Exam 11: Creating a Successful Financial Plan

Concerning how much cash to have at startup, one rule of thumb is to have enough to cover operating expenses (less depreciation) for two inventory turnover periods.

A quick ratio of more than 1:1 suggests that a small company is overly dependent on inventory and future sales to satisfy its short-term debt.

Mini-Case 11-7: Sharps and Flats Anthony Gray has been interested in music since he was old enough to sit at the piano. He literally grew up with music, and he used his talent to earn his way through college. Anthony has grown tired of his job at a large music house in Houston and is seriously considering moving back to his hometown in Massachusetts to open his own small music shop. In researching this venture, Anthony notices that he must include a projected income statement in his loan application. Use the following statistics from Robert Morris Associates' Annual Statement Studies to answer the following question(s). Net sales 100.0 percent Cost of sales 59.9 percent Gross profit 40.1 percent Operating expenses 31.2 percent Net profit (before taxes) 8.9 percent -Using Anthony's target income of $23,000, construct a pro forma income statement for Anthony's proposed music shop. Net sales $258,427 Cost of goods sold 254,798 Gross profit 103,629 Operating expenses 80,629 Net profit (before taxes) $23,000

________ ratios help a business owner evaluate the company's performance and indicate how effectively the business employs its resources.

In order to reach profit objectives, entrepreneurs must be aware of their firms':

Define what a pro forma financial statement is. What are the two types a small business owner uses, and how are they created?

Which of the following is not a liquidity ratio?

A high debt ratio:

Refer to the following information to answer the question(s) regarding Anita Lupino's toy and game shop: Anita Lupino is planning to open her own toy and game shop. She has conducted a great deal of research at the local library, contacted the industry trade association, and has set up a meeting with a consultant at the SBDC next week. Before she goes to the SBDC, she wants to sketch out an estimated income statement. She reviews the following data from RMA's Annual Statement Studies: Costs of goods sold 57.3 percent of net sales Operating expenses 32.9 percent of net sales Gross profit 42.7 percent of net sales -If Anita's net profit target is $32,000, what level of net sales must she achieve?

Which of the following is an assumption of break-even analysis?

Ideally, a company reaches a point where increases in operating efficiency mean that expenses as a percentage of sales revenue flatten or even decline. This is referred to as:

The break-even point:

________ ratios indicate how efficiently the small firm is being managed.

According to one study, 23 percent of small business owners lack financial literacy to identify the cost that has the greatest impact on their companies.

The ________ ratio is a measure of the small company's ability to pay current debts from current assets and is the liquidity ratio most commonly used as a measure of short-term solvency.

Most firms calculate their quick assets by subtracting the value of their inventory from their current asset total.

The ________ ratio measures a company's ability to generate sales in relation to its assets.

Liquidity ratios, such as the current ratio and the quick ratio, tell whether a small business will be able to meet its short-term obligations as they come due.

Small businesses with high leverage ratios are more vulnerable to economic downturns, but they have greater potential for large profits.

Mini-Case 11-1: Bowden Brake Service (Part A) Jim Bowden, owner of Bowden Brake Service, is planning to expand his six-year-old brake service to include tune-ups and tire services. Based on budget estimates for the upcoming year, Jim expects net sales to be $825,000 with a cost of goods sold of $530,000 and total operating expenses of $210,000. From the budget he created, Jim computes fixed expenses to be $168,000, while variable expenses (including cost of goods sold) are $572,000. Jim is concerned that the new cost structure may damage his ability to produce a profit and he wants to perform a break-even analysis for the upcoming year to gain insight. -Help Jim compute the break-even point for his brake service.