Financial Literacy Literacy 101

The Beginning Balance Sheet lists the beginning balances of assets, liabilities, and equity.

Assets: Items of worth to the business. Examples include cash, inventory, land, and equipment.

Current assets: Assets that are either cash, will turn into cash, or will be used up within one year.

Cash: The amount of cash on-hand in the business.

Inventory: Items the business owns and intends to sell to customers.

Other Current Assets: The sum of all Other Current Assets accounts, excluding inventory.

Total current assets: The sum of all current assets.

Land: The property owned by the business, not including buildings.

Fixed Assets (net): All property including land, plant, and equipment owned by the business (net of depreciation).

Other assets (net): Deposits and start-up costs (net of amortization). Start-up costs are typically amortized evenly over 60 months.

Total assets: The sum of all assets.

Liabilities: The debt the business owes.

Current liabilities: The balance of debt the business must pay within one year.

Accounts payable (inventory): The amount owed for inventory purchased on credit terms from suppliers.

Line of credit: A short-term loan that extends the cash available to the business.

Notes payable: Formal loans due in less than one year.

Current maturities of long-term liabilities: The sum of principal payments from long-term debt due in less than one year.

Accrued Liabilities: This value includes all Accounts Payable accounts less Inventory Payable and all Other Current Liability accounts that have not been identified as line-of-credit accounts.

Total current liabilities: The sum of all current liabilities.

Long-term liabilities (net): The sum of principal payments from long-term debt due beyond one year (net of interest expense). Long-term liabilities are formal loans where the term of the loan is greater than one year.

Total liabilities: The total amount owed by the business.

Equity: The owner’s investment in the business.

Contributed cash: The amount of cash contributed to the business.

Assets transferred in: The total current market value of the assets contributed to the business.

Less debt transferred in: The amount of money owed on the assets contributed to the business.

Total equity: The total investment in the business by the owner(s).

Total liabilities and equity: The total investment in the business by the owner(s) and creditor(s).

Debt-to-equity ratio: A financial ratio that describes the relationship between total liabilities and total equity.

The Profit & Loss (P&L) report lists income, expenses, and net income.

Income: Revenue generated from the sale of products and services to customers.

Less cost of goods sold: Costs associated with the products and services sold.

Material: The raw material cost of the products and services being sold.

Other: Any costs of products or services other than material and labor.

Gross profit: Sales minus cost of goods sold.

Operating expenses: Any expenses other than cost of goods sold required to run the business.

Bad debt: The portion of credit sales indicated in the Company section that will be uncollectible.

Amortization: The amount of start-up costs expensed each month.

Depreciation: The amount of the property, plant, and equipment costs expensed each month.

Total operating expenses: The sum of all operating expenses.

Operating income: Gross profit minus total operating expenses.

Interest expense: The cost of borrowing money. The interest portion of loan payments.

Net income before taxes: The amount gross profit exceeds expenses before estimated taxes (C Corporations only).

Estimated taxes: The amount of net income estimated to pay federal and state taxes (C Corporations only).

Net income: Operating income minus interest expense and estimated taxes (C Corporations only). For all other business types, net income is operating income minus interest expense.

The Balance Sheet lists the balances of your assets, liabilities, and equity as of a specific date.

Assets: Items of worth to the business. Examples include cash, inventory, land, and equipment.

Current assets: Assets that are either cash, will turn into cash, or will be used up within one year.

Cash: The amount of cash on-hand in the business.

Accounts receivable (net): Money owed to the business by customers for credit sales (net of bad debt).

Inventory: Items the business owns and intends to sell to customers.

Total current assets: The sum of all current assets.

Fixed Assets (net): The sum of property including land, plant, and equipment owned by the business (net of depreciation).

Other assets (net): Deposits and start-up costs (net of amortization). Organizational costs are normally amortized, or expensed, over 5 years. Deposits are not amortized.

Total assets: The sum of all assets.

Liabilities and Equity: The debt the business owes and the owner’s investment in the business.

Current liabilities: The balance of debt the business must pay within one year.

Accounts payable: The amount owed for inventory purchased on credit from suppliers.

Line-of-credit: A short-term loan that extends the cash available to the business.

Notes payable: Formal loans due in less than one year.

Current maturities: The sum of principal payments from long-term debt due in less than one year.

Accrued Liabilities: This value includes all Accounts Payable accounts less Inventory Payable and all Other Current Liability accounts that have not been identified as line-of-credit accounts.

Total current liabilities: The sum of all current liabilities.

