Finance for Non-Financial People

1. Finance for Non-Financial People with Chris Freeman

2. Chris Freeman Sr. Tax Accountant Chris has been with Grundfos for 4 years. Graduated from Kansas University Masters degree in Accounting Married with one little boy, Alex who is 7.

3. What you will learn: • Comprehend payback and break-even analysis, the time value of money, and how to calculate net present value • Improve financial literacy through understanding of cash and accrual methods, calculation of accounts receivable, and accounts payable • Determine adequate testing for liquidity, leverage, and solvency through ratio analysis • Record and analyze business transactions from source documentation

4. What is in an Annual Report? • Balance sheet • Income statement • Owner’s equity • Cash Flow • Notes

5. materials testing training salesmen marketing production design & engineering

6. Before we can talk about everything that goes into us selling a pump, we need to go over some basic terms and concepts. Profit and loss Assets Liabilities Owner’s Equity

7. Basic Accounting Equation Assets = Liabilities + Owners’ Equity What’s an asset? economic resources like cash tangible items a value that can be converted to cash all of the above Within the balance sheet, the assets generally are listed at either cost or FMV (fair market value) – what the company would receive if it decided to sell its inventory, fixed assets, and intangible rights.

8. Current Assets • Code 251 - Inventory • Code 260 - Accounts Receivable • Code 269 - Prepaids • Code 280 - Cash

9. Non-Current Assets These assets are expected to benefit the company over a period greater than one year. In general, they are not as easy to convert to cash as current assets. • Code 225 – Long Term Investments • Code 207 – Goodwill • Code 208 – Intangibles • Code 220 – Fixed Assets

10. Fixed Assets

11. If an asset is purchased for $50,000, and it has a depreciable life of 10 years then what is the depreciation impact the first year?

12. Which of these is not a current asset? cash pre-paids fixed asset inventory

13. What is a liability? a. a type of law suit b. our newest pump product c. tangible item d. debt

14. Current liabilities are due within 1 year. Example include: Code 361 - Accounts Payable (current) Long term liabilities are not due until after 1 year. Example: Code 324 - Loans from Banks or Parent Companies

15. Hi, I’m Jane. $1000 invested $400 Buys Fabric on Credit $100 Uses 90% of fabric Makes 20 dolls Sells all for $15 ea.

16. What were Jane’s assets and liabilities? Assets Cash $900 Fabric $10 Sewing machine $400 Accum. Depr. (80) Total $1230.00 Liability Accounts Payable $100

17. Owner’s Equity • Difference between total assets and total liabilities (PLUG) • Represents owners’ claim to company assets once liabilities are paid • Sometimes referred to as Net Worth • Capital – value of the owners’ original investment in the business • Retained Earnings – cumulative amount of earnings since the beginning of the business. • Dividends reduce Retained Earnings

18. How much is Jane’s equity as owner? Owns (Assets): $1,230 Owes (Liabilities): $100 Must be worth (Equity) $1,130

19. If a company has $1M loss in year 1, $2M profit in year 2, and $4M profit in year 3, what is the value of the company’s retained earnings after year 3?

20. If a company has $10M in assets, and $12M in liabilities, how much is the owners equity? What does this mean?

21. Successful Budgets What financial objectives must we accomplish? Who are the customers? Will customers sustain the sales volume we need? What additional tools do our employees require to meet the objectives? What internal business processes must we excel or improve?

22. Characteristics • Goal driven • Consensus • Aggregated up • Control Mechanism

23. How can a 12 month budget mechanism be used to control spending?

24. Analyzing Financial Statements Matching Principle Revenues are recognized when they are earned, and expenses needed to earn the revenue must be matched with it Consistency Once a particular accounting method is adopted, it will not be changed from period to period

25. Revenue Jane sells $500 worth of dolls to Big Behemoth Corp. on Dec. 10, 2011 but does not get the payment for them until Jan. 5, 2012. When should the sale “hit the books”? Grundfos sells $10,000 in UPS 15-58 pumps to a distributor in mid-December. The invoice is paid in mid-January. When does that sale “hit the books”?

