Chapter 3 Financial Management Part 2 BCN 4772 Summer 2007.

Chapter 3 Financial ManagementChapter 3 Financial ManagementPart 2Part 2

BCN 4772 Summer 2007BCN 4772 Summer 2007

Financial ManagementFinancial Management

What are the two main reasons What are the two main reasons businesses fail?businesses fail?Lack of a good IdeaLack of a good IdeaUnder CapitalizationUnder Capitalization

CapitalizationCapitalizationStart-up Capital Start-up Capital Working CapitalWorking CapitalExpansion CapitalExpansion Capital

Financial ManagementFinancial Management Start-up CapitalStart-up Capital

Rents and depositsRents and deposits Starting InventoryStarting Inventory SalariesSalaries AdvertisingAdvertising Equipping and making repairsEquipping and making repairs Organizing CostsOrganizing Costs Insurance PremiumsInsurance Premiums Taxes and LicensesTaxes and Licenses Attorney and accounting feesAttorney and accounting fees Management, consultant and counseling feesManagement, consultant and counseling fees UtilitiesUtilities Garbage removalGarbage removal


Sources of Start-up CapitalSources of Start-up CapitalPersonal SavingsPersonal SavingsBorrow from friends, banks, otherBorrow from friends, banks, otherBorrow from life insurance policiesBorrow from life insurance policiesMortgage residential real estateMortgage residential real estateSell stockSell stockVenture Capital from public or private sourcesVenture Capital from public or private sources


Working CapitalWorking Capital Cost of doing businessCost of doing business Direct costs Direct costs Indirect costsIndirect costs Short termShort term Long termLong term SeasonalSeasonal Equipment costsEquipment costs Applicable start-up costsApplicable start-up costs


Sources of Working CapitalSources of Working CapitalSome of the same sources for Start-up capitalSome of the same sources for Start-up capitalMortgage Commercial or industrial real estateMortgage Commercial or industrial real estateGood money managementGood money managementTrade credit from suppliersTrade credit from suppliersFinance A/R’sFinance A/R’sFactor AR’sFactor AR’s


Expansion CapitalExpansion CapitalRequires a great deal of capitalRequires a great deal of capitalEasier to identify?Easier to identify?Needed to purchase new equipmentNeeded to purchase new equipmentNew BuildingNew BuildingFinance a large projectFinance a large projectMay require sustained business period 2-5 yrsMay require sustained business period 2-5 yrs


Sources of Expansion CapitalSources of Expansion CapitalSame as Start-up and Working CapitalSame as Start-up and Working CapitalEquipment leaseback optionEquipment leaseback optionBorrow from governmentBorrow from governmentBondBondCommunity economic development programCommunity economic development program


Debt RestructuringDebt Restructuring4th type of capital need4th type of capital needNeed if business is failingNeed if business is failingSeek professional accounting and legal Seek professional accounting and legal

servicesservices


Sources for CapitalSources for CapitalBank LoansBank LoansCommon StockCommon StockDebenturesDebenturesNotes PayableNotes PayableMortgages PayableMortgages PayableCapital LeasingCapital Leasing


Bank FinancingBank FinancingHow much? How much? Is it enough?Is it enough?How long?How long?When and how to repay loan?When and how to repay loan? Is the debt secured?Is the debt secured?What is the opportunity cost?What is the opportunity cost? Is there a better way to get the money?Is there a better way to get the money?


Bank Financing TerminologyBank Financing Terminology PrincipalPrincipal TermTerm RateRate Maturity ValueMaturity Value Single Payment LoanSingle Payment Loan Ordinary InterestOrdinary Interest Compounded InterestCompounded Interest DiscountDiscount Installment LoanInstallment Loan


Common stockCommon stock Preferred StockPreferred Stock Par ValuePar Value No Par Value StockNo Par Value Stock Additional Paid in CapitalAdditional Paid in Capital Convertible Preferred StockConvertible Preferred Stock Cumulative Preferred StockCumulative Preferred Stock

Class B Common StockClass B Common Stock Mortgage PayableMortgage Payable Note PayableNote Payable DebenturesDebentures Convertible DebenturesConvertible Debentures Letter of creditLetter of credit Capital LeaseCapital Lease

