Entrepreneurial Finance and Accounting Exam 1

When a business is able to sell its products more than its competitors

Competitive advantage

Offering unique and innovative products and services that differ from the competition

Innovation and Design

Producing/selling products at a lower cost than its competitors

Operations

Makes customers aware of your products and differentiates them from competitors

higher demand = increased profit

Sals & Marketing 

Supporting customers during the sale and after the purchase process

builds a relationship between the customer and business 

Customer Service 

Obtaining higher prices through innovation and design, sales and marketing, and customer service

Customer Centric

Optimize operations / low cost producers

Operational Centric

Tells business owners whether or not they are making money

financial statements

1. Financial Issues

   1. create and equip factory before making products

   2. sales cycle might be 6 months between manufacturing and payment

2. Startup Issues

   1. must invest in machinery

   2. hire & train staff

   3. manufacturing costs incurred months before payment

Manufacturing Company

1. Financial Issues 

   1. no inventory

   2. services rather than products

   3. deferred revenue

   4. significant employee cost

2. Unique Issues

   1. selling their time

   2. minimal inventory

Professional Service Firm 

1. Financial Issues

   1. purchase inventory before sales

   2. time difference between revenue received and paying expenses

2. Cash Flow

   1. lag between store lease and business open

   2. months to grow sales volume

Retail

Tells a business where cash is from and how it is being spent

Cash Flow statement

Directly from inflows and outflows

CF- Direct Method

Using net profits and payables/receivables from BS

CF- Indirect Method

Inflows- customer payments 

Outflows- purchases, A/P, operating expenses 

Operating Activities

Inflows- investments, proceeds from loans

Outflows- dividends and other payments to owners/investors, repayment of loan

Financing Activities

Inflows- new machine, new factory

Outflows- sale of old machine

Asset Activity

Shows whether or not your business is making a profit 

Profit and Loss Statement 

Alternative names for profit and loss statement

Income Statement, Statement of Operations, Statement of Earnings

What are the 3 categories of the P&L

1. Revenue & expenses associated w sales

2. Ongoing operating expenses

3. one time non-operating income

Revenue a business generates from selling goods and services 

Sales Activity 

Costs associated with producing/purchasing products for sale

Cost of Goods Sold

Selling, R&D, General/Admin expenses of operating the business

Operating Expenses

Calculated by deducting interest, income taxes and nonrecurring expenses from operating profit

AKA- “bottom line”

Net profit

Assets already in cash or expected to be converted to case within 1 year 

• cash, A/R, inventory, raw, materials, WIP

Current Assets 

Used in company’s production and operating process

• buildings, machines, computers, software, office equipment

Plant, Property & Equipment

Debts a business owes

Liabilities

Liabilities due within 1 year

Current Liabilities

Value of the business after all liabilities have been paid

• money invested by owners

• retained earnings

Owners Equity

• Relationship between revenue and gross profit

• How much profit a business makes from a sale

Gross Margin

Gross Margin calculation?

Gross Profit / Revenue

• Relationship between revenue and a business’s operating profit

• How profitable the business is from operating profit

Operating Margin

Operating Profit calculation?

Operating Profit / Revenue

• Relationship between a business’s revenue and net profits

• How profitable the business is after expenses

Net Margin

Net Margin calculation?

Net Profit / Revenue 

• Relationship between net profit and total assets

• How effectively a business uses its assets to generate a profit

Return on Assets

Return on Assets calculation?

Net profit / Total assets

• Relationship between net profit and owners equity

• 5 return the owner is receiving on their investment

Return on Equity

Return on Equity calculations?

Net profit/ Owners Equity

Cash used to “fund operations”

Working Capital 

Measures how quickly or slowly a business converts the sale of its products or services to cash

Efficiency Ratios

Measures number of days inventory stays in the company before sale 

Days in Inventory 

Days in Inventory equation

End Inventory / COGS per day

Measures time it takes for customers to pay for goods and services they purchase from a business

Collection Period 

Collection Period equation

End A/R / Revenue per day

Measures the number of days it takes the business to pay bills

End A/P / COGS per day

Measures how many days it takes for a business to convert products to cash

Cash Collection Cycle

Cash Collection Cycle equation

Days in Inventory + Collection Period - Payment Period 

Measures how many times per year the inventory of a company turns over (i.e. is sold)

Inventory Turnover

Inventory Turnover equation

COGS / Inventory

Measures how efficiently the business uses its assets to generate revenue

Asset Turnover

Asset Turnover equation 

Revenue / Total Assets 

Measures a business’s ability to pay its bills over the next year

Liquidity Ratio

Measures the relationship between current assets and current liabilities

Current Ratio

Current Ratio equation

Current assets / Current Liabilities

Measures the ability to pay bills from assets that can be quickly turned into cash 

Quick Ratio 

Quick Ratio equation

Current assets - Inventory / Current liabilities

How do we know a business has sufficient funds to pay its bills?

Liquidity rations are greater than 1

Costs that vary with the level of production

Variable Costs

Costs that stay the same regardless of the level of production

Fixed Costs

Measures the number of units that must be sold in a period so revenue from the sale of those units is sufficient to cover the total costs of operating the business for that period

Breakeven Volume

Breakeven Volume: step 1

Revenue per unit - Variable cost per unit

Breakeven Volume: step 2

Fixed costs / Unit contribution margin

Measures the $ amount of revenue that must be realized in a period to cover the total costs of operating the business for that period

Breakeven Amount

Breakeven Amount: step 1 

(Revenue per unit - Variable Cost per unit) / Revenue per unit 

Breakeven Amount: step 2

Fixed costs / Contribution margin %