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4 ASSET MANAGEMENT In a business, assets are like fuel. But how effectively are you managing them? Formulas 1 & 2 have the answer. ACCOUNTS RECEIVABLE TURNOVER INVENTORY TURNOVER Accounts Receivable (\$75,000 x 365 days) \$27,375,000 \$900,000 = 30.4 \$31,025,000 \$540,000 = 57.4 It takes 30 days Net Sales Figure to collect bills Inventory of \$85,000 x 365 days Cost of Goods Sold 57 days to turnover or sell the inventory What It Shows How many days it takes to collect money owed to you. A lower answer is better. The Number Source Balance Sheet and Income Statement The Goal To reduce turnover time The Plan Right now, the Accounts Receivables turnover is \$75,000/30 days, or \$2,250 per day. If Accounts Receivable are collected just four days faster, (in 26 days instead of 30), the result is \$9,000 in extra cash (4 days x \$2,250). What It Shows How many days it takes to turn over (or sell) your inventory. A lower answer is better. The Number Source Balance Sheet and Income Statement The Goal To reduce excess inventory The Plan Inventory now turns every 57 days, equaling \$1,491 per day. (Ending inventory of \$85K divided by 57 days) If inventory is re-stocked every 30 days instead of 57, you cut 27 days from the formula. At \$1,491 per day, the result is a \$40,257 savings in inventory expenses. BALANCE SHEET Year End /As of Dec. 31 Assets Current Assets: Cash ,000 Accounts Receivable ,000 Inventory (ending) ,000 Total Current Assets ,000 Non-Current Assets Fixed Assets ,000 Less Accumulated Depreciation.... (25,000) Fixed Assets (net) ,000 Advances to Owners ,000 Total Non-Current Assets ,000 Total Assets ( ) ,000 Liabilities Current Liabilities Current Portion of Long-Term Debt.....6,000 Note Payable ,000 Accrued Taxes ,000 Accounts Payable (A/P) ,000 Total Current Liabilities ,000 Long-Term Liabilities/Loan Payable... 54,000 Total Liabilities (150+54) ,000 Capital or net worth Owners Investment ,000 Retained Earnings ,000 Total Capital ,000 Total Liabilities & Capital (204+87) ,000 Remember: Both statements must reflect the same time period. INCOME STATEMENT January 1- December 31 Sales Net Sales ,000 Cost of Goods Sold: Beginning Inventory ,000 Purchases ,000 Labor ,000 Total ,000 Less: Ending Inventory (85,000) Cost of Goods Sold (625 less 85) ,000 Gross Profit (900 less 540) ,000 Expenses Operating Expenses: - Selling Expenses ,000 - General & Administrative ,000 Total Expenses ,000 Operating Income (360 less 260) ,000 Interest Expense ,000 Profit Net Profit before taxes (100 less 20) ,000 Less: All Income Taxes ,000 Net Profit (80 less 27) ,000

