MGT Midterm

Tax Abatement

a legal reduction in taxes by a government. - provided by state and local governments, primarily to encourage specific activities that are expected to improve blighted areas or to provide additional employment

Operating Activities

activities involved in producing and selling goods and services - include all the function that are performed to create your product or service

Receivables

amounts owed to a business for merchandise that was sold on credit.

Variable Costs

change in direct proportion to the level of activity of the business.

Point-of-Sale System (POS)

hardware and software combinations that integrate inventory management directly into accounting software.

Linear Forecast

revenue growth is never linear

Hockey Stick Forecast

revenue will start slow and then boom with no force or cause

Factory Receivables

selling the rights to collect accounts receivable to an entity outside your business

Sales Budget

shows the projected future level of sales in units multiplied by the sales price per unit.

Growth Trap

a financial crisis is caused by a business growing faster than it can be financed. - growing will introduce more money, but you need more money to grow.

Variable Costs

those costs that change with each unit produced (ex: raw materials)

Fixed Costs

those costs that remain constant regardless of quantity of output (ex: rent)

Variance

(1) the difference between an actual and budgeted revenue or cost. (2) permission from a government organization to act differently than the laws state. - no one or no computer can estimate future results - management determines range of acceptable variances - variance analysis: the process of determining the effect of price and quantity changes on revenues and expenses. - variances occur because of one of two events: (1) prices are different from what was estimated, or (2) quantities are different from what was estimated. - variances can show 2 things: (1) the effect of changes in prices and (2) the effect of changes in quantity used or produced.

Disconnect Rate

1 / (average customer life in months)

Credit Reporting Agency

A business that collects, collates, and reports information concerning an entity's use of debt. - 4 primary CRAs: Equifax, Experian, Innovis and TransUnion - the information collected and reported by the CRAs is limited to 3 areas: identifying information, credit information, and public information.

Capital Expenditures

Capital expenditures also represent a cost for companies. Capital expenditures include the purchase of a piece of equipment or a building. These types of purchases are not expensed immediately but are allocated to expense over their useful lives.

Time out of cash/Cash Runway

Cash / Operating Cash Outflow Per Month (Or Burn Rate) The cash runway represents the number of months for which the firm's current cash balance would last if the firm were to continue operating in its current manner.

Four C's of Borrowing

Characters of the managers of the business Capacity of the business to repay both principal and interest on time Conditions of the industry and economy in which the business operates Collateral that can be used to secure the loan

Categories of Fixed Costs

Committed and Discretionary

Inventory Turnover

Cost of Goods Sold/ Average Inventory A turnover of twelve would indicate that the company is selling and restocking its inventory every thirty days.

Current Ratio

Current Assets/Current Liabilities

EBIT

Gross profit less operating expenses is often referred to as earnings before interest and taxes (EBIT). It is usually considered a key measurement of management's ability to utilize a firm's assets to generate income.

Three Mistake in Forecasting Revenue

Linear Forecast, Hockey Stick Forecast, 20/80 vs 80/20

Mixed Costs

Many costs do not behave simply as fixed or variable costs. Such costs are termed mixed costs, as they have both a fixed component and a variable component. Business cell phone expense is a good example of a mixed cost. There is a basic cost, i.e., a monthly charge that must be paid just to have telephone service available. However, there is an additional, variable portion of telephone expense that is based on the actual service used, such as text and data messaging. Sales staff salaries might also be mixed.

Burn Rate

Operating cash flow from the current month's statement of cash flow it represents the amount of cash used that month just for running the business

Breakeven Calculation

Quantity = Fixed Costs/(Price per Unit-Variable Cost per Unit): This is used to calculate number of units to breakeven

Microlender

SBA-approved partner that offers SBA-guaranteed microloans to eligible small businesses. These loans require much less paperwork than regular SBA or bank loans, and are for amounts under $50,000.

Accounts Receivable Turnover

Sales / Average Accounts Receivable Average accounts receivable (calculated using a simple average of the current period balance and the previous period balance in this example) are used because sales are over a period of time, while the accounts receivable balance on the balance sheet is at a point in time. A turnover of twelve would indicate that accounts receivable are being collected every thirty days, or twelve times a year.

