– Average inventory turns = Cost of goods

sold/Average inventory

• Average collection period– Average collection period = Days in account

period/Receivables turnover ratio

• Average payable period– Average payable period = Days in account

period/Payables turnover ratio

Profitability ratios

• Net profit on sales ratio– Net profit on sales = (Net income/net sales) X

100%

• Net profit to assets ratio– Net profit to assets = (Net income/Total

assets) X 100%

• Net profit to equity ratio– Net profit to equity = (Net income/Owner’s

equity) X 100%

Interpreting Business Ratios

• “Rules of thumb” for operating decisions

• Comparison to industry averages

• Subjective, but rational, judgment calls

Breakeven Analysis

• Shows the level of sales to “break even”

• Gives guidance for management decisions

• Used as a “what if” tool

Summary

• Basic financial reports

• Creating projected financial statements

• Ratio analysis

• Interpreting business ratios

• Breakeven analysis