Long-term liabilities (net): The sum of principal payments from long-term debt due beyond one year (net of interest expense). Long-term liabilities are formal loans where the term of the loan is greater than one year.

Total liabilities: The total amount owed by the business.

Equity: The owner’s investment in the business.

Total liabilities and equity: The total investment in the business by the owner(s) and creditor(s).

The Cash Plan lists the cash the business will generate from sales and use for expenses. The Cash Plan also shows how much cash will be left over or how much additional cash the business needs.

Cash receipts: The cash received from the sale of products and services. The time the business receives cash may be different from the time the Profit & Loss reports income if you plan on extending credit terms of net 30 or longer to your customers.

Operating cash expenses: Cash paid for the business’s purchases of inventory, supplies, labor, and all other expenses.

Inventory purchases: Cash paid for buying inventory.

Other costs of sales: Cash paid for all non-inventory costs directly related to sales.

Other expenses: Cash paid for all expenses not directly related to sales. These values are derived from the Expense worksheet.

Estimated taxes: Cash paid for estimated federal and state taxes (C Corporations only).

Total operating cash exp.: The sum of all operating cash expenses.

Cash from operations: The subtotal of cash generated by the business, which can be used for paying principal, interest, and owners.

Principal payments: Cash paid to reduce the principal balance on loans.

Interest payments: Cash paid for interest on loans.

Net cash after debt service: A subtotal showing the cash generated by the business that can be distributed to owners or reinvested in the business.

Distributions: Cash paid to owners (except C Corporations).

Change in cash: The net increase or decrease in cash from the beginning of the period.

Beginning cash: The cash at the beginning of the period.

Cash before borrowing: The cash balance before considering the need for additional borrowing.

Line of credit activity: The additional cash required by the business.

Ending cash: The total cash available at the end of the period.

A Ratio Analysis is a series of profitability, liquidity, activity, and leverage ratios. A ratio is simply the comparison of one number to another.

Profitability ratios: Profitability ratios are used to determine the business’s ability to earn income.

Gross profit margin: The amount by which income is greater than the cost of goods sold shown as a percentage (or as cents per dollar of income). This is the amount from each sale that the business has for other expenses, such as rent, utilities, phone, and owners. (Gross profit/Income)

Operating profit margin: The percent by which income is greater than the cost of all expenses, except for interest expense and taxes. This will indicate if the financial plan will generate sufficient returns to pay creditors and owners. (Operating income (Net income + Interest expense + Estimated taxes)/Income)

Net profit margin: The percent by which net income is greater than the cost of all the expenses, and indicates the planned return to owners for each income dollar. (Net income/Income)

Return on equity: The relationship between net income and the owner’s stake in the business or the amount of net income earned for every dollar invested. Return on equity should be higher than return on assets. If not, the owners are supporting the lenders instead of the other way around. (Net income/Equity)

Return on assets: The relationship between net income, adding back inter¬est expense, and the assets in the business. Planned borrowing makes sense when this value is greater than interest rates on loans. (Net income + Interest expense/Average Total assets)

Liquidity ratios: Liquidity ratios are used to determine if the business has adequate current assets to pay current liabilities.

Current ratio: The relationship of current assets to current liabilities. The current ratio indicates the business has enough current assets to pay its current liabilities. (Total current assets/Total current liabilities)

Quick ratio (Acid-test): The relationship of cash and accounts receivable (net) to total current liabilities. This value helps indicate how easily the business could pay all of its current liabilities if they came due in a very short time. (Cash + Accounts receivable (net)/Total current liabilities)

Working capital ratio: The relationship of working capital to income. Working capital is defined as total current assets minus total current liabilities. (Total current assets – Total current liabilities)/Income)

Activity ratios: Activity ratios are used to determine how well the business manages current assets, pays off current liabilities, and uses assets to generate income.

Accounts receivable days: The number of days’ sales remaining in accounts receivable. (Ending Accounts receivable (net)/Average daily credit sales)

Inventory days: The number of days’ sales in inventory. (Ending Inventory/Average daily cost of goods sold)

Inventory turnover: The number of times inventory is replaced. (Cost of goods sold/Average Inventory)

Income-to-assets: The relationship of income to total assets. (Income/Average Total assets)

Leverage ratios: Leverage ratios are used to determine how the business is financed.

Debt-to-equity: The relationship of total liabilities to equity. (Total liabilities/Equity)

Debt ratio: The relationship of total liabilities to total assets. (Total liabilities/Total assets)

Times-interest (TI) earned: The number of times operating income can pay interest expense. (Operating income/Interest expense)

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