Collateral

Something of value given or pledged as security for payment of a loan; collateral may consist of financial instruments, such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings. - collateral value is simply the estimated market value of the assets of your business

Discretionary Fixed Costs

The key trait of a discretionary fixed cost is that it is usually annual in nature and can be cut back for short periods of time without too much impact on the company. An example would be a company-sponsored wellness program.

Committed Fixed Costs

Two key traits of committed fixed costs are that they are long term in nature and are difficult to cut back to zero without impacting profitability or long-term goals. Generally, committed fixed costs include investments in facilities, equipment, and basic infrastructure.

Statement of Cash Flows

a statement of the sources and uses of cash in a business for a specific period of time. Also referred to as cash flow statements. - can be either direct or indirect statements - direct statement is developed solwy from the cash records of the business (only those things bought and sold) -- GAAP specifies the direct method should be used - indirect statement starts with net income and adjusts accruals and deferrals to provide cash flow information that can be easily reconciled to the other financial statements - all these financial reports present information that has already happened. - financial accounting was created and is conducted for the benefit of owners in the business who are not involved in the management of operations of the business. (for investors and financiers, not managers) - 6 items that must be reported in the statement of cash flows: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net effect of foreign exchange rates Net change in cash balance during the period Non-cash investing and financing activities

Accredited Investor

as defined by the SEC, "any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of sale of the securities to that person: banks, business development companies, companies worth more than $5 mil, an executive of the firm making the offering, or an individual with a personal net worth of more than $1 mil"

Sophisticated Investor

as defined by the SEC, people who "have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment".

Business Entity Concept

concept that a business has an existence separate from that of its owners. - distinction between money borrowed for business and money borrowed for personal needs - legal implications - implicit in all business regulations

Outsourcing

contracting with people or companies outside your business to do work for your business

Cash Budget

identifies when, how, and why cash is expected to come into the business, and when, how and why it's expected to leave. - The quality of these expectations is important. Making more realistic or accurate estimates about expected incomes and expenses means that the budget becomes a more useful tool for understanding and managing your cash flow and financial statements.

Financial Reports

income statement, balance sheet, statement of cash flows

Dividends

payments of profits to the owners of corporations.

Trade Discounts

percentage discounts from gross invoice amounts provided to encourage prompt payment. - given by suppliers and vendors to encourage customers to make timely payments on account. - in effect, you are borrowing from the vendor at the discount rate for the number of days that you may wait to pay after the cutoff date for receiving the discount.

Utilization Ratio

percentage of time doing billable work

Working Capital

term that refers to the current assets of a firm, such as cash, accounts receivable, and inventory.

Capital Budgeting

the process of deciding among various investment opportunities to create a specific spending plan - the goal is to improve the quality of decisions about how to best use the scarce resources of the business

Retained Earnings

(1) the sum of all profits and losses that the business experiences from formation. (2) a balance sheet item in owners equity that reflects the wealth created by the business from its formation.

Quick Ratio/Acid Test

(Cash+Accounts Receivable+Short-Term Investments)/Current Liabilities measures the ability of a company to meet the current liabilities over the next thirty to ninety days versus the next year with the current ratio.

Tax Accounting

- done by following tax laws and regulations that are made by various governments. - final product of tax accounting is a set of returns, forms, and schedules - primary value of tax accounting for a business is to avoid penalties for noncompliance and to legally minimize how much money it has to pay in taxes

Financial Accounting

- most common form of accounting when referring to accounting - based on GAAP

Supply Chain

A way to think about the line of distribution of a product from its start as materials outside the target firm, to its handling in the target firm, to its handling by sellers, with placement into the hands of customers.

Language of Business

Accounting is the language of business Much of what is communicated in business is accounting Necessary to be successful

Accelerator

An organization that supports start-ups, typically of a particular type (e.g., Internet, biotech, fashion, sports, women-owned firms, etc.) with a financial investment, free or inexpensive office space, mentoring, a variety of free or low-cost support services, and other resources. - The goal of an accelerator is to accelerate a start-up from its early stages to being ready to pitch for investment. Most accelerators take an equity stake in the companies they help.

