Analyzing the Business

©2004 Actimax Learning Inc.2 Key Concepts Financial Statements Measures of Performance Profitability Productivity and Efficiency Budgeting Risk Business Size and Growth Bankruptcy

©2004 Actimax Learning Inc.3 Think about… How do you measure your financial performance? What information do you need to determine profitability and productivity? How do you estimate the success or failure before doing certain activities? Is bigger always better? Why or why not?

©2004 Actimax Learning Inc.4 Financial Statements Summaries of financial performance Four types Balance Sheet Income Statement Owner’s Equity Statement Cash Flow Statement

©2004 Actimax Learning Inc.5 Balance Sheet Snapshot of a company’s financial situation at a particular point in time Lists assets, liabilities, and owner’s equity As of a specific date Monthly, Quarterly, or Annually Shows financial position of a business

©2004 Actimax Learning Inc.6 Income Statement Shows a company’s profitability over a period of time Revenues and expenses Beginning and ending dates Monthly, Quarterly, or Annually Helps answer questions regarding profitability and costs of products/services, or whether employees could receive bonuses

©2004 Actimax Learning Inc.7 Owner’s Equity Statement Shows a summary of changes in owner’s equity over a period of time Beginning and ending OE Profit (loss) Beginning and ending dates Changes in OE are because of additional investments and net income Shows value of the owner’s ownership of business

©2004 Actimax Learning Inc.8 ICE melts into the ALPS ICE InCome – Expenses Profit (Loss) ALPS Assets = Liabilities – Proprietor's Share Change in Owner’s Equity Increase Profits = Growth in Owner’s Equity ICE ALPS

©2004 Actimax Learning Inc.9 Cash Flow Statement Shows cash inflows and outflows during a period of time Cash in and cash out Investing Financing Operating Beginning and ending dates Important for business using accrual method

©2004 Actimax Learning Inc.10 Measures of Performance Profitability Financial indicators Standardized across businesses Productivity and Efficiency Operating indicators Comparisons based on type of business activities

©2004 Actimax Learning Inc.11 Profitability Measures Net Income Revenues - Expenses Profit Margin Net Income/Net Sales (or Outputs) Return to Labor and Management Ratio Net Income/Total Salaries for Labor and Mgt

©2004 Actimax Learning Inc.12 Profitability Measures Return on Asset Net Income/Average Assets Rate of Return to Net Worth Net Income/Owner’s Equity Change in Net Worth Change in OE for Current Period/Change in OE for Previous Period

©2004 Actimax Learning Inc.13 Productivity and Efficiency Operating Activities Labor Efficiency Crop Productivity and Efficiency Animal Productivity and Efficiency Calculated by: Outputs/Inputs See examples at:

©2004 Actimax Learning Inc.14 Budgeting Enterprise Analysis Business-wide assessment of every enterprise Budgeting Comparing actual results with expected results Scenarios with different assumptions Partial Budgets Used to assess a change in operations within the business Whole Business Budgets Used to assess the entire business activities collectively

©2004 Actimax Learning Inc.15 Managing Risk Risk keeps a business from reaching its goals Cannot eliminate Need to manage Use probability to estimate negative chances and uncertainty Taking risks depends on manager’s personality

©2004 Actimax Learning Inc.16 Business Size and Growth Growth is healthy when it is planned based on the business’s financial performance Economies of scale Spreads fixed costs over larger outputs of units Factors affecting costs External factors (e.g., regulations, taxes) Internal factors (e.g., bargaining power with suppliers) Necessary conditions for growth Resources for growth Demand for growth

©2004 Actimax Learning Inc.17 Bankruptcy Insolvency is the last thing a business wants to face Bankruptcy attempts to free a business from debts owed to creditors, often start over again Creditors are paid based on a hierarchy of highest priorities Not all creditors are paid Process often gives the business a negative reputation

©2004 Actimax Learning Inc.18 End of Game Business owners look forward to financial growth and success Success can be measured by meeting monthly, quarterly, annual, or multi-year goals In The Farming Game, the first player to reach $250,000 of owner’s equity is the “winner”

©2004 Actimax Learning Inc.19 Review Questions Why are financial statements produced? Who benefits from financial statements? What are 4 financial statements that businesses prepare? How does the income statement affect the owner’s equity statement? Where is owner’s equity reflected on the balance sheet?

©2004 Actimax Learning Inc.20 Review Questions Where does the balance sheet get its name? What does a balance sheet reflect? How does a manager use a cash flow statement? What are some measures of performance? What is profitability? What are some measures of profitability?

©2004 Actimax Learning Inc.21 Review Questions What is productivity? What are some measures of productivity? How can a budget help a business plan its activities? What is risk? How can a business measure risk?

©2004 Actimax Learning Inc.22 Review Questions How can a business determine if it is the right size, or if it can grow? What is bankruptcy? How can a business measure solvency? How can analysis help a business stay solvent?

©2004 Actimax Learning Inc.23 Are you ready to analyze your business?