1. Unit 3 Financial Analysis

2. Unit 3 Vocabulary Accounting Period Accounts Payable
Accounts Receivable
Accrual Basis
Angel
Assets
Balance Sheet
Bootstrapping
Budget
Calendar Year
Capacity
Capital
Capital Expenditures
Cash Basis
Cash Flow
Character
Chart of Accounts
Collateral
Comparative Financial Statement
Conditions
Contingency Fund
Credit Bureaus
Credits

3. Unit 3 Vocabulary Current Assets Current Ratio Debt Capital Debits
Due Diligence
Equity
Equity Capital
Factor
Financial Reports
Fiscal Year
Fixed Assets
Fixed Expenses
GAAP
General Journal
General Partner
Income Statement
Initial Public Offering (IPO)
Journal
Journalizing
Liabilities
Net Profit on Sales Ratio
Operating Capital
Operating Ratio

4. Unit 3 Vocabulary Owner’s Equity Posting Private Placement Pro forma
Quick Ratio
Ratio Analysis
Risk Capital
Statement of Cash Flows
Stock
Subchapter S Corporation
Trade Credit
Variable Expenses
Venture Capital
Venture Capitalists
Working Capital

5. Unit 3 Essential Question 1 (MKT-EN-4)
What information is needed to compile a business plan worksheet?

6. Essential Question 1A (MKT-EN-4G)
What are the sources of capital available to entrepreneurs?

7. Start up Financing Sources of Financing
Equity Capital: Cash raised for a business in exchange for an ownership stake in the business or equity.
Risk Capital: (Equity funding) money invested in companies where there is financial risk.
Sources of Equity Financing:
Personal Savings
Friends and Family
Private Investors
Partners
Venture Capitalists
Government-sponsored venture capital funds

8. Start up Financing Sources of Financing
Debt Capital: Money raised by taking out loans.
Sources of Debt Financing:
Banks and Credit Unions
Trade Credit
Minority Enterprise Development Programs
Commercial Finance Companies
SBA Loans
Small Business Investment Companies (SBICs)

9. Essential Question 1B (MKT-EN-4H)
How do the sources of capital compare and contrast?

10. Start up Financing Sources of Financing Equity Capital Debt Capital:
Advantage: Money does not have to be paid back even if business fails
Disadvantage: You are giving up a percentage of ownership and/or control and profit
Debt Capital:
Advantage: You maintain ownership, control and profits
Disadvantage: Money has to be paid back even if business fails

11. Unit 3 Essential Question 2 (MKT-EN-7)
What are the processes, strategies, and systems needed to guide the financial organization of an entrepreneurial entity?

12. Essential Question 2A (MKT-EN-7A)
What are the fixed and variable costs for start up and maintenance of a business?

13. Start up Financing Start up Costs
Fixed Expenses: Expenses that do not change with the number of units produced.
Rent
Loans
Insurance
Management Salaries
Promotion

14. Start up Financing Start up Costs
Variable Expenses: Expenses that change with the number of units produced.
Supplies
Utilities
Worker wages / Commission
Production materials
Maintenance
Transportation
All operating expenses

15. Essential Question 2B (MKT-EN-7B)
What are the terms used in financial reports?

16. Financial Terms Definitions
Assets: Items of value that belong to a business or individual.
Liabilities: Monies owed to others.
Equity: Ownership or investment.
Liquidity: The ease of converting assets to cash. Items with high liquidity are savings, stocks, mutual funds, etc. Items with low liquidity are houses, equipment, etc.
Solvency: Measure of indebtedness. If assets are greater than liabilities then you are solvent. If liabilities are greater than assets then you are insolvent.

17. Financial Terms Definitions
Ratio Analysis: The comparison of two or more amounts on a financial statement and the evaluation of the relationship between them.
Current Assets: Cash or any other item that can be converted to cash quickly and used within a year.
Current Liabilities: Debts due within a year.

18. Financial Terms Ratio Analysis Current Ratio
Obtained from the balance sheet.
Indicates the ability of a business to pay its bills.
Is measured by:
A ratio of 2:1 or higher is good.

19. Financial Terms Ratio Analysis Working Capital
Obtained from the balance sheet.
Indicates the capital available to carry out daily operations.
Is measured by: Current Assets – Current Liabilities
Amount of working capital needed is determined by industry average.

20. Financial Terms Ratio Analysis Debt Ratio
Obtained from the balance sheet.
Indicates the solvency of a business.
Is measured by:
A ratio of 50% to 75% is good for business operation. This indicates the majority of the business is financed by creditors and provides a negative incentive for takeovers.
A ratio of 40% or less is required for a business or personal loan.

21. Financial Terms Ratio Analysis Net Profit on Sales
Obtained from the income statement.
Indicates the amount of money left from each dollar derived from sales.
Is measured by:
Amount of net profit on sales is determined by industry average.
If net profit on sales is lower than industry average, it may indicate that prices are too low or costs are too high.

