Ba 101 1st EditionExam # 2 Study Guide, Lectures: 10 - 17Lecture 10 (February 10)Where do you get the money to start or run a business? You can borrow, reinvest some of your retained earnings, or sell stock, which dilutes the ownership of your company but also raises money. What do you do with the money you have on hand? - Operating: What you do with the money you have on hand to keep your businessrunning smoothly. Buying materials, paying workers, etc. are all operating costs. - Investing: Buying capacity is an example of investing in your business. Your investments pay off over the long term. What is investing in the long term? Short term investing?- Accounts receivable (credit sales to customers): short term- Inventory: short term- New product development: short term- Equipment (automation levels): long term- Facilities (additional capacity): long term- Buy other companies (not an option in foundation): long termWhat to do when you don’t have enough cash?- Borrow (take on debt) pay interest to use someone else’s money- Reinvest earnings: Retained earnings, use your own net income to finance your own investments- Sell stock: dilute the ownership of your company for a price- Bank Loans: apply, the risk (determined by your debt) influences the amount of interest you pay. More debt, more interest- Interest rates in foundation: All companies are facing the same market risk. Moredebt, pay more interest, longer the loan means higher risk and higher interest also. Equity Financing is another way to bring in more cash. Instead of borrowing funds you take on new owners by selling stock. This can dilute ownership and be a negative factor for a company, but you don’t need to repay the money. What are the commonly used stock terms?- Close: the value of a share at the end of a trading day- Change: how much higher or lower the price is today than yesterday (in foundation this is yearly)- Shares: the amount (number of shares) of outstanding stock- Dividends: the cash payment to owners- Yield: dividends divided by stock price- P/E or price to earnings ratio: closing price divided by EPS- EPS or earnings per share: net income divided by total sharesHow does stock work? If you as an individual purchase a share or shares of stock, you now own a piece of the company. This means you share in the risk and reward of the company, and benefit when the stock price goes up and when the company offers dividends. The company who issued the stock benefited by people buying it. They received money for the stock. Lecture 11 (February 12) What are the two product strategies in Foundation? How do they differ?Low tech strategy: keep it in the inner circle (pmf and size), only revise to manage the age, keep the age between 2-4 years, mtbf should be at 20000. For marketing, you want to build awareness and accessibility early and aggressively, then just maintain. For your production decisions, you want to automate early and aggressively to about an automation level of 7. Add capacity as needed. Finance these as you wish. High tech strategy: Revise it every year to manage performance/size and age expectations. Adding new products is fine. Build awareness and accessibility aggressively. The market is not as price sensitive as the low tech market. Keep your automation low, because the R&D time will be faster. Add capacity as needed, finance as you wish. What is leverage? Leverage measures the amount of debt versus the amount of equity owned in an asset. It compares the amount you owe to the amount you own. The lower the score (or ratio) the more you own of that asset. What are the three most important ratios to know? - Current ratio: which is current assets over current liabilities- Quick or Acid Test ratio: current assets minus inventory over current liabilities- Debt to total assets ratio: Debt over assetsLecture 12 (February 17)What is working capital? Working capital represents the extent to which a company can cover (pay off) its current liabilities with its current assets. Working capital (WC) = currents assets amount minus current liabilities amount. The higher the ratio the better. A low WC ratio indicates that the company may have trouble meeting its current liabilities with the assets that are most easily converted to cash. A high WC ratio means a healthy company that could easily pay off its current obligations with current assets. Where do you find the working capital? On the balance sheet, where you can find current assetsand current liabilities. What is a cash flow statement? What does it do?- Shows movement of cash in and out of an organization over a given period- Shows how much cash is available for use during a given period- Reconciles net profit back to cash- Managing cash is particularly difficult during times of rapid expansionRemember: PROFIT IS NOT THE SAME AS CASHLecture 13 (February 19)What financial document is the cash flow statement derived from? What does it represent? The cash flow statement shows the flow of cash in and out of an organization over a given period of time (like a year). Shows how much cash is available for use during a given period. Reconciles net profit back into cash. It is found in your income statement using the following rules: Net Profit + depreciation value = amount of cash. Red number in (parentheses) show cash going out. Cash flows found with this formula: net profit + depreciation = (assets gained is negative cash) + (assets lost is positive cash). The opposite is true for liabilities/owner’s equity – less equity equals less cash, more equity equals more cash. Lecture 14 (February 24)What is a Break Even analysis? What are its advantages and disadvantages?Definition: the break-even is the point at which the sales and costs are equal. Profit iszero at this point. “The business has broken even” -Or- the break-even point answersthe question “how many units do you have to sell to cover all of your costs?”(Break-even units = fixed costs over price – variable costs per unit – or – contribution margin over units)Advantages of Break-Even Analysis:- Quick assessment of potential for a business or a new product- It identifies a finite targetDisadvantages: - Assumes that all products are sold at the same price- Doesn’t specify a time frame- Does not consider the net present value of money What does Net Present Value (NPV) mean? How is the concept used in the business world?NPV