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Working capital management

Includes: current assets and current liabilities

-current assets: also called "gross working capital

include

cash

marketable securities

accounts receivable

invitory

current liabilities

short term debt that is expected to be paif off within one year

include

accounts payable

fixed payment

accrued liabilities

net working capital: the company's net worth

NWC=(gross working capital)—CL

Working capital management: the effective and effitent control of current assets and liabilities

Obj: maximize returns while minimizing paments

*operational efficiency

perffered strategy if you can only do one

*long term effectiveness

the total would be the current ratio

current ratio: shows the relationship between assets and liabilities

CR=(CA/CL)

Indicator of the operational health of the business

Ex: a  firm has 10,000 in cash, 75,000 in accounts receivable, 18000 in invitory value and 30000 in current

1. current asset management

1. cash management

tyoes of cash

-peddy cash – fund to pay daily needs (recipes and required to match expenses)

Cash on hand – to handle daily sales (change fund)

Cash in bank: checking and savings

Float: is the time that elapses between using and clearing a check

Disbursed flot: when busnesses pay by check

Time difference between writing a check and actually discounting it's value

*the longer the better so that you can allow your accounts sto earn interest for a longer time

collection float: when the business receives checks from cashers

time between getting a check and cashing it

*the shorter the better because you can liquidate the funds imediadly (incres liquitidty)

ways to speed up collections

lock box: post office box opened by an agent working between banks and business so that checks reseved in the box can be emediadly deposited to the business account

EFT – electronic fund transfer

2. Marketable Securities Management

Manageing and controlling government and corporate stocks and bonds & treasury bills

3. accounts receivable

accounts that are seseavable that are not paid in cash

factoring – businesses can except credit without establishing a credit department by selling the account receivable to another firm for a discount

saving will be acheved through factoring by

-avoding the caust of billing

the cost of processing

record keeping

monitering

fraud

customer service

dealing with credit

the 5 C's

character – credit history

capacity – income, affordability, employment, abilitiy to pay

collatoreal – the other assets that could back you up

capital – net worth, investment, home ownership

condition – the condition of the economy

establishing the colletion pattern

collection span depends on ART (Acounts Resevable Turnover)

Collection span= (365/ART)

ART=(credit sales) / (Accounts receivable)

EX. company x has 780,000 in credit sales only 75,000 is in acconts resevable.  What would be the collection time frame

ART=780,000/75,000=10.4

Collection days = 365/10.4 = 35 days

4. inventory management

overall goal: minimize total invatory cost while maximizing cusstemer satisfaction

a) determine the reorer quantity

method – EOQ econimc order quanty

EOQ=\/(2DS)/(IP)

D – the annual demant

S – ordering cost

I – Carrying cost (%) – cost of storying invitory for a year calculated as a % of the invitory value

Carrying cost = (storing cost/invitory cost)*100

P – unit cost

Ex how much would the reorder quantity of stapels for stable good C. if the annueal demand is estimated at 30,000 units ording cost is $5  cost of storing is 7490 for a invitory evauated at 75,000, cost per stapiler is $7

Carrying cost = 7490/7500*100~10%

EOQ=\/(2(30,000*5))/(.10*7)=654 units need to be ordered

B. deteminining the reorder point (ROP)

ROP=Ld+SS

L = lead time: the time which lapses from the day of order to the day of delivery

d = daily demand

D = Annual demand

d=D/(# operatingdays per year)

SS= safter stock of # of units that should be avaible on shelf when the new order arrives

It takes 7 days for a company to receive an order of mettle sheets when its safety stock is at 450 sheets

1. caluculate the ROP

lasts

givin this business is open only 300 days/ear and enjoys an annual demand of 65,000 sheets

d=6500/300=216

ROP=7*216+450=1960

This means that when in store inventory reaches at least 1962 sheets, it would be time to place a new order.

2. determine how long the ROP lasts as compared to how long the SS

1962/216=9 days the ROV lasts

450/216 = 2.08 days

*safety stock lasts 2 das at the time of placing an order, business has enough sheets for 9 days

*since it takes 7 days for the oder to arrive, the 9 days supply would offer 2 days extra days

II. Currernt liabilities management

1. short term debt management

business obligations that would be paid within the current accounting period

such as:

Pay to on long term debt (mortgage)

Pay to on short term debt loans (bank lone of credit)

2. Accived liabilities management

Accumulated  obligation during the normal cause of business

*payroll taxes &benefits

federal emploryment taxes(income, ss, medicare employment)

state "" "" (income, employment, workers)

*sales taxes

*property taxes

3. Accured Payable Management

includes:

inventory purchased on credit

travel expens.

