Entrepreneurship

Chapter 11Financials

A Look at Each of the Financial Statements

Balance Sheet

Income Statement

Statement of Cash Flows

Why do we even need financials – can’t we just see that we’ve got money in the bank, and that’s good enough?!?!

The Balance Sheet

Gives a snapshot of one-time performance

Assets Things that can be used as factors of production

Liabilities Things that the company owes to someone else.

Owners’ Equity The stash of value that has been contributed by the

owners and that has been added to by each period’s net income.

The Income Statement

Shows performance over a period of time

Compares the revenue you brought in and the expenses you incurred to make that revenue

Net sales All sales minus returns

Cost of goods sold Value of the goods you used to make things to sell plus

shipping

Margins Gross, operating, and net

Statement of Cash Flows

Shows changes in working capital Current assets – current liabilities

Starts with net income and works back throughout the year and Adds back sources of funds as if you didn’t have

them (loans, contributions, accts receivable, inventory sold, depreciation)

Subtracts uses of funds throughout the year: plant and equipment, inventory, dividend payout, debt paydown, accounts receivable lended, payments to creditors

Cash Budget

More helpful to the new entrepreneur than a traditional cash flow statement

List all of your monthly expenses

Come up with a revenue estimate for the month

See what is left over, in terms of cash.

Working with Ratios

Common Sizing Reducing raw figures to ratios so that we can

make comparisons▪ Big companies with little companies▪ Previous years to this year

Really bad signals Decreasing sales, falling profit margins Increasing overhead Increasing inventory Increasing accounts receivable

Working with Ratios

Great mentality from your book When all else fails, don’t spend more today

than you brought in yesterday!

Only 26% of small businesses use ratio analysis at all.

Simplicity of control information is what is key▪ Find out what is important to know, and only

measure that.

Liquidity Ratios

Current ratio Current assets/Current liabilities

Working Capital Current assets-Current liabilities

Debt to Equity (Debt + Current Liabilities) / Owner’s Equity

Debt to Assets (Debt + Current Liabilities) / Total Assets