Stakeholders

Stakeholders are interested parties beyond the owners of a business who have a stake in the decisions made in that business and in the outcomes of those decisions. Necessary for a company to exist

Return on Investment (ROI)

a capital budgeting equation used to measure the relationship between initial investment and the profits that are expected to be received from making the investment. - measure of the relationship between the initial investment and the profits that are expected to be received from making the investment - ROI = (avg. annual profits)/(avg. investment)

Interest

a charge for the use of money, usually figured as a percentage of the principal.

Capital Lease

a lease in which at the end of the lease period the asset becomes the property of the lessee, possibly with an additional payment

Operating Lease

a long-term rental in which ownership of the asset never passes to the person paying for the lease

Discounts for Prompt Payment

a reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner. - you must carefully balance the cost of providing the discount with the cost of obtaining needed cash from other sources.

Balance Sheet

a statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity). - explicitly details the accounting equation for your business

Financing Activities

activities through which cash is obtained from and paid to lenders, owners, and investors. - actions taken by management to finance the operation of the business

Payables

amounts owed to vendors for merchandise or services purchased on credit.

Safety Stock

an amount of inventory carried to ensure that you will not run out of inventory because of fluctuating levels of sales

Short-Term Debt

any debt that must be paid in less than one year from the date of the financial statement on which it is reported.

Factoring Receivables

borrowing money secured by a firm's accounts receivable. - this should be considered only if other, less expensive methods to increase cash flows have not been sufficient. - factoring is a method of borrowing against receivables. - to factor receivables, your customers must have good credit ratings.

Deposits and Progress Payments

cash payments received before product is completed or delivered. - can greatly smooth the receipt of cash in businesses which otherwise have highly variable levels of cash flows

EBITDA

earnings before interest, taxes, depreciation, and amortization used because it tends to reflect the cash profits that are generated by the operations of the business Depreciation and amortization are ignored because they are noncash items

Grant

gift of money made to a business for a specified purpose - available from the U.S. gov't, most state gov'ts and semiprivate and private economic development agencies - purpose of grants varies with the entity that makes the grant

Pledging Receivables

giving a third party legal rights to debts owed your business in order to provide assurance that borrowed money will be repaid - when you do this, your business is liable only for the borrowed amount and accrued interest on the loan, regardless of the amount that is subsequently collected from your customers.

Unsecured Debt

loans that do not allow a lender to seize specific assets in the event of nonpayment. - not backed by collateral, risk of losing the loan if not paid back - does not give a lender the right to seize any specific assets if the loan in the event of nonpayment.

Secured Debt

loans that provide the lender with the legal right to seize specific assets in the event of nonpayment. - mortgages and car loans, gives those who are giving loans the power to take away the car/house - The loan is backed by collateral

Equity Capital

money contributed to the businesses in return for part ownership of the business

20/80 vs 80/20 mistake

most of your time should be spent forecasting revenues (80%) and less time on expenses (20%)

Hockey Stick Forecast

most of your time should be spent forecasting revenues (80%) and less time on expenses (20%)

Pro Forma Statements

planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows. - detailed plan for future operations and is the standard against which actual results are compared to assess the performance of individual managers, operations, departments, and divisions.

Marketing Mix

product positioning, pricing, promotion, and distribution (place), also known as the 4Ps of marketing

Service as a Software (SaaS)

refers to an Internet-based program that you would use in work or leisure. - These are paid for by time frame, project, or some measure of usage.

Depreciation

regular and systematic reduction in income that transfers asset value to expense over time.

Accrual Accounting

revenues and expenses are recognized when the activities associated with them occur rather than when cash is received or expended.

Going Concern Concept

the accounting concept that a business is expected to continue in existence for the foreseeable future.

Accounting Equation

the statement that assets equals liabilities plus owner's equity → assets = liabilities + owners equity - owners of a business do not own the assets of the business. The business itself owns them. The owners have a claim on the assets (the claim is owners equity).