Maintainces expens.

Entertainment expenses.

Purpose: minimize the cash paid

Business Discount

Trade discount: offered by the manufacturea of trade angent

Single % (35%)

Multibe % (30/20/10) is neither additive or average but successive

Ex: of the maultiple discount

A Discount of 30/20/10 is offered to an appliance store for a specific brand of washing machine prced at 300$ when:

30% the normal market from wholesale retail "retailers allowance"

additional 20% only if you offer free delivery to customers

10% for certain display of the product and advertising

2 ways to caluculate the discount:

1. traditional way

300-(.30*300)=210

210-(20*210)=168

168-(.10*168)=151.20 (final cost to the retailer called "invoce price"

*if we divide the invoce price by the list price we obtain: NCRF (net cost rate factor) = (IP/LP)

NCRF=pi*complement=comp1*comp2...

Comp=(1-discount)

2.the NCRF way

IP=NCRF*LP

NCRF=(comp1)(comp2)(comp3)

=(1-.30)(1-.20)(1-.20)

=.7*.8*.9=.504

IP=.501*300=151.20

Types of trade discounts:

Cash discount:

Offered to credit customers to entice them to pay promptly

Quantity discount:

Offered for purchasing large quantities

Good only if benefits exceed cost inccered

Cumulative discount:

Offered for customer loyalty

Give at the end of the term

Dan lass - person with projector key

Goal – specified by frame of time/place/condition

It is a measurable objective

criteria – all goals have to be satisfied

Feasible

Must be measurable

Time controlled –

objectives( short, intermediate,) goal( long)

Plans

Strategic

5 year multiples

long term

2-25 years

establishing the overall companies priorities

determining the allocation

Planning basic functions

Where do you want it to be?

How long will it take?

Functional

Specific to certain functions of businesses such as marketing, human res.

Personal plain

Hiring

Capital budgeting – equipment, building

Operational plan – distribution

Marketing plan – competition, customers

financial plan, res. budget

3 financial goals for any busin. – minimizing cost, maximizing profit

Paying interest

Maximizing capital over life of busin

Maintaining a reasonable rate of growth

Organizing – structure to carry out on the plans

Structure would adapt to the development of the plans as the busin goes forward

Staffing – finding, allocating, monitoring jobs

Size

Qualifications

Specifications

Directing – to provide proper guidance to those who car out the organization's mission

Setting an example

Follow the golden rule

Treat others as you want to be treated

controlling – 3 basic steps

1 establishing a standard

2 assessing actual performance v/ theoretical

3 establishing & following corrective actions to match the two:

solution

remedies

business organization & ownership

4 major forms of ownership

sole proprietorship

ownership by one person

advantages

no federal requirements usual only state
local license
disability fees
title is attached to the persons name
no formal/complicated organization
simple taxes
more freedom to take action

disadvantages

limited capital
financing depends on a great deal on the owners resources
unlimited liability
life of business is limited to life of owner
less retention of high skills
skills required are directly related to the owners skills

partnership

corporation

limited liability

reasons to choose

owners desire

type and location

taxes

financial support

(due Thursday the 23rd)
Articles
Title
Citation {author, reference, date}

Partnership

An association of 2 or more owners

General – equal rights and responsibilities

complementarily – a base for teaming up with partners

Termination – legally terminated if one partner dyes unless there is a pre-agreement in the contract

Limited – variable rights and responsibilities

Ex. real-estate where one person doesn’t have enough money

Corporation

Large number of owners operating in a specific legal entity under various laws and regulations

C-corp

partial vote – less than 100% of the share holders have the legal right to vote

Subject to corporate taxes – the corp pays taxes on profit before any distribution of dividends

S-corp

Full vote – all share holders have a right to vote

Not subject to corp taxes, shareholders pay taxes individually

Similarity – summarized by the way ownership is determined, which is based on % ownership=#indiv shares/total # or shares outstanding.

