Financial Management

Purpose of Financial Reports Financial Reports – Summarize financial data over a given period of time (shows if the company made or lost money)

Why is Financial Data Needed? Managers  Make day-to-day decisions for operations  View past results  Plan for the future Owner  Decide whether or not to continue operations  Decide what areas of the business need to be eliminated or expanded upon.

Types of Financial Reports Balance Sheet: Statement that report’s a business’s assets compared to a business’s liabilities  Assets: Anything that adds value to a company. (Cash, Inventory, etc)  Liabilities: Items that take away from the value of the company (Expenses, Loans, etc)

Types of Financial Reports Income Statement: A financial statement that reports total revenue and expenses for a specific time period.  Revenue: Income earned for a given time period.  Expenses: All costs incurred by the business for a given time period Also known as Profit/Loss Statement

Petrie’s Gift Shop Income Statement For the month ended July 31, 2005 Revenue Sales75,952 Less sales Returns and Allowances 1,900 Net Sales74,052 Cost of Goods Sold Beginning Inventory, July 1211,638 Purchases 31,548 Goods Available for Sales243,186 Ending Inventory, July 31196,920 Cost of Goods Sold46,266 Gross Profit on Sales27,786 Operating Expenses Salaries and Wages10,567 Rent 3,194 Taxes 1,864 Utilities 1,678 Advertising 780 Depreciation of Equipment 726 Insurance 253 Other Expenses 854 Total Operating Expenses19,916 Net Income 7,780 A B C D E Net Sales COGS Gross Profit Operating Expenses Net Income

Section A: Net Sales Net Sales: The total amount of money made in sales after returned and/or broken items Net Sales = Sales – Sales Returns and Allowances

Revenue Sales75,952 Less sales Returns and Allowances 1,900 Net Sales74,052 Calculating Net Sales

Sections B & C Cost of Goods Sold Cost of Goods Sold: Expenses directly related to buying or producing the goods sold. Example: We bought a couch from a manufacturer for $ which we later sold in our store for $  The cost of goods sold is $300.00

Cost of Goods Sold Calculating Cost of Goods Sold (COGS)  Begin by taking the inventory at the beginning of the period.  ADD in any inventory purchases you made  SUBTRACT the amount of inventory at the end of the period. By doing this we can calculate how much we sold for the period

Calculating COGS Beginning Inventory 211,638 ADD Purchases 31,548 Goods Available for Sales 243,186 SUBTRACT Ending Inventory 196,920 Cost of Goods Sold 46,266

Section C: Gross Profit Gross Profit: Amount of money made in sales minus the cost of goods sold Gross Profit = Net Sales – Cost of Goods Sold

Calculating Gross Profit Net Sales 74,052 Cost of Goods Sold Beginning Inventory, July 1 211,638 Purchases 31,548 Goods Available for Sales 243,186 Ending Inventory, July ,920 Cost of Goods Sold 46,266 Gross Profit on Sales 27,786

Section E: Net Income Net Income: A company’s net income represents the amount of money the business made after all expenses are taken into account. Net Income = Gross Profit – Operating Expenses

Calculating Net Income Gross Profit on Sales 27,786 Operating Expenses Salaries and Wages10,567 Rent 3,194 Taxes 1,864 Utilities 1,678 Advertising 780 Depreciation of Equipment 726 Insurance 253 Other Expenses 854 Total Operating Expenses 19,916 Net Income 7,780

Financial Management Analyzing Financial Statements

Financial Statements Financial Reports – Summarize financial data over a given period of time (shows if the company made or lost money)  Income Statements  Balance Sheets

Why Do We Need Them? Managers:  Make day-to-day decisions for operations  View Past results  Plan for the future Owner:  Decide whether or not to continue operations  Decide what areas of the business need to be eliminated

What to Look For As a manager there are several things you should be looking for on the income statement.  Return on Sales  Inventory Turnover  Net Profit Margin  Gross Profit Margin

Analyzing Income Statements Return on Sales: Percentage of sales that were a profit. Net Income ÷ Sales Example: 80,000 ÷ 800,000 = 10% Meaning: 10% of total sales were profit. For every ten dollars sold, $1.00 is profit. If only 10% of all sales are a profit, maybe we are spending too much on COGS or Expenses.

