small business finance exam 3

what should a list of assumptions include

- hours of operation - nature and extent of employee use - details regarding business model - info to define revenue, expenses, assets, liabilities, and equity

what does the accounts receivable turnover allow us to see

how fast a company turns its credit sales into cash

what is the inventory turnover ratio determining

how fast a firm is moving inventory and it indicates how many times per year on average a company sells / replaces all inventory

what is the return on assets ratio (ROA/ ROI)

how much money is being earned on an asset/ investment

what is the return on equity ratio

how much profit a firm is earning on amounts invested in the company / profits retained by owners

what is the goal of market research

if performed by entrepreneur prior to the start of a business is to identify and understand all potential customers of the business

what are pro forma statements used for

to develop internal budgets for the business, plan for its future, and make sure their are resources avaliable to grow, and determine if the venture is worth pursuing

what are the 4 basic methods of financial statement anaylsis

vertical , horizontal, ratio, breakeven

what combination gives us the most complete picture in financial statement analysis

vertical and horizontal

what are liquidity ratios

working capital is the capital required to sustain operations and support business growth after a company's start up phase

what is ratio analysis

form of evaluation that uses a variety of ratios to determine the health of a business

what are profitability ratios

help potential investors and creditors determine how much of an investment will be returned each year via earnings

when estimating sales for a proposed entity it is important to remember:

- as much as possible sales need to be built from the bottom up rather than estimated from the top down - an entity's sales often dont begin in the same month, the same quarter, or even same year - sales for most entities start at some sort of base level and then slowly gain momentum over time - sales can only exist to the exist of the a new entity's ability to deliver products and services

a business plan is also necessary to complete with the following components

- business concept / model - operational & organizational structures - marketing plan - growth plan - pro forma statements

a proper feasibility analysis is required to be completed with a financial plan composed of what aspects

- detailed accounting of the amt of start up capital required by the business and how and when it is used - expected product pricing - expected short / long term profitability - expected working capital needs - sources of capital - expected return on investment - breakeven anlysis

what does research in industry research include

- reading trade journals and other trade association publications - attending industry trade shows to assess which companies currently dominate, the up and coming, and individual industry experts - talking to industry experts and asking open ended questions - reading competitors annual reports and other relevant competitor information - talking to those who sell or service competitors products or services - talking to those who use the companies products and services - buying and using competitors products and services

what would a preliminary list of startup up cost look like

- rent - utilities - business insurance - store design / decoration - clothing inventory - checkout counters / furniture - clothing racks and shelving - computers and software - security system

market research should be completed by the following:

- talk to those who sell the service or product - talk to industry experts - perform primary market research

how many year out do most investors typically request pro forma statements be

3-5 years into the future

what is one of the largest assets on the balance sheet

accounts receivable

what is salvage value

amount for which an asset is expected ti be sold for after a business has fully depreciated the asset and ceased using it

what are pro forma statements

an entrepreneurs best attempt to predict future operational effectiveness, profitability, and cash flows, often with the goal of obtaining funding

what is current ratio

an indicator of a company's ability to pay its obligations in the short term

each cost that is associated with the start up phase is either an

asset or expense

what is the next step after you have drafted a preliminary list of costs

attach a number - realistic, researched dollar amount - to each item

what are different ways to calculate a breakeven point

breakeven sales units, breakeven revenue, breakeven price

what is vertical financial statement analysis on the balance sheet

by using the total assets as a constant and dividing every figure on the balance sheet by total assets

what is primary market research

conducted by communicating directly with current / potential customers and this is the BEST source

what is the pre revenue pro forma balance sheet doing

creating a foundation upon which the rest of pro forma statements will be based upon

what is horizontal financial statement analysis on the income statement

determination of the percentage increase or decrease in each line item on a financial statement from the base period to another period

what is the purpose of financial statement analysis

determine where the company underperformed in the past, determine where the company can improve, determine if the company should be created

what is a common mistake for estimating sales

estimating sales based off how much market share you plan to capture

why are the pre revenue balance sheets important

every entrepreneur needs to know how much cash is available at the end of the start up phase immediately before operations commence

how can creating this list help you understand if you need to seek outside investment

if you are estimating 150,000 in costs but you are only needing 129,000 then you have enough on your own and do not need to seek outside investors

what is the times interest earned ratio

illustrates the relationship between the amount of interest a company must pay its creditors on an annual basis and company's annual operating income (higher is better)

what is the debt to total assets ratio

indicates what percentage if a business's assets are owned by creditors

what is the debt to equity ratio

indicates what percentage of a business's assets are financed with debt compared to equity

what is market research

involves the identification of one or more specific markets and determination of their relatives sizes and characteristics

what sources can you use to complete horizontal , vertical, ratio analysis

it is unlikely a direct competitors will show you financials so you can look to publicly held companies or sources like: yahoo industry center, value line, mergent online, IBIS World, bizminer, trade journals, general business publications

what are the types of ratio analysis

liquidity, activity, leverage, profitability

what must be completed before the pro forma income statement can be drafted

list of assumptions

what are findings that vertical analysis on the balance sheet might bring

might find that the majority of assets are fixed and they are financed through equity / debt

historical financial statements are used for comparing the companys current performance to

past performance & the performance of other company's operating in the same industry

what is a breakeven analysis

point at which that company's net income = 0

what are comparative financial statements

present more than one period or date of financial statements information side by side

what is vertical financial statement analysis on the income statement

process of using a single line item of a financial statement as a constant and determining how all other line items relate as a percentage of that constant

what is industry research

researched performed to provide insight regarding the size and complexity of an industry, number and nature of participants, and the economical, political, market, and the factors that effect it

there are also detailed schedules and pro forma statements that must be curated including

schedule of start up costs, proforma prerevenue balance sheet and start up phase expense statement, list of assumptions, depreciaton, COGS, estimated sales schedules, pro forma balance sheet and income statement after first revenue

what are activity ratios

show how effectively a business is managing its assets

what do pro forma statements indicate

the amount of capital that is needed to start a company, tell us when the entity will become profitable, and inform us regarding the ongoing financial position of the company

breakeven analysis is most relevant if

the company is adding a new product or service to the company or starting a new venture

what are conditions to the pro forma pre revenue balance sheet

the entrepreneur's approach to creating these statements for an entity will vary somewhat depending on the entity in question, its business model, and industry

what is gross margin illustrating

the percentage of each dollar of net sales that remains after COGS has been considered

what are the 3 traditional pro forma statements

the pro forma income statement, balance sheet, and statement of cash flows

what are leverage ratios indicating

the role of debt in financing the activities of the company

how can credit cards be characterized

they are not true accounts receivables because purchases utilizing these types of credit cards are more or less immediately converted by a business into cash at business' local bank

is there a difference between horizontal financial statement analysis on the income statement and balance sheet

they are the same