Advantages

Access to capital – unlimited by acquiring shareholders, loans, grants

Continuity – fully continues for the # of shareholders goes up and down

State of liability – liability is shaped according to ownership %

Disadvantages

Legal obligations – heavy and complicated federal and state obligations

Relationship of owner to business – distant, less relationship, indirect, separated

Taxes – (c) double taxation

Sole = 73%

partnership = 7%

C Corp ~ 10%

S-Corp ~ 10%

Other forms

Privet corp –

formed under state law

adv:

does not sell its shares to the public

enjoy limited liability

dis:

limited ability to get the best management

"        " liability

subject to double taxation

Sub chapter S corp

Usually a private that will move to a s corp

Privately held but has been granted the s status

# owners = <1 >75

best advantage to combination of sole & corp

LLC

Cross between partnership/corporation

Taxed as a partnership

Characterized by active membership by all managers

Not avidly available

Franchise: a form of business where the franchise (the immediate owner) buys the right to produce and sell a specific product that is patented & registered by the franchiser (the ultimate owner)
            *the franchiser honors the contractual obligation to the franchisee by offering:
            -standardized product, service, procedures, and politics
            marketing services such as strategies and advertising
            -employer and manager training
            -updates and modifications on product, services and polices

the franchisee honors the contractual obligations by offering:
            to implement and abide by all the standards and policies
            to pay the franchise a share to the franchiser (% of gross monthly sale)

Justification of the franchisee
            -recognized brand and promo product
            -guaranteed sales and reliable market share
            -guaranteed profit margin range
            -ready & vetted (experienced) programs of training & marketing
            -proven success rate
{first 5 years more that 45% new business fail whereas less that 10% new franchisees fail}

Financial statements – compilations of data designed to provide quick indications on the business performance

Most common

1. Balance sheet – quick to show the firms finical position at any point in time through the comparison between what is owned (assets) and what is owed (liabilities)

Net worth – assets –liabilities (debt & obligations) [NW=A-L=owners equity{OE}]

2. The income statement

Income-expenses

To show the firms financial position over a period of time threw the comparison of the in-resources and the out-resources

3. Perform financial statement: to show the projection of the future performance based on the past & the present performance

balance sheet = snapshot at one spot

income statement = current extended look

pro forma – current –future – extended look

financial statement analysis

ratio –

liquidity ratios – indicate how much of the firms current assets can meet its short term clames

current ratio (CR) – related current assets (CA) to current liabilities (CL)

CR=(CA/CL)

Ex. CA = $225,000, CL = 150,000 CR=225,000/150,000=1.5

interpretations

The firm currently has one time and a half in assets as much as in debt

For every dollar in credits the firm has $1.50  to match [1.5=1.5/1]

The firms current obligations would require a 66 cents on top of each dollar of its assets

b. quick ratio (acid test) – relating the current assets (CA) to CL after discounting inventory

QR=(CR-inventory)/CL=Real Cash

Ex. if the total inventory (capital assets) is 45,000 then QR=(225,000-45,000)/150,000

Ex: if inventor is estimated at 100,000 then liquid assets=225,000-100,000=125,000 --- QR=(125,000/150,000)=.83

*lower QR indicates less liquidity(and probably higher growth which could lead to: less ability to meet short term claims

higher ability for expansion

Dept (leverage) ratio

solvency ratio(SR) – relationship to total assets (TA) to total debt (TD)

ex. SR=TA/TD

SR>1 = company is solvent

SR<1 = company is insolvent

SR=1=on margin

B. Debt/Asset ratio(DA) – reverse of solvency ratio

Relates debt to asset instead of the other way around

DA=TD/TA

c. Debt/equity ratio (DE)

shows what % of network or equity is due to debt

de=TD/NWà NW=TA-TL

ex: TA=25,000, TD=10,000 NW=15,000 (10,000/15,000)=.66    ----   ⅔ of the  company net worth is generated by the dept it incurs

d. operating income/interest ratio – also called times-interest earned ratio

shows the extent by which the company can pay its interests on its debt

OYIR=OY/I ---- OY operating income  I=interest

Operating income(OY): earnings before interest and taxes are paid (EBIT)

Ex. (OY170,000/35,000)=4.86àthe company generates income almost 5 times more than the interest it pays on debt

3. Profitability Ratio

a. gross profit margin ratio (GPN)

