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What is a Balance Sheet?
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Date Added:
9/11/2008
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A Balance Sheet is a document that shows the total assets and liabilities of a business. Assets would commonly include monies in the bank, plant and equipment and stock. Liabilities can best be summed up as what a business owes at thte date the balance sheet was prepared. This is a document relevant to the individual, not the running of the business and as such is not required when assessing a business for sale. It is the owners private document.
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What is Depreciation?
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Date Added:
9/11/2008
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Depreciation is the gradual process of writing off the cost of an asset, or paying off a liability by means of a sinking fund, over a period of time. The plant and equipment of a business depreciates in value and useability every year. The depreciation rates are set by the Australian Taxation Office and applied by your Accountant when calculating depreciation. As depreciation is a non cash expense it is deleted as an expense when calculating the Net Profit of a business.
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What is a Profit & Loss Statement?
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Date Added:
9/11/2008
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A Profit & Loss Statement shows the total revenue and expenses of a business for a certain period of time. Profit and loss statements require thorough investigation as a bottom line indicating a profit and loss can be influenced by many factors, such as 'one off' expenses, or owner's drawings, or revenue that maynot be relevant to normal trading. These items are called 'add backs' and while relevant to the present owner may not be relevant to the new owner.
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What are Cost of Goods Sold (COGS)?
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Date Added:
9/11/2008
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Cost of Good Sold are the total cost to the business of the goods sold during a specific period. That is: Opening Stock + Stock Purchases - Closing Stock = Cost of Goods Sold.
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What is Gross Profit (GP)?
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Date Added:
9/11/2008
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Gross Profit is the single most important figure for all businesses. The figure shows the difference between the revenue and the cost of goods for a business, i.e. Total Sales - Cost of Goods = Gross Profit.
Gross Profit is often expressed as a percentage of revenue, i.e. (Gross Profit x 100) / Total Sales = GP%). What is an acceptable Gross Profit will vary from industry to industry. What is for certain though, is that for any business to be profitable and successful, it's operating Gross Profit to sales ratio needs to be such that all other expense commitments can be met whilst returning an acceptable nett profit.
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What is Goodwill?
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Date Added:
9/11/2008
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Goodwill in an intangible asset that forms part of the sale price over and above the price asked for the tangible assets and stock. This component of the sale price represents a payment for the existing client base and the security of future profits.
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What is Inventory (commonly called Fixtures & Fittings or FF)?
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Date Added:
9/11/2008
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Inventory is a list of tangible assets of a business. Those items of plant and equipment, chattels, vehicles and furnsihings that are necessary for the everyday running of the business. This is an important document for both buyer and seller as it forms part of a contract of sale of most businesses. In most cases any leases on these items are paid out by the Vendor prior to settlement so that all are unencumbered.
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What is Stock at Valuation (SAV)?
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Date Added:
9/11/2008
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SAV is the total value of the stock (products) that a business holds, calculated at wholesale or cost price with all applicable trading discounts applied. Stock is usually counted and priced by an independent specialist stocktaker.
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What is Stock Turn?
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Date Added:
9/11/2008
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Stock Turn shows how many times, on average, the normal stock level was sold and replaced during the financial year. This is not a crucial figure for all businesses, but, for those such as manufacturing, wholesale and large retail, stock turn per annum can indicate how well stock purchasing, production and sales are geared. Assuming opening and closing stock for the financial year are roughly the same then the equation would be: Total Stock Purchased / Average Stock Level = Number of Stock Turns.
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What is Loan Principal?
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Date Added:
9/11/2008
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Loan Principal is the amount of money borrowed to fund investment, and on which interest is paid.
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What is Return on Investment (ROI)?
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Date Added:
9/11/2008
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ROI is the acceptable return for your investment after you have paid yourself an appropriate wage for work performed. The ROI percentage is linked to current commercial loan rates so it will vary from time to time. For example, 20% ROI may be an acceptable minimum return when you can borrow at 7.5%, but if rates increased to say 11%, the the required ROI would need to be increased. Following is an example of setting a fair market price for a business. The business has a net profit of $200,000 after the owner has paid themselves a wage, but before tax and interest. To offer the business at a 20% ROI would therefore be $200,000 x 5 = $1,000,000 total sale price. You can apply any percentage ROI you like to set a sale price, but the 'acid test' is will the business sell at that price? All investment after all is risk versus reward. The total sale price is the stock (SAV) + Inventory + Goodwill.
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What is Written Down Value (WDV)?
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Date Added:
9/11/2008
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WDV is the monetary value of the tangible assets of a business as they age and suffer wear and tear. All items steadily lose value year by year and this is reflected in a depreciation schedule that is prepared by a business accountant and forms part of any financial year's report.
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What are Fixtures, Fittings and Chattels (F&F) 'as a going concern'?
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Date Added:
19/11/2008
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Fixtures, fittings and chattels are classified as machinery, vehicles, shelving, computers, cabinets, floor coverings, etc which may have a written down value in the Balance Sheet of $50,000 but in reality the cost to replace the items is $320,000 or in the worst case scenario of a fire sale they may only fetch $11,000. That's why an arbitary value is set, given the F&F are still servicing the business and are working items. The arbitary values is set between the written down value and the replacement value. In this case scenario it would be negotiated around $125,000 in consultation with the vendor.
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What is the Sale Price and how is it calculated?
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Date Added:
19/11/2008
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The sale price of a business is made up of three components.
STOCK: This is a nominal figure and is approximately the value of stock at cost at the time of sale.
F&F: This is a list of all the unencumbered items you will receive when you purchase the business.
GOODWILL: Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets. Goodwill is also known as an intangible asset.
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What is a Sale Time Line?
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Date Added:
4/5/2009
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This time line provides an approximate timeframe that it will take to bring a business sale to settlement. Of course, many things can delay this process and that is where Raven's can help smoothe the way. Residential and property sales run a similar process albeit shorter, but all incorporate the following considerations: Analysis, Proposal, Action, Screening, Offers, Contracts and Settlement.
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