Outline: Chapter 7
Monitoring Financial Performance
 Tracking
assumptions
 Establishing milestones
 Using numbers to manage
 Financial statement analysis
 Ratio analysis
 Working with accountants
Copyright 2013 Cornwall, Vang & Hartman
Table 7.1
Sample List of Assumptions
Assumption
Measurement Technique
30 calls per sales person per month.
Sales staff will keep a log of sales calls.
One in ten sales calls results in
proposal.
Enter proposals to prospective clients in
the sales activity log.
One third of proposals results in order.
When a customer places an order, this
will be noted in the sales log.
Each order averages ten units.
The size of each order will be noted in
the sales log.
Customers make an average of one
order per month.
The date of each order is noted in the
sales log.
An average of one customer will stop
ordering each month.
Contact to see if this client intends to
make any future orders.
Using Numbers to Manage
Financial Statement Analysis
 Ratio Analysis

 Liquidity ratios
 Activity ratios
 Profitability ratios
 Solvency and coverage ratios
Copyright 2013 Cornwall, Vang & Hartman
Medical Products, Inc. Income Statement
Exhibit 7.1
2011
Net Sales
2010
10,979.0
100.0%
9,013.0
100.0%
Cost of goods sold
5,440.0
49.5%
4,644.0
51.5%
Gross Profit
5,539.0
50.5%
4,369.0
48.5%
Research and Development
1,053.0
9.6%
914.0
10.1%
Selling Expense
1,200.0
10.9%
1,000.0
11.1%
General and Administrative Expense
2,825.0
25.7%
2,358.0
26.2%
Total Operating Expenses
5,078.0
46.3%
4,272.0
47.4%
Operating Income (EBIT)
461.0
4.2%
97.0
1.1%
(146.0)
-1.3%
(95.0)
-1.0%
50.0
0.4%
38.0
0.4%
Total Other Income (Expense)
(96.0)
-0.9%
(57.0)
-0.6%
Net Income before Taxes
365.0
3.3%
40.0
0.5%
(124.1)
-1.1%
(13.6)
-0.2%
240.9
2.2%
26.4
0.3%
Interest Expense
Interest Income
Income Taxes
Net Income
Copyright 2013 Cornwall, Vang & Hartman
Medical Products, Inc. Income Statement
Exhibit
7.2
`
2011
Net Sales
$
10,979
$
Increase
Increase
2010
$ Change
% Change
9,013
1,966
21.8%
Cost of goods sold
5,440
4,644
796
17.1%
Gross Profit
5,539
4,369
1,170
26.8%
Research and Development
1,053
914
139
15.2%
Selling Expense
General and Administrative
Expense
1,200
1,000
200
20.0%
2,825
2,358
467
19.8%
Total Operating Expenses
5,078
4,272
806
18.9%
Operating Income(EBIT)
461
97
364
375.3%
(146)
(95)
(51)
53.7%
50
38
12
31.6%
Total Other Income(Expense)
(96)
(57)
(39)
68.4%
Net Income before Taxes
365
40
325
812.5%
(124)
(13)
(110)
853.8%
26
214
692.6%
Interest Expense
Interest Income
Income Taxes
Net Income
$
241
$
Copyright 2013 Cornwall, Vang & Hartman
Medical Products, Inc. Balance Sheet
Exhibit 7.3
ASSETS
Cash and cash equivalents
2011
$ 799.0
2010
$ 706.0
Net Accounts Receivable
1,572.4
1,176.0
Inventories
1,427.0
1,310.0
49.0
73.0
Total Current Assets
3,847.4
3,265.0
Property and Equipment
4,188.0
3,441.0
Prepaid Expenses
Less depreciation
Net Property & Equip.
TOTAL
(2,854.0) (2,750.0)
1,334.0
691.0
$ 5,181.4 $ 3,956.0
LIABILITIES AND EQUITY
Note payable to bank
2011
$
2010
1,551.0 $ 1,252.0
Accounts payable
437.0
383.0
Accrued expenses
668.0
334.0
lease obligations
58.0
22.0
Income taxes payable
124.1
13.6
Total current liabilities
2,838.1
2,004.6
215.0
47.0
3,053.1
2,051.6
41.0
41.0
1,677.0
1,677.0
410.3
186.4
2,128.3
1,904.4
Long-term liabilities
Total Liabilities
Common Stock
Additional paid-in capital
Retained earnings
Total shareholders' equity
TOTAL
$
5,181.4 $ 3,956.0
Copyright 2013 Cornwall, Vang & Hartman
Working with Accountants
Internal versus external accountants
 Internal accountants