Shows how much gross profit is generated by the net sale

GPN=(GP/NS)

GP=gross profit

NS=net Sale

Ex: GP=250,000 NS=980,000

250,000/980,000=.25=GPM

*almost a quarter in profit is generated out of each dollar of net sail

b. operating income margin ratio(OPM)

shows how much of operating income (profit) is generated by the net sales

OPM=OP/NS=370,000/980,000=.38

Ex. 38cents out of each net sale goes to operating income

c.Net Profit margin ratio (NPM)

shows how much each dollar each dollar of net sale yield net profit

NPM=NP/NS=180,000/980,000=.18

Company income is 18cents in net profit out of ech dollar in net sale

d. operation return on investment(assets) ratio (ORI)

shows how much operating income is generated by investment in assets

ORI=OY/TA=370,000/2,000,000=.185

18.5% of the investment serves as operating income

e. Net return on investment(assets) ratio (NRI)

shows how much net profit are generated by investment

shows how good the company does after paying interest and taxes

NRI=NP/TA=180,000/2,000,000=.09(9%)

f. return on equity ratio

shows how each dollar of net worth is related net

shows how much each dollar of net worth is generating in net profit

ROE=NP/NW=50,000/150,000=.33(⅓) of net worth would be considered net profit

Market Ratios – Also called "investment ratios"

Good for comparison with the same industry

Good to determine the worth of capital investment

A. Earnings per share

Shows how much net profit per share is available for a company after paying off the preferred stock

EPS=((Net Profit)-(Preferred stock dividends)) / (# shares) - calculates the earnings for the companies stock

B. price/earnings ratio (P/E)

shows how much the value of each dollar of earnings in terms of market price of a stock

P/E=(Market Price of Stock)/Earnings Per Share

national range is  5-15 of P/E – lower the better

*The reverse of P/E would be E/P which is called "Earnings Yield"

EY(E/P)=EPS/Market Price

C. dividends Per Share

Shows how much cash dividend is generated by each of the common stock shares

DPS=(Cash dividends for the common stock [CD])/#shares

*if we divide DPS by the market price we obtain "Dividend Yield."

DY=DPS/(Market Price)

D. Dividend Payout Ratio (DPR)

Shows how relative the dividends are to earnings

DPR=CD/NE

NE=Net Earnings usually measured after paying off prof. stock, taxes, and interests

E. Price/Sales Ratio (PSR)

Indicates how good the stock is by showing the relationship of market value of a shock to the companies revenue

PSR=(current Market Value of a Stock)/(Total Revenue [TR])

Current market Value of a stock also called Market Capital Ratio, Total Cost of Stock which is equal to Price*# Shares

Ex. Price $24 #shares=20,000, capitalization=25*20,000=value=500,000,          TR=750,000,   PSR=500,000/750,000=.67

Range:.75-1.5 – on margin

Recommended PSR<.75

If PSR>1.5 it should be avoided

vertical analysis –

shows the realationship of a selected single variable as it is compered to another

% cost of producet sale –

(cost of goods sale)/(net sale)*100=% cost of producet sale

horisital analysis –

shows presentage change in a given variable

ex. NP Last year = 42,000

     NP this year = 35,000

(New-old)/old*100=35,000-42,000/42,000*100=-16.6

vertical analysis –

shows the realationship of a selected single variable as it is compered to another

% cost of producet sale –

(cost of goods sale)/(net sale)*100=% cost of producet sale

horisital analysis –

shows presentage change in a given variable

ex. NP Last year = 42,000

     NP this year = 35,000

(New-old)/old*100=35,000-42,000/42,000*100=-16.6

Chapter 5: Profit, Profetability, Break-even analysis

Profit is exepressed in absolute number of earnings on investment

-the accounting profit is total Revenue-Total cost

-entreprenuereal profit is amount earned above & beount what the inverster would have earned had he chosen an alternative investment

-profetability is net return on investnement as compared to the amount invested

provitabiliy = (net Profit)/(Total assets invested)

ex.

intvestment 100,000 in software productes earning 20,000 and 10,000 in consulting earning 3000

20,000/100,000=20%

3000/10,000=30%

-earning power (EP) is the product of two factors: Net profit margin (NPM) and total asset turnover

