Mastering Cash Flow for Business Success

1. MM 2.03 – Implement accounting procedures to track money flow and to determine financial status. MM 2.00Understand Financial Analysis

2. Preparation of documents Preparing financial statements is very important when running a business, so that you can see the financial position and profitability of your company. It is also required when you need to attract investments or loans. The two most widely used financial statements are the balance sheet and the income statement.

3. Define • Cash Flow--movement of real money into and out of your business cash account (not just money owed) • The Cash Flow Statement is one of the main financial statements. • traces the flow of funds (or working capital) into and out of your business during an accounting period. • prepared either monthly or quarterly. An annual statement is a must for any business.(http://www.accountingcoach.com/online-accounting-course/06Xpg01.html)

4. Describe the importance of adequate cash flow into a business • Adequate cash flow means that enough cash is coming into the business to pay bills on time • Inadequate cash flow can close a business • If a company is consistently generating more cash than it is using, the company will be able to grow and save money to better face bad economic times.

5. Sources of Cash Flow • Operating Activities (selling the company’s products) • Investing Activities (using money to make more money) • Financing Activities (collecting interest from loans to customers or other businesses) (http://edwardlowe.org/index.elf?page=sserc&function=story&storyid=6332)

6. Sources of Expenses (cash flow out) • Salaries/Payroll • rent • insurance • raw materials • supplies • other operating expenses • loan payments • capital expenditures • tax payments • utilities

7. Explain how cash flow statements tell when where and how much money will flow into an out of a business keeps track of how much cash it has on hand to pay its expenses and buy assets. Reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations.

8. Explain how cash flow statements tell when where and how much money will flow into an out of a business • lists who paid in, when & how much • Lists how much paid out, when & how much

9. How do new and established businesses estimate their cash flows? • New businesses: • Forecasts for income and expenses • estimates based on industry standards or realistic assumptions • Established businesses: • Estimate cash flow figures based on historical data (previous years) • Existingdata and current records

10. Items found in Cash Flow Statement • Beginning cash • Sales/Services Income • Sale of Assets • Customer deposits • Loans • Contributed Capital • Available Cash • Salaries • Other operating expenses • Loan payments • Capital Expenditures • Tax Payments • Total Cash Out • Net Cash Flow http://www.businessplans.org/cashflow.html

11. Explain how cash flow is calculated The cash flow statement organizes and reports the cash generated and used in the following categories: • Operating activities- • converts the items reported on the income statement from the accrual basis of accounting to cash. • Investing activities- • reports the purchase and sale of long-term investments and property, plant and equipment. • Financing activities- • reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends. • Supplemental information- • reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.

12. EBIT + Depreciation – Taxes = Cash Flow (EBIT is “earnings before interest and taxes”) http://www.ehow.com/how_4420972_calculate-operating-cash-flow.html • Earnings = revenues

13. Balance Sheet • Balance sheets are one of the most useful forms of accounting documents • can be used in everything from individual home budgets all the way through to multilevel corporations. • shows income (revenue), against expenses and equity (ownership). • also known as a "statement of financial position“ • reveals a company's assets, liabilities and owners' equity (net worth). • The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements.

14. Time for a Vocabulary Break- Copy the following terms in your notes… This is a grade.

15. Assets - Any item of economic value owned by an individual or corporation , especially that which could be converted to cash Net worth – Net worth is the difference that exists between what is owed and what assets are in the possession of the individual, business, or other entity. Liabilities –describes an obligation. It refers to money owed to complete a transaction, a debt that has yet to be paid, or products or services that have been paid for but have not yet been rendered. Income statement - A financial statement that measures a company's financial performance over a specific accounting period. Revenue- The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. Total Revenue- the total receipts of a firm from the sale of any products.

16. Define the following terms • Depreciation - A decrease or loss in value, as because of age, wear, or market conditions. • Accounts receivable - is money owed to a business by its clients (customers) and shown on its Balance Sheet as an asset. • Accounts Payable - Accounts payable records amounts that a company owes to suppliers, but has not paid yet (a form of debt), sometimes referred as trade payables. • Shareholders equity - A firm's total assets minus its total liabilities. • Retained earnings – The accumulated net income retained for reinvestment in a business rather than being paid out in dividends to stockholders

17. Define the following terms • Par Value – The face value of an investment bond. • Capital surplus – Equity which cannot otherwise be classified as capital stock or retained earnings. • Treasury stock – The portion of shares that a company keeps in their own treasury. • Reserve – holdings of deposits in central banks plus currency that is physically held in bank vaults • Accounting equation – is the formula for representing the relationship between assets, liabilities, and net worth.