◦ Bookkeeper
◦ Controller
◦ CFO

Hiring external accountants
◦
◦
◦
◦
◦
Get referrals
Judge compatibility with entrepreneur & staff
Industry knowledge
Clear billing policies
Effective communication key once hired
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 8
Day-to-Day Cash Flow Management and Forecasting







Why is cash flow different from net income?
Why is accrual-based income statement
important?
How is cash flow measured?
Interpreting a statement of cash flows
Investors’ and creditors’ use of the cash flow
statement
Effective cash management
Emotional side of cash flow management
Copyright 2013 Cornwall, Vang & Hartman
Measuring Cash Flow
Cash Flow from Operating Activities
 Cash Flow from Investing Activities
 Cash Flow from Financing Activities

Copyright 2013 Cornwall, Vang & Hartman
Medical Products, Inc. – Statement of Cash Flows
Exhibit 8.1
Cash flow from operating activities
$
Collections from customers
10,000
Payment for inventory
(20,000)
Payment for operating expenses
(10,000)
Payment of interest
(100)
Net cash flow from operating activities
(20,100)
Cash flow from investing activities
Purchase of equipment
(36,000)
Cash flow from financing activities
Issuance of common stock
100,000
Proceeds from note payable
15,000
Net cash flow from financing activities
115,000
Net cash increase (decrease)
58,900
Beginning cash
0
Ending cash
58,900
Copyright 2013 Cornwall, Vang & Hartman
Medical Products, Inc. Statement of Cash Flows – Direct Method
Exhibit 8.2
2011
Cash Flows – Operating
Activities
Collections from
customers
10,582
2011
Cash flows from
Financing Activities
Net change in capital
9,000
lease obligations
Borrowings on note
38
payable to bank
Interest received
Payments for
inventories
Payments for
operating expenses
(5,503)
(4,616)
Dividends paid
Net cash provided by
(4,000) financing activities
Payments for taxes
(13)
(5) Net change in cash
Payments for interest
Net cash provided by
operating activities
Cash flows from
Investing Activities
Purchases of property
and equipment
Net cash used in investing
activities
50
2010
(146)
354
(4,500)
2010
204
10
299
100
(17)
(15)
486
95
93
8
(95) Cash beginning of year
706
698
438 Cash end of year
799
706
(747)
(525)
(747)
(525)
Copyright 2013 Cornwall, Vang & Hartman
Medical Products, Inc. Statement of Cash Flows – Indirect Method
Exhibit 8.3
2011
Cash Flows – Operating
Activities
Net Income
Adjustments to reconcile
net income to net cash
provided by operating
activities:
240
Depreciation
Changes in operating assets
and liabilities:
104
Accounts Receivable
(396)
Inventories
(117)
Cash flows from Investing
Activities
Purchases of property and
26
equipment
Net cash used in investing
activities
Cash flows from Financing
Activities
Net change in capital lease
100
obligations
Borrowings on note
payable to bank
(525)
(747)
(525)
204
10
299
100
(17)
(15)
486
95
93
8
Cash beginning of year
706
698
Cash end of year
799
706
Dividends paid
Net cash provided by financing
(125) activities
24
Accounts Payable
54
40
Accrued Expenses
334
224
110
5
354
438
2010
(747)
177
Prepaid Expenses
Income Taxes Payable
Net cash provided by
operating activities
2011
2010
(10) Net change in cash
Copyright 2013 Cornwall, Vang & Hartman
Example of Cash Flow Over Life Cycle of Business
Figure 8.1
Profits
0
Cash flow
Start-up to Early Stage
Growth Stage
Maturity
Copyright 2013 Cornwall, Vang & Hartman
Reasons for Cash Flow Problems







Difficulty in collecting receivables
Seasonality of sales
Unexpected variation in sales
Policies on how payments are made to
suppliers
Large expenditures up front for customer
projects
Capital projects
Ineffective inventory management
Copyright 2013 Cornwall, Vang & Hartman