Corporate FinancingCorporate Financing


Record keeping and creatingRecord keeping and creatingEstimating RecordsEstimating RecordsJob Cost RecordsJob Cost RecordsChange Order RecordsChange Order RecordsEquipment RecordsEquipment RecordsContractsContractsAccounting RecordsAccounting Records


Estimating RecordsEstimating Records Direct and Indirect Job CostsDirect and Indirect Job Costs Amounts of Material NeededAmounts of Material Needed Man-power NeededMan-power Needed

Estimating processEstimating process Determine labor, material and equipment needsDetermine labor, material and equipment needs How much subcontracting?How much subcontracting? Assign prices to quantitiesAssign prices to quantities Add in: indirect costs, overhead and profitAdd in: indirect costs, overhead and profit


Job Cost RecordsJob Cost RecordsMust account for several jobs at same timeMust account for several jobs at same timeEach contract is treated as separate companyEach contract is treated as separate companyBad record keeping leads to company failureBad record keeping leads to company failure Include all costsInclude all costsAlso should contain data from original Also should contain data from original

estimateestimate


Change ordersChange ordersContract modificationContract modificationAgreement between owner and contractorAgreement between owner and contractor Initiated by either owner or contractorInitiated by either owner or contractorMust be reflected in contract files Must be reflected in contract files Must update job cost recordsMust update job cost records


Equipment RecordsEquipment RecordsAssigning cost of equipment to jobAssigning cost of equipment to job

DepreciationDepreciationRepairsRepairsMaintenanceMaintenanceInsuranceInsuranceOperating costsOperating costs

Establish per hour rate for equipmentEstablish per hour rate for equipmentDaily rateDaily rate


Construction ContractsConstruction ContractsFixed-price / lump-sumFixed-price / lump-sumUnit-priceUnit-priceCost-plusCost-plusTime and materialTime and material


Contract CompletionContract CompletionHow do you know when the job id done?How do you know when the job id done?Percentage of Completion MethodPercentage of Completion Method

Revenue recognitionRevenue recognitionRequired for tax purposes if $10,000,000 + annual Required for tax purposes if $10,000,000 + annual

salessalesCost to cost Cost to cost

Complete Contract MethodComplete Contract MethodNo revenue is recognized until contract is fully or No revenue is recognized until contract is fully or

nearly completednearly completed


Accounting Unique to ContractorsAccounting Unique to ContractorsAccounting for RetainagesAccounting for RetainagesAccounting for Overhead CostsAccounting for Overhead CostsProvision for losses on Uncompleted Provision for losses on Uncompleted

ContractsContractsCost and Estimated Earnings in Excess of Cost and Estimated Earnings in Excess of

BillingsBillings


Financial RatiosFinancial RatiosLiquidity ratiosLiquidity ratiosLeverage ratiosLeverage ratiosActivity ratiosActivity ratiosProfitability ratiosProfitability ratios


Liquidity ratiosLiquidity ratiosCurrent RatioCurrent RatioQuick RatioQuick Ratio

Leverage ratiosLeverage ratiosDebt to equity ratioDebt to equity ratioTimes interest earned ratioTimes interest earned ratio

Activity ratioActivity ratioNumber of days of contract revenue in Number of days of contract revenue in

receivablesreceivables


Profitability ratiosProfitability ratiosGross profit marginGross profit marginNet income as a percentage of salesNet income as a percentage of salesReturn on beginning stockholders’ equity Return on beginning stockholders’ equity

percentagepercentage


Acquiring AssetsAcquiring AssetsLease Lease PurchasePurchase

Evaluation of purchase decisionsEvaluation of purchase decisionsPresent value methodPresent value methodReturn on investment methodReturn on investment methodCash payback methodCash payback method

Present value methodPresent value method

Present ValuePresent ValuePurchase the equipment if:Purchase the equipment if:

The annual costs are < The present value of the The annual costs are < The present value of the annual savingsannual savings

The cost of the equipment < the present value of The cost of the equipment < the present value of the expected return on the equipmentthe expected return on the equipment

The opportunity cost of purchasing the equipment The opportunity cost of purchasing the equipment is < the present value of the savings or expected is < the present value of the savings or expected return.return.

You must consider foregone incomeYou must consider foregone income

Chapter 3 Financial Management Part 2 BCN 4772 Summer 2007.

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Transcript of Chapter 3 Financial Management Part 2 BCN 4772 Summer 2007.