| A | B |
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| What time period does the Income Statement Represent? The Balance Sheet? | The income statement represents activities over a period of time, such as a year. The balance sheet is an instantaneous snapshot |
| What does "turnover" mean in Asia and Europe | Sales Revenue |
| What does "turnover" mean in the U.S. | COGS/Avg. Inventory (tells how many times you sell your average inventory) |
| Gross Profit | Sales Revenue-COGS=Gross Profit |
| How meaningful is an income statement to a small business owner? | Income statement is very insignificant. What is important is the Net Cash Flow |
| Why do some business owners purposefully understate inventory? | Because inventory and profit are directly related, therefore if you understate inventory, you also understate profit and have to pay fewer taxes. |
| What is the problem with understating inventory? | It will decrease business value and borrowing power because profit has been understated |
| What is the relationship between assets, liabilities and equity | assets=liability+equity |
| Who has a claim on a company's assets? | Creditors and Owners |
| In regards to personal financial statements, what is personal net worth? | It is your personal equity or your assets-your liabilities |
| True or False: Personal finances and Small business finances are often combined but they SHOULD be kept seperate | True |
| What is the trend in Net Worth since the financial crisis? | When the real estate market fell out, people owed more than their house was worth. Thus they have negative Net Worth (due to one asset, real estate) |
| Corporate Questions in Financial Planning | What business are we in? what business should we be in in the future? How should we invest in it? Do we have the cash to meet the obligations? |
| What happened with Shipping in the Recession | Shippers took ships off the water to avoid fixed costs. Now that the economy is ramping up logistics firms must make a risk return decision as to whether or not to refloat the ships |
| What is a budget do? | It guides the firm's operations & financial needs (allocates resources throughout the firm) |
| What does the budget depend on? | Accurate financial statements |
| What is a Capital Budget? | Spending plans for major asset purchases (depreciable assets) like buildings, machines, etc |
| What is the "idle cash" problem | when you have surplus cash that is just sitting in the bank waiting to be used |
| What is the solution for the "idle cash" problem | short term investments |
| What is a Cash Budget? | monthly forecast of inflows and outflows; usually the last budget prepared |
| What is the most important budget for small businesses? | Cash budget |
| If you are making a business plan, how many years out should you prepare financial statements | 3 years; would want yearly income and balance sheets, monthly cash flow statements |
| Are credit card card sales considered cash or credit sales? | cash |
| What is a commitment fee? | it is a fee you pay the bank for them to promise x dollars in credit in the future |
| What is the Master Budget? | The budget that ties all other budgets together and summerizes proposed financial activities |
| What is the most detailed and useful budget? | Master Budget |
| There are 3 overarching types of budgets, what are they? | Financial (source & use of cash); Operating (planned ops in financial terms); nonmonetary budget (planned ops in nonfinancial terms) |
| What % of assets can be typically found in A/R? | 25% or more |
| Would you prefer to pay employees monthly or weekly? | monthly because you want to cut down administrative costs |
| True or False: All business want to pay late and collect early | true |
| When controlling credit operations, there are two management strategies, what are they? | Careful screening of credit history or lax screening and aggressive collection methods |
| What is a gateway fee? | this is a fee to access a credit card site's system (paid by firms) |
| What two fees should you balance when considering what credit card to do business with as a firm? | Up front fee and per transaction fee |
| When is a UPS driver's day over? | When he empties his truck |
| What is a Payday Center? | Very short term (daily) loans that charge enormous interest rates that tend to quickly pile up (300-500% IR common) |
| What are Usary Laws? | laws that outlaw excessive interest rates by banks (don't apply to payday centers) |
| What is the least expensive and most convenient form of ST financing? | Trade Credit, also called Accounts Payable |
| 2/10 net 30 | Trade Credit terms: This means that if you pay off your account within 10 days, you receive a 2% discount; after 10 days, you must pay full price; you must pay within 30 days |
| If you have the terms 2/10 net 30 and you always pay on the 30th day; how much extra have you paid over one year? | 2%*(360/20) = 36%; you have foregone 36% in savings (note that the equation is always the first number, the discount, multiplied by (360/30:last number-10:middle number) |
| What is a Promissory Note? | It is a promise of payment from the buyer to the supplier that the supplier can then sell at a discount to the bank |
| True or False: A loan from a family member/friend should be treated the same as a bank loan. | True: always write down the loan, schedule repayment, and agree on SPECIFIC terms; not doing so can ruin relationships |