Bootstrapping

using low-cost or free techniques to minimize your cost of doing business. - how the great majority of small business start-ups are funded

Managerial Accounting

- used for future business operations - no set of formal rules - Plan for future business activities through standard budgeting and profit planning - standard budgeting: a method for business forecasting and control in which specific expected volumes and prices per unit are used - profit planning: the process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes - method of organizing and formatting business planning is called pro forma financial statements: planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows. - this is a detailed plan for future operations and is standard against which actual results are compared to assess the performance of individual managers, operations, departments and divisions.

Physical Inventory

a count of all the inventory being held for sale at a specific point in time

Limited Liability Company

a legal form of business organization that is created by filing required documentation with a state government. - LLCs have a choice, under federal tax law, of being taxed as either corporations or partnerships. - is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. - Passthrough taxation of a partnership or sole proprietorship, but the limited liability of a corporation

Liquidity

a measure of how quickly a company can raise money through internal sources by converting assets to cash. - measures the ability of a company to meet both short term and long term obligations - level of risk that a loan will not be paid as contracted

Income Statement

a statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time - the primary source of information about a business's profitability - shows the amount of revenues minus its expenses which equals the net income - revenues - expenses = net income - single step format → lists all revenues and gains together, then lists all expenses and loses together (little detail) - multiple step format → lists revenues from operations separately from other income and gains.

Economic Order Quantity (EOQ)

a statistical technique that determines the quantity of inventory that a business must hold to minimize total inventory cost

Perpetual Inventory

a system of recording the receipt and sale of each item as it occurs. - drawback is high cost in time needed for constant record keeping

Angel Investor

a wealthy individual who invests in companies in relatively early stages of development.

Two Type of Financial Goals: Income and Wealth

income is the cash that is available from the business to pay the entrepreneur's salary wealth is the value of the business if sold. entrepreneurs may also build wealth through savings from the salary they draw, but for most entrepreneurs their single most valuable asset by far is their business.

FICO Score

is a measure of consumer credit risk, has become a fixture of consumer lending in the US Scores ranges from 300-850 Scores in 670-739 range is "good" credit history and creditors will consider favorable FICO created by Fair and Isaac Company

Payback Period

the amount of time it takes a business to earn back the funds it paid out to obtain a capital asset

Replacement Value

the cost incurred to replace one asset with an identical asset

Book Value

the difference between the original cost of an asset and the total amount of depreciation expense that has been recognized to date.

Net Present Value (NPV)

the difference between the present value of cash inflows and the present value of cash outflows over a specified period of time. - NPV analyses are based on the concept that a dollar to be received right now has more utility (value) than does a dollar to be received at some time in the future. - to perform NPV analysis, only cash flows are considered - decision is to accept the largest positive NPV.

Disposal Value

the net amount realized after subtracting the costs of getting

Costs of Capital

the percentage of cost of obtaining future funds

Consignment

the practice of accepting goods for resale, without taking ownership of them and without being responsible to pay prior to their being sold.

Just in Time Inventory (JIT)

the practice of purchasing and accepting delivery of inventory only after it has been sold to the final customer - attempts to reduce inventory levels to the absolute minimum by (1) accepting inventory only as it is sold, (2) assembling product in the absolute minimum time possible, and (3) shipping product to the customer immediately upon completion.

Fair Market Value

the price at which good and services are bought and sold between willing sellers and buyers in an arms-length transaction

Periodic Inventory

the process of physically counting business assets on a set schedule

Investing Activities

the purchase and sale of land, buildings, equipment, and securities. - include the acquisition and disposal of property, plant, equipment and investment securities of other firms.

Generally Accepted Accounting Principles (GAAP)

the standardized rules for accounting procedures set out by the Financial Accounting Standards Board and used in all audits and submissions of accounting reports to the government - GAAP places transactions into categories and produces specific financial reports that consist of (1) how profitable the business is. (2) the value of the things the business owns and who has a claim on that value. (3) how much and from where money was received and how much and to whom money was paid.

Whole of Life Costs

the sum of all costs of capital assets, including acquisition, ownership, operation, and disposal

Cash-to-Cash Cycle

the time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale. - repeating flow of money

Current Ratio

the value of current assets divided by current liabilities. - common ratio used to estimate liquidity