Everything Finance for the Fashion Business Entrepreneur by Andre Taitt

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EVERYTHING FINANCE FOR THE FASHION

BUSINESSENTREPRENEUR

Facilitator – Andre Taitt

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CONTACT INFOMATION

Andre [email protected]

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Patrizio Bertelli and Miuccia Bianchi Prada

The crucial point is that the creative and commercial needs of the brand have to be on equal footing for the company to be a true success (Wall Street Journal , March 11 2010)

What is Finance?Finance is concerned with value , or more appropriately, creating and measuring value.

�Profitability�Viability

�Every decision you make in your business is a finance decision. Facilitator – Andre Taitt

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� “You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting…how to read and interpret financial statements…you really shouldn’t select stocks yourself.”

� WARREN BUFFET


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ACCOUNTING PROFIT VS CASHFLOW


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Financial Accounting


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Accrual vs cash basis of Accounting


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Traditional Assumptions of the Accounting Model

� Business Entity� Going Concern

(Continuity)� Time Period� Monetary Unit� Historical Cost� Conservatism� Realization

� Matching� Consistency� Full Disclosure� Materiality� Industry Practices� Transaction

Approach� Cash Basis� Accrual Basis

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FINANCIAL STATEMENTS


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Financial Statements� Business entities may have many objectives. The two

primary objectives of every business are solvency and profitability. Solvency is the ability to pay debts as they become due. Profitability is the ability to generate income.

� Unless a business can produce satisfactory income and pay its debts as they become due, other objectives a business may have will never be realized simply because the business will not survive.

� The Financial statements that reflects a company’s solvency is the Statement of Financial Position and the Cash Flow Statement . The Financial statement reflecting the company’s profitability is the Statement of Comprehensive Income


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Financial Statements

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Financial Accounting � Coverts firms’ day to day operating activities into

general-purpose Financial Statements� Primary financial statements:

� Financial Position (Balance sheet).� Statement of Comprehensive Income (Income

statement).� Statement of Stockholders’ Equity (Statement of

retained earning)� Statement of Cash Flows.

� Common rules used so you can compare with other companies’ financial statements.


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Basic Accounting Concepts

Double entry Accounting


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Basic Accounting Concepts� Created in 15th century – Luca Pacioli

� Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion).

� Purpose � To answer the question - How are we doing� Not convenient to physically count all Assets,

Liabilities and Equity� Developed a system of records� We believe number because of Integrity in system

• Check and Balances / Rules


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TRANSACTIONS�Fundamental Accouting Equation A=L+E�Every accounting transaction has an equal

affect on both sides of the equation.�Dual impact:

� Results in maintenance of fundamental accounting equation.

� Double-entry system.� Debit and Credit


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T-ACCOUNTS

� The Accountant’s secret – Dr and Cr� Dr = Debit = Left side of account� Cr = Credit = Right side of account

ACCOUNT

Debit Credit

+ -


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DOUBLE ENTRY SYSTEM OF ACCOUNTING

�Confusion caused by� Entity principle

• Your Bank book (credited when you make deposits to your account)

� English language• She is a credit to the company (Favourable)• Chalk up a debit against him (unfavourable)


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DOUBLE ENTRY SYSTEM OF ACCOUNTING

�Asset accounts:� Increases (Dr.)/Decreases (Cr.)

�Liability and OE accounts:� Necessarily the opposite to maintain

fundamental accounting equation:• Increases (Cr.) /Decreases (Dr.)


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Owner invests $100,000 in Business

Cash

(1) 100,000

Paid-in-Capital

(1) 100,000


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Firm borrows $50,000 from bank

Cash 50,000Loan Payable 50,000

Cash

(1) 100,000

(2) 50,000

(2) 50,000

Loan Payable


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Accounting Records and Systems


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The Accounting System� Consists of:

� Journals.� Accounts� Ledgers.� Rules for using them.

� Manual, computerized, or anything between.

� In a computerized system:� Bookkeeping steps are done electronically.


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The Accounting Cycle� Analysis of transactions

� What and how much to Dr and Cr� Knowledge of accounting concepts and Judgement

� Journalize original entries .� Preparation of the Journal

� Post from journal to ledger. � Make adjusting entries. � Journalize and post closing entries.� Prepare financial statements


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MANAGING WITH FINANCIAL

STATEMENTS

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Vertical Analysis

Each financial statement element is presented as a percentage of a designated base.