EP=NPM*TAT=(NP/NS)*(NS/TA)=NP/TA

NPM – the companies ability to grenerate on the amount of revenue resceived

NPM = NP/NS

TAT – the companies ability to maximize revenue from proper assets employ & mAnagement

TAT= NS/TA

-owners equity  (OE) is networth of a company (NW=A-L)

L includes financial leverage which is a portison id investment  (other peoples money)

Debt Finacising: occurs when leverage is larger than their own capital (L>Owners cappetel)

Equity finacing: occurs when Owners Cappetal>L

Breakeven analysis: the process to detemin how many units of a product must be sold before the company begins to make a profit

BreakEvenQuantity=Fincanal Cost/(Market Price Per unit/Variable Cost Per Unit)

Ex. find the BreakEvenQuantety for a company producing toys w/info

Rent=2000 Monthly

Wages=5000 ""

Benefits=7000Anually

Insurance= 1500 quarterly

Prop Taxes=3000  annually

Matreal=1.50 per toy

Labor=2.50 per toy

Packing.shiping=2.00 per toy

Each toy is sold for $10

Annual FixtedCost= (2000*12)+5000+7000+(1500*4)+ 3000=

100,000

100,000/(10-6)=25,000 toys

Contribution margin (CM)-the amoint of gain/loss that will made each unit sold above and beyond the BEQ

CM=P-(Variable Cost[VC])

BER=(Fixed Costs[FC])+(Desired Net Profit[DNP)/(1-((Variable Cost)/(Price))

For any predetermined & desired profit marjin

Bankrupcy

1. chapter 11

business continures to operate abiding by a payment plan to pay off their debt

acreditors have to approve the payment plan, which may include: reduced debt, written off debt.

2. chapter 7

business can no longer operate

if the payment plan is rejected by creditors, emediate liquidation of assets occurs

Chap 6 – Forcasting & Proforma financing statements

Forecast:

A quantifiable estiment of future demand for  a product or service

1. detyrmination & selection of the forecasting model

criteria for determination

who would be the user, what informsting is required

relevance and availability of data

level of accercy

time frame covered

time frame available to deliver forcasting

Cost/benifut

2.determination & selection of the forecasting horizon

criteria for horizon

accuracy – as time increases, accuracy decreases (negative relasonship between horizon and accuracy)

strategic plan: forecasting would be more accurate if it reflects the stragic plan (time line)

type of project lifespan (how long it is going to last)

3. evaluation of the forcasded model

criteria for evaluation

MAD: Mean Absulute Deviation is a popular method of evaluation

Dynamic change in the market needs to be considered

4. application of the forcasted model

To reduce the gap between the projected and the actual

Models

1. judjment

uses outside data

qualitative (as opposed to quantitave=[data gathering]) approce

history

experts view

Delphi method: panel of exports to reach consences of opinions

2. causal model

outside data

logical approce to track down cause and effect and use the info for prediions

(organization chart

3. time series model

inside data

quantitable method

data, mathatical  and strategic analysis to predict

internal, intrinsic, endrogeneoins

1. The movie average model

Assumptions

Actual dates for the most recent past

Each period in the observation horizon has an equal influence on the forcast

F[t+1]=(A[t-(n-1)] +......+ A[t-1]+A[t])/n

F = forecasted dates

A = Actual Dates

t = current period (2006)

t+1=the next period

t-1=the past period

n=number observations for the forecast

2. The mean absolute deviation

a tool for presenting the average difference between the actual & the predicted data for measuring the forcating errors

MAD=([average|A-F|])/n

Average A-F  = 53.67

MAD=53.67/13.42

3. Weighted Moving average

Used when the influence of the different periods are not equal

Certain waites would be assigned to effect the reative influence

F[t+1]=(W2(A[t-2])+(W1(A[t-1]))+(W(At)))/[average weight[EW])

W=weight

EW=total of all weights would add up to 100% when there is a common ground for the relative importance

*could be more that 100% if there is no common growd for the relative importance

ex.