18. Cost of goods sold- The direct costs attributable to the purchase/production of the goods sold by a company. • Gross Profit- A company’s revenue minus its cost of goods sold. • Operating Expenses- A category of expenditure that a business incurs as a result of performing its normal business operations • Goodwill- An account that can be found in the assets portion of a company's balance sheet • Depreciation- A decrease in an asset’s value caused by unfavorable market conditions. • Amortization- The paying off of debt in regular installments over a period of time (like a mortgage)

19. Current Assets • converted into cash within one year in the normal course of business. • Current assets include: • cash, short term investments • accounts receivable, • inventory, • marketable securities, • prepaid expenses (insurance) • other liquid assets that can be readily converted to cash.   • used to pay outstanding debts and cover liabilities without having to sell fixed assets.

20. What are fixed assEts? Fixed assets can NOT be easily converted into cash yet are worth real money. Often they are used as collateral for a loan. Fixed assets are among the most important assets that a company holds, for they represent major investments of financial resources. Indeed, fixed assets usually comprise the majority of a business's total assets. Intelligent allocation of resources to meet a business's land, facilities, and large equipment needs can bring it assets that will serve as cornerstones of successful operation for years to come.

21. Fixed vs. Current Fixed assets would take significant time to convert to cash (large equipment, buildings, land, etc.) Current assets can more easily be converted to cash in a short time

22. Liabilities • Current Liabilities are the things a company owes, and needs to pay. • For example, accounts payable for goods, services or supplies that were purchased for use in the operations • Bonds, mortgages and loans that are payable over a term exceeding one year would be fixed liabilities or long-term liabilities.

23. current ratio= current assets / current liabilities. • A ratio higher than “1” means that current assets, if they can all be converted to cash, that would be more than sufficient to pay off current obligations. • The higher the ratio, the more assets the company has than liabilities, this means they are doing very well usually. • Current liabilities includes things such as • short term loans, accounts payable, dividends and interest payable, bonds payable, consumer deposits, and reserves for Federal taxes.

24. Equity • Equity is the calculation of how much the owner has invested in the business. • When the owners are shareholders, the interest can be called shareholders' equity; • This means that the ownership equity spread is out among shareholders. ( Example, the people who own shares of stock in Google.) • The individual investor is interested not only in the total changes to equity, but also in the increase / decrease in the value of his own personal share of the equity. • Retained earnings = • (net income or loss + gains and losses + adjustments) – (cash dividends, property dividends, stock dividends and other amounts)

25. Assets – Liabilities = Equity

26. Sample Balance Sheet

27. Using a balance sheet It first lists what the company owns (assets). It then shows what the company owes (liabilities) then calculates net worth (equity) by subtracting liabilities from assets. At the bottom of each list is the total of that column. As the name implies, the bottom line of the balance sheet must always "balance." In other words, the total assets are equal to the total liabilities plus the net worth.

28. The ways a business can use a balance sheet • Balance sheets can be used to show potential lenders the health of the business so the company can get a loan. • Balance sheets can be used to help a business plan for its future.

29. Another Vocabulary Break…Add These to the list we started earlier • Minority Interests- A significant but non-controlling ownership of less than 50% of a company's voting shares by either an investor or another company • Discontinued Operations- A segment of a company's business that has been sold, disposed of or abandoned • Net Income- A company's total earnings (or profit).

30. Explain the purpose of an income statement. • summarize the profit-generating activities that occurred during a particular reporting period. • track its revenues, expenses and profits. • Income statement is also called • Profit and Loss Statement • Statement of Income and Expenses • Statement of financial performance • Earnings Statement

31. Sample Income Statement

32. Describe the categories of components on an income statement. • Revenue • Sales of products • Other income • Cost of Goods sold • Cost to produce or buy the products • Other expenses • Write-offs, amortization, taxes, etc. • Profits (gains and/or losses) • Gross • Net

33. Explain why an income statement is cumulative The primary purpose of the income statement is to report a company's earnings to investors over a specific period of time. Even if the income statement is done quarterly, the company still wants to track how it is doing throughout the year. It is cumulative because it also tracks the equity (ownership) of the company.

34. Explain who analyzes the information found in income statements. Managers, regulators, investors, owners and bankers could all use the income statement to see if a business is running successfully

35. Distinguish between depreciation expense and accumulated depreciation • Depreciation means that an item has lost value over time. (Think about what happens to the value of a car after you buy it). • Depreciation can increase due to an accident • It can be slowed or reversed if the item is repaired or becomes a collectors item • A Depreciation Expense is the current period's depreciation of the assets currently in service. It is shown on the income (P&L) statement as an expense. • Accumulated Depreciation shows how much value the item has lost since it was purchased