Analyzing Income Statements Inventory Turnover: Shows how many times the inventory could be sold in a given time period. COGS ÷ Average Merchandise Inventory  Average Merch. Inv. = (Beg. Inv. + End Inv.) / 2 Example: 440,000/64,000 = 6.88 Meaning: We had to reorder inventory 6.8 times this period to keep up with demand. As a manager I want to order more larger amounts so I don’t need to order so much.

Analyzing Income Statements Net Profit Margin: Percentage of the net sales that were a profit. Net Income ÷ Net Sales Example: 95,000 ÷ 250,000 = 38% Meaning: 38% of my sales were net income  If the “Return on Sales” was 20% and the “Net Profit Margin” was 10% that means we are losing ½ our profit on “Sales Returns and Allowances”.  Too many returned items, too many discounts.

Analyzing Income Statements Gross Profit Margin: Percentage of the gross sales that were a profit Gross Profit ÷ Net Sales Example: 50,000 ÷ 250,000 = 20% Meaning: 20% of my sales were gross profit (before expenses are paid)  If the percentage is very low, we are not generating enough money from our sales. Cost of Goods Sold may be too high – new supplier Might not be “marking up” prices enough

Assignment Analyzing the Income Statement

Financial Management Balance Sheets The Balance Sheet

What is a Balance Sheet? Balance Sheet: Statement that reports a business’s assets compared to a business’s liabilities.  Assets: Items that adds value to a company. Cash, Inventory, Land, Building, etc.  Liabilities: Items that take value away from the company Expenses, Loans, Mortgage etc.  Owner’s Equity: The owner’s share of the business.

What is a Balance Sheet? Balance Sheet: Prepared at least once a year and shows a company’s financial status on a specific day.  Creating a Balance Sheet usually occurs at the end of a month, quarter, or year.

Purpose of Balance Sheets Managers/Owners  Shows the manager or owner how much of the business’s money is “tied up” in assets and liabilities.

Petrie’s Gift Shop BALANCE SHEET July 31, 2005 ASSETS Cash$16,300 Inventory196,000 Supplies 5,380 Equipment 24,500 Total Assets$243,000 LIABILITIES Accounts Payable $51,560 Bank Loan 45,200 Total Liabilities$96,760 OWNERS EQUITY Chris Oechsner, Capital$146,340 Total Liabilities and Capital$243,000 A B C Petrie’s Gift shop

Section A: Assets Assets: Anything that adds value to a company.  Cash  Building  Inventory  Equipment  Accounts Receivable Payments owed to you

Section B: Liabilities Liabilities: Items that take away from the value of the company  Accounts Payable People or companies that you pay money to  Expenses  Loans  Mortgage

Section C: Owners Equity Capital: The owner’s share of the business  Determines the profitability of the business  Amount of money left after liabilities have been paid.  Also known as: Equity or Capital  Example: Selling a Business Step 1: Sell all assets to gain income (equipment, building, etc) Step 2: Pay all liabilities (bank loan, accounts payable, etc) Step 3: Money left after all assets sold & liabilities paid is the amount of money the owner made on the business. Owner’s Equity = Assets - Liabilities

Why is it a “Balance Sheet” Referred to as a “Balance Sheet” because the following formula must be “balanced” in order for the sheet’s information to be accurate. Assets = Liabilities + Capital

Example My company’s assets are valued at $115,000. The outstanding liabilities I currently have total for $97,500. How would this look on a balance sheet? 115,000 = 97, ,500 I have $115,000 in Assets But I have to pay bills of $97,500 (Liabilities) The remaining money is the owners equity BALANCED

Petrie’s Gift Shop BALANCE SHEET July 31, 2005 ASSETS Cash$16,300 Inventory196,000 Supplies 5,380 Equipment 24,500 Total Assets$243,000 LIABILITIES Accounts Payable $51,560 Bank Loan 45,200 Total Liabilities$96,760 CAPITAL Chris Oechsner, Capital$146,340 Total Liabilities and Capital$243,000 A B C Petrie’s Gift Shop