F[t-1]=(.1(273)+.3(278)+.4(256))/1=265

For midterm chapters 2,3,4,5,6

Final=7,9 probabl not = 10,8,1

Time formulas

Exponential Smothing Model (ESM)

-using alpha as an smoothing constant

-alpha is an assigned value based on the forcaseters assumptions on the relationships between one period and another

0<alpha<1

F[t+1]=F[t]+alpha(A[t]-F[t])

F[t+1]=forecast for the next piorod

F[t]=forecast for the current period

A[t]=actual data for the current period

Alpha=constant

Higher alpha vaue is uealy assigned when the current data are more preditve of furter data

Indicates and enphasis on current time

Lower means smother

Enphasis on future time

Ex: use and alpha of .27 to forecast salrd fr November id the actuale sales for octobber is 411 and the forecast was 450

F[nov]=450+.27(41-450)=439.5

Linear Regression Models

y=a+bx

a=consteant

b=change in  based on the change in x

y=dependent

x=independent variable

b=(y[2]-y[1])/(x[2]-x[1])

x=advertising expenxes

y=sales

b=efectivness

a=beginning worth (time 0)

proforma Analysis: Process to predict the finanal variables and integrate them in the prepreation of f, statement

Proforma Statement: is a projected statement based on forecast.  Such as proforma balance sheet or income statement

Proforma cash budget: projected futer revenues (receipts) and expenses(payment)

Balance sheet

2006 –

assets = 2000

actual sales = 100,000

2007 – proforma

assets=2% of 150,000

projected = 150,000

this % sale can be used to find out the new financing using:

RF=((Change in sale)(NW))/(S[alpha])-S[f]*M(1-OP)

Change in sale = (forcasted sale) – (actale sale)

NW=assets-liabilities

M=profit margin

OP=owner payment

RF=Required Financing

Ex

Current assets=57,000

Liabilities=49,000

Sale=100,000

Forecast=150,000

RF=(((100000-150000)(57000-49000))/100000)-150000*.15*(1-.66)

Gantt Chart

A chart that lays out everything financial

Successful entrepreneurs are :
            young, have diverse backgrounds

What does it take to be a successful entrepreneur
Personality
            confidence - internal
Trust – external

relationship of the two

1. the extent to which one can convince others and persuade them to see, feel and believe in the viability of those ideas and plans
2. the extent to be convinced of owns ideas and plans

what entrepreneurs are:
-significantly child's of first generation Americans
-non high achievers in school
-not usually group participants (early on)
-not social early on
-usually early entrepreneur
-tend to change things continuously (get board easily)
-tend to get absorbed with what they do if the find what they like
-generally optimistic
-often stubborn & daring "un- cautious"
-often do not care what other's think

The idea – fit it into the right place at the right time
The range – buying vs. leasing vs. creating from scratch
The market – location, other products, consumers, producers/distributors
The structures – sole proprietor...
Business plan –
The legal side –
Financing – where you get the money, what to by first
Execution of plans –

SWOT analysis – To put down all the strength's and weaknesses of everything you do along the way
Strength vs. Weaknesses vs. |Opportunity vs Threat
internal                                                                          | external

Business Plan: the minimum standard required by the Small Bus. Administration (SBA)
            -Cover Sheet
                        name,
Name of Proposal,
Sub. To Date
            -Contents
                        table of Con..
                                    -
                                    -
                        Form & Name
            Legal form of the bus.
            Name of Bus.
Bus. License
Location & other considerations
            Raw materials
            Labor supply
Consumer market
Laws and regulations
Pollution Control
Taxes
Transportation
Purpose
Product/services
Brief history
Proposed future operations
Market plan
Assessment of competition
Personal
Insurance
            Kind you can buy
            Benefit to ...
operating procedures
service Domain
Where would your product pr services go?
financial data
Loan appreciation
Capital
Balance sheet
Breakeven Analysis
            -
cash flow
income potential
            revenue
            income acquired

Appendix
Tax returns
            Requested for past 3 years
Personal financial statement
Franchise contract
Lease or perhaps agreement for buildings
résumés of owners
Other contracts or commitments
            From Suppliers
            From Venders

Any business has Objects you are required...
Management – effective and efficient use of resources
            effective – to do a job
            efficient – to do it efficiently (different ways of measuring efficiency) [lowest cost {time, money, satisfaction])
Leadership – the quality and complicity to take strategic decisions, over seas operations, and bring about change
5 functions
planning
organization
staffing
directing
controlling

planning – systematic process for progress from current state to the state of the business operation

Objective: a defined purpose to be pursued
            specificity of which determines the level at which it moving towards the goal