6 DEBT MANAGEMENT LEVERAGE OR DEBT-TO-WORTH RATIO Total Liabilities Total Capital Investing in a business is serious business. To find out how much money owners have invested versus lenders, plug your numbers into Formulas 6 and 7. ACCOUNTS PAYABLE TURNOVER Accounts Payable at \$41,000 x 365 days Purchases \$204,000 \$87,000 = 2.34 \$14,965,000 \$350,000 = days What It Shows Whether a company has enough equity. The Number Source Balance Sheet The Goal An answer of 3 or lower is preferred. This company is leveraged 2.34 times, meaning for every \$1 owners have invested, lenders and creditors have invested \$2.34. The Plan Decrease leverage by increasing the amount of money earned and kept in retained earnings. BALANCE SHEET Year End /As of Dec. 31 Assets Current Assets: Cash ,000 Accounts Receivable ,000 Inventory (ending) ,000 Total Current Assets ,000 Non-Current Assets Fixed Assets ,000 Less Accumulated Depreciation.... (25,000) Fixed Assets (net) ,000 Advances to Owners ,000 Total Non-Current Assets ,000 Total Assets ( ) ,000 Liabilities Current Liabilities Current Portion of Long-Term Debt.....6,000 Note Payable ,000 Accrued Taxes ,000 Accounts Payable (A/P) ,000 Total Current Liabilities ,000 Long-Term Liabilities/Loan Payable... 54,000 Total Liabilities (150+54) ,000 Capital or net worth Owners Investment ,000 Retained Earnings ,000 Total Capital ,000 Total Liabilities & Capital (204+87) ,000 What It Shows How quickly a business pays its suppliers. The Number Source Balance Sheet and Income Statement The Goal To pay bills faster. Lower numbers (30 days or less) are better. This business now takes 43 days to pay its suppliers. The Plan Take advantage of discounts that often apply if a bill is paid early. 2%, 10 days, net 30 days means 2% may be deducted from an invoice if it s paid in 10 days. For example, if the \$350,000 in annual purchases was paid in 10 days, the savings would be \$7,000 yearly. INCOME STATEMENT January 1- December 31 Sales Net Sales ,000 Cost of Goods Sold: Beginning Inventory ,000 Purchases ,000 Labor ,000 Total ,000 Less: Ending Inventory (85,000) Cost of Goods Sold (625 less 85) ,000 Gross Profit (900 less 540) ,000 Expenses Operating Expenses: - Selling Expenses ,000 - General & Administrative ,000 Total Expenses ,000 Operating Income (360 less 260) ,000 Interest Expense ,000 Profit Net Profit before taxes (100 less 20) ,000 Less: All Income Taxes ,000 Net Profit (80 less 27) ,000

7 PROFITABILITY CASH FLOW TO CURRENT MATURITIES OR DEBT SERVICE RATIO Net profit of \$53,000 plus \$13,000 in depreciation (number created for this example) \$66,000 \$6,000 = \$11 Current Portion of Long Term Debt For every dollar of payments \$11 is available to pay it No matter what kind of product or service you provide, turning a profit is the goal. So how are you doing? Formulas 8 and 9 give you the bottom line. PROFIT MARGIN ON SALES Net Profit \$53,000 \$900,000 =.0588 Net Sales 5.9% profit margin when converted to a percentage What It Shows Your ability to pay term debts after owner withdrawals. The Number Source Balance Sheet and Income Statement The Goal An answer of 2 or more is preferred. New businesses use one year s worth of loan payments instead of the Accounts Receivable figure. The Plan To increase debt service, do three things: 1) refinance at a lower rate, 2) ask if you can pay interest only on loans for a period of time, and 3) consolidate debt in order to pay it back over a longer period of time. BALANCE SHEET Year End /As of Dec. 31 Due over the next year or \$500 per month Assets Current Assets: Cash ,000 Accounts Receivable ,000 Inventory (ending) ,000 Total Current Assets ,000 Non-Current Assets Fixed Assets ,000 Less Accumulated Depreciation.... (25,000) Fixed Assets (net) ,000 Advances to Owners ,000 Total Non-Current Assets ,000 Total Assets ( ) ,000 Liabilities Current Liabilities Current Portion of Long-Term Debt.....6,000 Note Payable ,000 Accrued Taxes ,000 Accounts Payable (A/P) ,000 Total Current Liabilities ,000 Long-Term Liabilities/Loan Payable... 54,000 Total Liabilities (150+54) ,000 Capital or net worth Owners Investment ,000 Retained Earnings ,000 Total Capital ,000 Total Liabilities & Capital (204+87) ,000 What It Shows The percentage of net profit for every dollar of sales. The Number Source Income Statement The Goal The higher the number, the better. The Plan To increase your profit margin, follow three courses of action: raise prices, lower the cost of goods and reduce expenses. INCOME STATEMENT January 1- December 31 Sales Net Sales ,000 Cost of Goods Sold: Beginning Inventory ,000 Purchases ,000 Labor ,000 Total ,000 Less: Ending Inventory (85,000) Cost of Goods Sold (625 less 85) ,000 Gross Profit (900 less 540) ,000 Expenses Operating Expenses: - Selling Expenses ,000 - General & Administrative ,000 Total Expenses ,000 Operating Income (360 less 260) ,000 Interest Expense ,000 Profit Net Profit before taxes (100 less 20) ,000 Less: All Income Taxes ,000 Net Profit (80 less 27) ,000 Loan to be paid back over time. \$60K loan with \$54K due over time and \$6K due in one year - Current Portion of Long-Term debt

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