22. Financial Terms Ratio Analysis Operating Ratio
Obtained from the income statement.
Indicates the relationship between an expense and sales.
Each expense is measured separately.
Is measured by:
Amount of operating ratio is determined by industry average.
If your percentage is higher than the industry average, it could be an indicator that you are spending too much in that expense area.

23. Financial Terms Ratio Analysis Quick Ratio
Obtained from the balance sheet.
Indicates the liquidity of a business without relying on inventory.
Is measured by:
Amount of quick ratio is determined by industry average.

24. Financial Terms Ratio Analysis Return on Equity (ROE)
Obtained from the balance sheet and income statement.
Indicates the amount of money earned for each dollar invested.
Is measured by:
Amount of ROE is determined by industry average.

25. Essential Question 2C (MKT-EN-7C)
What are the various elements needed for a tentative budget for a business including an income statement, balance sheet, and cash flow statement?

26. Financial Statements
Budget: A formal, written statement of expected revenue and expenses for a future period of time. It will include a projected (pro forma) income statement, cash flow statement, and balance sheet.

27. The Income Statement
Income Statement: A summary of the business’s revenue and expenses and is used to calculate Net Income or Loss.

28. The Income Statement Total Sales Returns and Allowances = Net Sales
Cost of goods Sold
= Gross Profit
Operating Expenses
= Net Income from Operations
+ Other Income
Other Expenses
= Net Profit Before Taxes
Income Taxes
= Net Profit (Loss)

29. The Income Statement Cost of Goods Sold is calculated by:
Beginning Inventory
+ Purchases
= Goods Available for Sale
Ending Inventory
= Cost of Goods Sold

31. The Balance Sheet
Balance sheet: A summary of a business’s assets, liabilities, and owner’s equity.
Assets = Liabilities + Owner’s Equity
A balance sheet consists of:
Current assets: Cash or any other item that can be converted to cash quickly and used within a year.
Fixed assets: Items that will be held for more than a year. (Automobiles, equipment, buildings, etc)
Current liabilities: Debts due within a year.
Long-term liabilities: Debts that will not be paid off within the year.
Owner’s Equity: The value or worth of the business.

33. Cash Flow Statement
Cash Flow: The amount of cash available at any time.
Cash Flow Statement: A report of how much cash a business took in and where the cash went.
Cash Flow also helps you see if you will have enough money when you need to pay your bills.

35. Calculating Lifetime Value
Lifetime Value: A prediction of the net profit attributed to the entire future relationship with a single customer.
There are many nuances to be considered in calculating lifetime value.

36. Calculating Lifetime Value
A rough estimate can be obtained by taking the annual revenue you earn from a single customer and subtract the money spent on acquiring and serving them.

37. Calculating Lifetime Value
Example: The average new car customer is age This customer will purchase a new car every five years at an average cost of $35,000. The customer will make a total of 13 purchases and generate $455,000 in gross sales. Assuming $2000 in profit per sale, this equates to $26,000 in profit over the lifetime of the customer.

38. Calculating Lifetime Value
Customer lifetime value helps business owners make important business decisions about sales, marketing, product development, and customer support.

39. Calculating Lifetime Value
It helps answer the following questions:
Sales: What type of customers should sales representative spend most of their time trying to recruit?
Marketing: How much should be spent to acquire a new customer?
Product: What products/services, specifically tailored for business’s best customers, should be offered?
Customer support: How much money should be spent to service and retain customers?

40. Essential Question 2D (MKT-EN-7D)
What are the various tax liabilities?

41. Laws that Affect Taxes
Sales Taxes: Percentage of the price of an item that goes to a state or local government.
Federal Unemployment Tax: The Federal Unemployment Tax Act (FUTA) requires employers to pay 6.2% of their employee’s gross pay as insurance for workers who are temporarily out of work.

42. Laws that Affect Taxes
State Unemployment Tax: The State Unemployment Tax Act (SUTA) requires employers to pay a percentage (varies with the state – 2.7% on the first $8500 with step decreases depending on hiring/firing history in Georgia) of their employee’s gross pay for workers who are temporarily out of work.
Business Income Taxes: Your business’s legal status regulates the amount of local, state, and federal income taxes paid.

43. Laws that Affect Taxes
Other Business Taxes: Depending on the business, there may be other local, state, and/or federal taxes.
Environmental taxes
Communication and air transportation taxes
Fuel taxes
First retail sale on heavy trucks, trailors and tractors
Manufactures taxes on the sale and use of a variety of different articles
There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways
Businesses that accept wagers or conduct a wagering pool or lottery

44. Laws that Affect Taxes Payroll Taxes:
Federal Insurance Contributions Act of 1935 (FICA): Established the Social Security Tax.
Is 13% of the employee’s gross pay.
Employee pays 6.5%.
Employer pays 6.5%.
If you are self-employed you are considered both the employer and employee and are required to pay the full 13%.

45. Laws that Affect Taxes Medicare Tax
Is 2.9% of the employee’s gross pay.
Employee pays 1.45%.
Employer pays 1.45%.
If you are self-employed you are considered both the employer and employee and are required to pay the full 2.9%.