Class Notes on Financial Planning and Ratio Analysis

Overview of Client Communication and Project Management

  • Discussed the plan for letter preparation to clients.
  • Importance of applying financial ratios to projects.

Upcoming Class Schedule

  • Class meeting on Wednesday in UC Commons.
    • Location: 2nd Floor of the Student Building, near UC to Go.
    • Activities include mock interviews and a piggy bank painting session.
    • Participation is key to the quiz for that day, no need to log in for a quiz; just show up and engage.

Events and Reminders

  • Financial Planning Network and Awards Banquet scheduled for April 9 in the ballroom. Students encouraged to sign up.
  • Financial statements project due next Monday.
    • Balance sheet and income statement should be complete minus any lingering questions.
    • Students should be working on financial ratios; completion planned for the class today.

Project Details and Financial Ratios

  • Total investment assets should amount to 2,236,7782,236,778, a reference figure for project tracking.
  • Any deficit in the income statement should be noted; this represents a red flag.
  • For the Income Statement Ratios:
    • HR (Housing Ratio) definitions:
    • HR1: Links to applicable housing ratios based on conversation and insurance payments.
    • HR2: Similar links but specific to another aspect of housing costs.

Dress Code for Interviews

  • Professional appearance is encouraged.
    • No pajamas or flip flops, but formal attire (e.g., a tie) is not mandatory.
    • Essential to avoid grungy looks; business casual is recommended.

Q&A Session on Project Concerns

  • Discussion about the specifics of ratios and how to apply them effectively.
    • Inquiry about employer-sponsored retirement plans when changing jobs.
  • Emphasis on the importance of knowing the amount of investment assets vs. gross pay.

Retirement Plans and Job Change Implications

  • If changing jobs, options regarding employer-sponsored retirement plans:
    • Employers may let the plan stay or require it to be moved, possibly into a new employer’s plan or an IRA.
    • Do not cash out unless absolutely necessary; consequences of cashing out repeatedly can lead to severely diminished retirement funds.
    • Average number of job changes across careers approximated to be 7 to 8.

Vesting Schedules and Employer Obligations

  • Vesting schedules may retain some of the employer’s contributions if an employee leaves before a certain period.
  • Legal issues could arise if an employer maliciously denies access to retirement funds beyond vesting limits.

Discussion on Financial Ratios

  • Financial ratios are classified into:
    • Investment Assets to Gross Pay Ratio
    • Recommendations per age (e.g., investment assets need to equal 20% of gross pay at age 25, 3-4 times gross pay at 45).
    • Performance ratios discussed:
    • ROI (Return on Investments): ROI=EndingInvestmentBalance−(BeginningBalance+Savings)BeginningInvestmentBalanceROI = \frac{Ending Investment Balance - (Beginning Balance + Savings)}{Beginning Investment Balance}; desired return benchmark is 8%-10%.
    • ROA (Return on Assets) and RONW (Return on Net Worth) should also be calculated similarly, focusing on assets and net worth respectively.

Limitations in Ratio Analysis

  • Ratios are historical data; they do not guarantee future performance.
  • Caution against overvaluing the implications from any single ratio without context.

Financial Analysis Techniques

  • Vertical Analysis: Each item on the income statement expressed as a percentage of total income, revealing spending habits against total income.
    • Example: If total income is 100,000100,000 and savings is 14,00014,000, savings represent 14 ext{%} of the total income.
  • Horizontal Analysis: Looks at financial data across multiple periods as a percentage of a base year to track growth over time.
  • Importance of understanding both the art and science of financial ratios—calculating and interpreting them in light of client goals and circumstances.

Recommendations for Client Engagement

  • Discouraged sharp cuts from expenditures associated with discretionary spending; instead, propose moderate reductions.
  • Evaluation should also look at sources of income or savings rather than only expenditures.