FINANCE 101

FINANCE 101

FINANCE IS

a)    Art and Science of watching money into and out of a business

b)   Accounting is ensuring the data is complete and accurate

c)    Business needs sufficient revenue.

d)   Profit

(1) Bring in more than you spend.

1.     Revenue over expenses.

a.     Profit margin

i.       Revenue capital,

ii.     How much spent to capture in percentage terms

iii.    ((Revenue-Cost) /Revenue) x 100 = Percent Margin

iv.    Can never be 100%

e)    Markup Formula

i)     ((Price-Cost)/ Cost) x 100= Percent Markup ∞

(1) The higher the margin, the stronger the business

f)     Value Capture

i)     Is retaining a percentage of the value in every transaction.

ii)    Value Created into profit

(1) IE, business grows 1million,

(a) You charge 100,000=10% of the value created.

g)    Value Capture

i)     Two Schools

(1) Maximization

(a) Capture as much value as possible in each transaction

(b) Known as nickel and diming revenue

(i)   Customers purchase from you because they are receiving more value than they are giving

(2) Minimization

(a) Capture as little value as possible while sufficient

(i)   Not short-term gain. preserves customers for long term sufficient.

h)   Sufficiency

i)     Enough profit, that the people running feel it worthwhile to keep it going

(1) Ramen Food-Cockroach mode

(2) Business is not about maximizing profits

(a) Profits are a means to an end

(i)   Money is a tool

ii)    Tracking Financial Sufficiency

(1) TMR

(a) Target Monthly Revenue

(i)   Bring in more than your TMR, You’re sufficient.

i)     Valuation “Venture Deals”

i)     Is an estimate of the worth of a company

(1) Higher Revenue

(a) Stronger Profit Margins

(i)   Higher Bank Balance

1.     Promising Future

2.     Higher Valuation

a.     Helps with investors

i.       To Raise Capital

j)     Cash Flow Statements

i)     An examination of a company’s bank account over time

ii)    More in than out.

(1) Time Factor

(a) A day

(b) A week

(c)  A month

(d) A Year

(i)   Short Periods Tracks

1.     Cash

(ii) Long Periods Tracks

1.     Performance

k)    Cash moves in and doesn’t lie

(1) Operations

(a) Selling Offers

(b) Buying Inputs

(2) Investing

(a) Collecting Dividends

(b) Paying Capital Expenses

(3) Financing

(a) Borrowing to pay back

l)     Free Cash Flow

i)     Metric for amount of cash a business collects

(1) Minus Cash Spent for

(a) Capital Equipment and

(b) Assets (operation costs)

(i)   More cash flow Means

(ii) Less investment in Capital

1.     More Cash: Less Resilient

m)  Income Statement

i)     Cash Isn’t Profit

(1) Cash Flow Statements aren’t enough

(a) Track

(i)   Sales

(ii) Expenses

1.     Track on Accrual Basis, Not Cash Flow And Expense Statements

a.     Accounting “Matching Principle”

i.       Revenue is recognized when a sale is made + expense with the sale incurred within the same period.

(2) A good accountant

(a) Has great judgment to produce spectacular Income Statements

1.     Profits and Losses

2.     Operating Statement

3.     Earning Statements

a.     Income Statements

i.       Are estimations of Profits over a period of Time, When Revenue Matches expenses.

ii.     Revenue-Cost of Goods Sold- Expenses- Taxes= Net Profit

4.     Amortization Matches Expense to Revenue

(3) Balance Sheet

(a) Snapshot of Business owes

(b) An estimate of Net Worth

(i)   When Balance Sheet was created

1.     Assets-Liabilities= Owners Equity

a.     Assets are things of value the company owns

i.       Products, equipment, Stock, etc

b.     Liabilities are not yet discharged obligations

i.       Loans Financing, Etc

2.     Simple Setup

a.     Cash on Hand + Estimated Market Value of Assets-Debt and obligations

3.     Complex Setup

a.     Common Assets

i.       Cash, Accounts Receivable (extended credit to customers) Inventory, Equipment and Property

b.     Liabilities

i.       Long and Short Debt, accounts payable (credit extended to you) and obligations

c.      Owners Equity

i.       Value of Company’s stock capital from investors, retained earrings (profit that hasn’t been paid to shareholders)

(c)  Assets= Liabilities + Owners Equity

(i)   When a company borrows money it then receives cash borrowed

1.     Creates Cash Flow Statement

a.     Could be a good month

b.     Or Just a Loan

i.       The company has more assets but more debt

ii.     No change to net worth

n)   Financial Ratios

i)     Comparison of two elements

(a) Good for quick comparison vs industry average and change over time

1.     Profitability Ratios

a.     Ability to generate profits

b.     Higher revenue, lower costs, Higher Profitability Ratios

2.     Leverage Ratios “Debt to Equity”

a.     How to Use debt

b.     Diving total liabilities by shareholder equity

c.      Gives you dollars borrowed for every $1

                           i.     If High

1.     Means leveraged (not good)

                          ii.     Interest Covered

1.     Profit to interest on debt.

3.     Liquidity Ratio

a.     Ability to pay bills

                           i.     Current Ratio (Assets Divided by Liabilities)

1.     Quick Ratio

a.     Assets – Inventory/Current Liabilities

4.     Efficiency Ratios

a.     Managing assets and liabilities good for inventory management

                           i.     How long to sell out inventory

                          ii.     Day sales outstanding how long to collect cash from sales

1.     Good for Production

2.     Managing Inventory

a.     Planning Future capital investments

5.     Cost Benefit Analysis

a.     Create to make better decisions which

b.     Leads to changes

                           i.     To see if the benefits

1.     Accumulate and outweigh the cost in

a.     Time

b.     Energy

c.      Resources

    i.     Enjoyment Overall