26. Which is more conservative? • Taking a position that would lead to $1,000 more income in the current year • or a $500 more expense?

27. What is the inventory worth? Jane’s Plush Toys builds 1000 dogs for total cost of $15,000 Big movie hit allows selling price of $50 ea. The inventory’s historical cost is $15,000

28. Financial Statements Which of these is an example of a financial statement? balance sheet income statement statement of owner equity all of the above

29. What was the basic accounting equation we learned ? Assets = Liabilities + Owners’ Equity

31. Income Statements Amount that can be used to pay operating expenses, interest, taxis and profit Cost of producing the goods or services sold

32. True or False: The balance sheet shows a picture of the business over time.

33. Yea ratios! I’ve been waiting for this section! • Internal analysis of items on balance sheet • Comparative analysis of a company’s ratios at different time periods and comparison to other firms in the same industry

34. Solvency ratios measures the company’s ability to use assets and profits to meet its debt obligations. • Quick ratio • Current ratio • Current liabilities to net worth • Total liabilities to net worth Types of ratio analysis measurements Solvency Efficiency Profitability

35. Quick ratio Measures the extent to which a business can cover its current liabilities = (Cash + Accounts Receivable) Current Liabilities a business is said to be liquid when its ratio is 1:1

36. Current ratio Measures the degree to which current assets cover current liabilities Does the company have sufficient current assets to cover the liabilities that are due soon? = Current Assets Current Liabilities

37. Liability ratios Current Liabilities to net worth ratios Total Liabilities to net worth ratio Shows how all of the company’s debt relates to the equity of the owner or stockholders How capable is the company to pay off its total debts? = Total Liabilities Net worth (or Equity) Indicates the amount due creditors within a year as a percentage of the owners’ or stockholders’ investment How capable is the company to pay off immediate debts? = Current Liabilities Net Worth (or Equity)

38. Why are the quick and current ratios important? What quick ratio result should a company strive to attain?

39. Efficiency ratios • Collection period • Sales to inventory • Assets to sales • Sales to net working capital Types of ratio analysis measurements Solvency Efficiency Profitability

40. Collection period Helpful in analyzing the collectability of accounts receivable, or how fast a business can increase its cash supply Companies want to continue to lower this ratio. The lower the ratio, the more efficient the company is in collecting receivables (and thus increasing cash inflows) = Accounts Receivable x 365 (days) Sales

41. Sales to Inventory (turnover) Measures how fast inventory is moving the cash flow into the business Low ratio shows that the company may struggle to make money from some of its inventory Consistently worsening ratios may indicate business is slowing or that the company has some worthless inventory on the books = Annual Net Sales Inventory

42. Assets to Sales Rates sales to the total investment that is used to generate those sales A year/year comparison can be misleading if a company has made significant changes in total assets within the year (such as large purchase of fixed assets) = Total Assets Net Sales

43. Sales to Net Working Capital Measures the number of times working capital turns over annually in relation to net sales How efficient is the working capital making money for the company = Sales Net working capital Net Working Capital = Current Assets-Current Liabilities

44. Which sales to inventory ratio result is better? A 10:1 ratio or a 1:1 ratio?

45. Profitability ratios • Return on sales (profit margin) • Gross profit margin • Return on assets • Return on net worth (return on equity) Types of ratio analysis measurements Solvency Efficiency Profitability

46. Return on Sales This very popular ratio measures profits after taxes on the year’s sales This is the % profits earned per each dollar of sales = Net Profit after Taxes Net Sales

47. Gross Profit Margin Measures the marginal profit earned on each additional dollar of revenue = (Revenues – Direct Costs) Revenues Direct Costs = material costs and direct wages

48. Return on Assets Return on Net Worth Measures the ability of a company’s management to realize an adequate return on the capital invested by the owners = Net Profit after Taxes Net Worth The key indicator of profitability = Net Profit after Taxes Total Assets

49. Would you be concerned if your company had a negative ratio for the Gross Profit Margin Ratio? What would this result say about your company?

50. Why are financial ratios important?