Sales revenue 100,000$ 100.0% 95,000$ 100.0% 91,000$ 100.0%Cost of goods sold 65,000 65.0% 60,800 64.0% 56,420 62.0%

Gross profit 35,000 35.0% 34,200 36.0% 34,580 38.0%

Operating expenses:Selling expense 14,000 14.0% 11,400 12.0% 10,000 11.0%General expense 16,000 16.0% 15,200 16.0% 13,650 15.0%

Total operating expense 30,000 30.0% 26,600 28.0% 23,650 26.0%

Operating Income before taxes 5,000 5.0% 7,600 8.0% 10,930 12.0%Taxes related to operations 1,500 1.5% 2,280 2.4% 3,279 3.6%

Net Income 3,500$ 3.5% 5,320$ 5.6% 7,651$ 8.4%

Melcher CompanyIncome Statement

2016 2015 2014For the Years Ended December 31

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Horizontal Analysis

2015 2014 2013 2015 2014 2013

Sales revenue 100,000$ 95,000$ 91,000$ 109.9% 104.4% 100.0%Cost of goods sold 65,000 60,800 56,420 115.2% 107.8% 100.0%

Gross profit 35,000 34,200 34,580 101.2% 98.9% 100.0%

Operating expenses:Selling expense 14,000 11,400 10,000 140.0% 114.0% 100.0%General expense 16,000 15,200 13,650 117.2% 111.4% 100.0%

Total operating expense 30,000 26,600 23,650 126.8% 112.5% 100.0%

Operating Income before taxes 5,000 7,600 10,930 45.7% 69.5% 100.0%Taxes related to operations 1,500 2,280 3,279 45.7% 69.5% 100.0%

Net Income 3,500$ 5,320$ 7,651$ 45.7% 69.5% 100.0%

Melcher CompanyIncome Statement

For the Years Ended December 31

Each financial statement element is presented as a percentage of a base amount from a selected year.

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IMPORTANCE OF LIQUIDITY� “One of the things you will find – which

is interesting and people don’t think of it enough -- with most businesses and with most individuals, is life tends to snap you at your weakest link. The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage –leverage being borrowed money.”

� WARREN BUFFET


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IMPORTANCE OF LIQUIDITY� DEFINITION

� Liquidity refers to an entity’s ability to pay it’s debts without disrupting productive capabilities.

� Short-term Liquidity analysis specifically measures a firm’s ability to pay current obligations with cash generated internally.

� IMPORTANCE“Even a very profitable entity will find itself bankrupt if

it fails to meets its obligations to short-term creditors.”

- CL Financial- Bear Stearns- Washington Mutual

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Current RatioCurrent Assets

Current Liabilities

Acid -Test (Quick) Ratios

Current Assets - InventoryCurrent Liabilities

Cash Equivalents+ Marketable Securities+ Net Receivables

Current Liabilities

Working Capital

Current Assets – Current Liabilities


BALANCE ASSET FINANCING

Solvency Analysis

� Ability to stay in business over the long-term

Debt-to-EquityRatio

DebtRatio

TimesInterestEarned

Cash Flowfrom Operations

to CapitalExpenditures

LO5Facilitator – Andre Taitt

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Profitability Analysis

� Rate of Return on Assets� Return on Common Stockholders’

Equity� Asset Turnover� Earnings per Share� Price/Earnings Ratio� Dividend Ratios

LO6 Facilitator – Andre Taitt

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Internal Control System� Consists of the policies and procedures

necessary to ensure:• The safeguarding of an entity’s assets• The reliability of its accounting records• The accomplishment of its overall objectives

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Cash Management

� Necessary to ensure company has neither too little nor too much cash on hand

� Tools• Cash flows statement• Bank reconciliations• Petty cash funds

LO2

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Limitations on Internal Control� No system is entirely foolproof

• Employees in collusion can override the best controls

• Cost vs. benefit tradeoff

Document Flow for Merchandise

CheckPrepared

PurchaseRequisition

ReceivingReport

PurchaseOrder

Invoice Approval

PurchaseInvoice

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Technical analysis for management control

•Pricing Clients•Cost benefit analysis•Break even analysis•Budgeting

The Cash Budget

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Cost-Volume-ProfitRelationship


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DataFixed costs (TFC) $400.00Variable costs (UVC) $6.00Selling price (UP) $8.50

50 100 150 200 250

$2,000 -

1,600 -

1,200 -

800 -

400 -

0 -

Tota

l Cos

t or

Rev

enue

Volume

Revenue

160 = breakeven

CostLoss Zone

Loss

Profit Zone

Profit

Profitgraphs

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CREATING FORECASTS


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KEY IS YOUR ASSUMPTIONS MUST

BE REALISTIC. SHOULD BE BASED

ON EVIDENCE/ RESEARCH


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CASHFLOW IMPROVEMENT� Invoice immediately after you deliver goods or

services.� Consider shortening your payment terms - to 30 days

from 60 days, for example.� Offer a small discount to customers who pay their bills

early and charge a penalty to those who pay late.� Do a financial check on new customers before offering

them credit. Also check their business references.� Monitor your receivables on a regular basis and follow

up with late payers when appropriate.� Use your business credit card to pay suppliers.� Put your excess cash to work

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BUSINESS PLAN

/PROPOSALFacilitator – Andre Taitt

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BUSINESS PLAN / PROPOSAL

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We Are All Entrepreneurs: It's A Mindset, Not A Business Model

Everything Finance for the Fashion Business Entrepreneur by Andre Taitt

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Transcript of Everything Finance for the Fashion Business Entrepreneur by Andre Taitt