| When dealing with a commercial bank, why should you not necessarily look for the lowest rate? | There may come a time when you need a lot of credit. You will need a solid relationship with a banker who wants you to succeed to get the line |
| Why do firms need short term funds? | Meet monthly expenses; unanticipated emergencies; cash-flow issues; expand current inventory; temporary promotional programs |
| Why do firms need long term funds? | new product development; replacing capital equipment; mergers or aquisitions; expansion into news markets; building new facilities |
| True or False: You can secure a loan with collateral (car or home) or with accounts receivable | True: some companies pledge their A/R as to recieve credit |
| What is a Revolving Credit Line? | Guaranteed credit if you need it, this goes with a commitment fee |
| What should be the last resort for receiving a short term loan? | Commercial Finance Companies like GE Capital; they require more collateral and charge a higher interest rate |
| What is the largest Commercial Finance Company (world and US)? | GE Capital; operates in 47 countries |
| What is Factoring Accouts Receivable? | This occurs when you actually sell your A/R to the bank(factor); This is very costly but is often needed as a last resort for small businesses; increasingly popular in global trade; shifts collection risk to bank |
| What is Dirty Flow? | this occurs when a country's government manages the exchange rate of their currency rather than allowing market forces to handle it (China artificially devalues the Yen) |
| What occured between IBM, AMD, and China? | AMD wanted to invest in China but lacked capital; China has a poor banking system so AMD couldn't raise $ locally; IBM factored AMD's A/R that was 4 months from maturity |
| Explain the 4 party factor system referring to international trade. | US exporter(seller) signs agreement with US Factor(export factor) in which the US Factor guarantees the Exporters A/R less a fee. The US Factor then contacts the Russian Factor (import factor) who finds customers in Russia, called the Russian importer (buyer). The pupose of this is to hedge collection risk through relationships |
| What is Commercial Paper? | Short term financing for large corporations (les than 270 days but usually 30-90); These are unsecured promissory notes of $100k or more; only available to firms with excellent credit |
| What % of small businesses use Credit Cards for start up or expansion? | 50%; there are high rates and fees, this is extremely risky |
| Name several types of ST financing. | Trade credit (A/P); Family & Friends; Commercial Banks (secured or unsecured); Commercial Finance Companies; Factoring; Commercial Paper; Credit Cards |
| What are Lending Institutions? | sources of long term financing; bank, insurance company, commercial finance company, or pension fund |
| With regard to Lending Institutions for long term financing, factor affects the terms of the loan the most? | asset collateral |
| What is the time frame for Lending Institution Loans? | 3-7 years typically, up to 20 years |
| True or False: with loans from Lending Institutions, operational restrictions and financial covenants are typical. | True |
| True or False: Lending Institution LT loans bear a higher interest rate than do ST loans | True; rate depends on the firms collateral, market interest rate, and the firm's credit rating |
| What is a bond? | long term IOU with a face value of $1000, a set coupon rate, and a fluctuating price |
| What is another name for an unsecured bond? | debenture |
| What is the difference between Authorized shares and Outstanding shares? | Authorized shares represent the largest number of shares a firm can issue (agreed on upon inception and can only be changed by shareholder vote). Outstanding shares are the shares that have actually been issued |
| Do firms ever return to private after going public? | Yes, often times to avoid SEC restrictions |
| What are the benefits of financing long term operations with retained earnings | No interest or divident payments, no underwriting fees, no dilution |
| What is the disadvantage of financing long term operations with retained earnings | Opportunity cost: if you limit growth to RE you are also limiting opportunities |
| What is the last resort of long term financing? | Venture Capitalism |
| Who uses Venture Capitalism? | many tech firms, few entrepreneurs |
| True or False: When a Venture Capitalist invests in your firm, he expects to do so once | False; VCs expect to give their firms one or two additional installments |
| What is that advantage of Venture Capitalism? | You will grow your firm larger and faster than you could otherwise |
| What is the Disadvantage of Venture Capitalism? | there so many caviats in the deals; that paired with the loss of ownership means that, in the end, the only thing you still own is an idea |
| If rate of return is lower than the after tax cost of debt, are you effectively using leverage? | No, ROR must be above after tax cost of debt |
| How do you value a firm per the Pirkle method? | 1) find Enterprise Value 2) find Current Value 3) find Future Value 4) express FV and CV as a % of EV |
| Enterprise Value Equation | EV= Debt+Equity (market value) |
| Current Value Equation | CV=NI/WACC or After Tax Profit/ROA |
