Course Overview

Topic: Introduction to EntrepreneurshipInstructor: Arabella PollackDate: March 3, 2025Contact: arabella.pollack@hunter.cuny.edu

Objectives of the Class

By the end of the class, students should be able to:

• Understand the difference between cash and profits clearly, identifying key scenarios where businesses can be profitable yet lack cash flow.

• Apply common financial ratios to assess companies' performance, explaining their significance in providing insights into financial health.

• Explain the basic concepts of cost accounting, including various expense types and their implications for pricing and financial strategy.

• Recognize the significance of budgets and how variances track spending, illustrating effective budgeting techniques and forecasting methods.

• Prepare for upcoming assignments by synthesizing knowledge from the class to analyze and interpret financial data effectively.

Key Concepts

Profits vs. Cash

• Question: Can a business be profitable yet lack cash?

• Example: If customers take 3 months to pay, the business may struggle with cash flow despite profitability due to delayed receivables.

• Implication: A lack of working capital is a frequent reason for small business failures as it can lead to an inability to cover day-to-day operations.

• Slogan: "Cash is King." - This emphasizes the critical importance of cash flow management in sustaining a business.

Financial Statements

• Main Types:

  • Balance Sheet: Shows assets, liabilities, and owner’s equity, providing a snapshot of a company's financial position at a specific point in time.

    • Formula: Assets = Liabilities + Owner's Equity

  • Income Statement: Indicates profit or loss over a specified period, showcasing income and expenses to deliver insights into operational efficiency.

  • Cash Flow Statement: Details cash generation and usage, breaking down cash flows from operating, investing, and financing activities. This is essential for assessing liquidity.

Financial Ratios

Financial ratios enable comparison of performance across organizations.A. Solvency Ratios

• Current Ratio (Banker’s Ratio): Indicates ability to pay immediate debts.

  • Formula: Current Ratio = Current Assets / Current Liabilities

  • Goal: Generally, aim for a current ratio greater than 2, indicating good short-term financial health.

  • Example of Calculation: For TEDDY FAB INC., the current ratio calculated from the balance sheet is 3.2, demonstrating strong liquidity.

B. Long-Term Solvency Ratio (Debt to Equity Ratio)

• Definition: Measures risk related to long-term debt, indicating how a company's capital is financed.

• Calculation: Total liabilities / Owner's equity. A lower ratio (typically <1) is preferred, as it suggests less risk and is a sign of financial stability.

Activity Ratios

• Return on Sales (ROS): Measures operating profit as a percentage of revenue, providing insight into operational efficiency.

  • Formula: ROS = Operating Profit / Revenues x 100%

  • Example: A company with a 6.0% ROS indicates efficiency in generating profit from sales, crucial for competitive analysis.

Cost Accounting

Types of Costs:

• Fixed Costs: Do not change with production volume (e.g., rent), affecting long-term financial planning.

• Variable Costs: Fluctuate with production volume (e.g., materials), essential for cost management strategies.

• Direct Costs: Directly tied to production (e.g., raw materials), crucial for pricing strategies.

• Indirect Costs: Not directly tied to production (e.g., overhead), impacting overall profitability.

Budgeting and Variances

• The budgeting cycle includes forecasting revenues & expenditures, establishing budget priorities, and incorporating public input for accountability.

• Variance Analysis: Helps in measuring differences between budgeted and actual figures, guiding strategic improvements.

  • Favorable Variance: Performance exceeds expectations, suggesting efficiency.

  • Unfavorable Variance: Performance falls short of expectations, necessitating corrective actions.

• Regularly measure, explain, and update variances for better financial oversight and effective financial decision-making.

Assignment Overview

• Next Assignment: Interpreting Financial Reports for Uber by analyzing the Uber February 2024 Investor Update. Due on March 17th, worth 100 points (10% of final grade). Team assignment - only one submission is required.

Important Notes

• Financial literacy is crucial for understanding business performance and health, empowering entrepreneurs to make informed decisions.

• Effective cash management is vital for sustaining operations, regardless of profitability, ensuring that businesses can meet obligations.

• Comparing performance with industry benchmarks allows businesses to gauge where they stand financially and identify areas for improvement.

• Cost management is essential in ensuring profitable operations, helping businesses remain competitive in their markets.

• Ongoing variance analysis ensures that budgeting aligns with actual performance, aiding in future planning decisions by adjusting expectations based on real-world data.