The Military Families Learning Network's personal finance team presented a webinar on Financial Ratios & SWOT Analysis, two important components of creating a manageable spending plan.

1. Welcome to the
Military Families Learning Network Webinar
A few days after the presentation, we will send an evaluation and links
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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,
and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.

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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,
and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.

3. Financial
Ra)o
and
SWOT
Analysis
Dr.
Michael
S.
Gu;er,
University
of
Florida

4. Find
us
online
• Facebook:
h;p://www.facebook.com/#!/PersonalFinance4PFMs
• Blog:
h;p://blogs.extension.org/militaryfamilies/category/
personal-­‐finance/
• Website:
h;p://www.extension.org/militaryfamilies
• Twi;er:
Follow
#MFLN

5. CEU
Informa)on
• AFC-­‐creden)aled
par)cipants
will
earn
1.5
CEUs
by
par)cipa)ng
in
this
90-­‐minute
web
conference
and
following
these
instruc)ons:
1. Please
make
a
note
of
TWO
passwords
that
will
be
presented
during
the
presenta)on.
2. Send
BOTH
words
to
the
email
address
given
at
the
end
of
the
presenta)on,
along
with
your
first
and
last
name.

6. Financial
Ra)o
and
SWOT
Analysis
Dr.
Michael
S.
Gu;er,
University
of
Florida

7. Recap: Why Do You Need
Records?
• Records serve as a reference point
• Records provide evidence of progress
– Track income, expenses, assets, liabilities, and
achievement of objectives
• Records help consumers work more efficientyly
with various financial services providers

8. Review
Case
Study
Family
• Meet
Bre;
(28)
and
Bri;any
Johnson
(25).
– Live
off
base
– Son
–
Sam
(2)
– Dog
–
Fluffy
(10)
• Bre;
is
on
ac)ve
duty,
Bri;any
is
a
nurse
in
local
hospital

9. Our
Key
Statements
•
•
•
•
•
Balance
Sheet
Income
and
Expense
Statement
Budget
Statement
of
Changes
in
Net
Worth
Statement
of
Cash
Flows

12. So to recall: a Personal
Balance Sheet
• Allows you to determine your net worth
• Updating it periodically allows you
to monitor changes in your net worth
over time
• Balance Sheet: Net Worth
• Can NW be negative?
– What does this mean? Is it bad?
• How do we increase net worth?
2005© University of
Wisconsin-Madison
Board of Regents

15. Suppor)ng
statements
BREAKING
THESE
DOWN

16. The
Statement
of
Cash
Flows
• For
a
given
period,
the
statement
of
cash
flows:
– Shows
the
inflows,
oudlows
and
the
net
change
in
cash
between
two
balance
sheets
– Iden)fies
the
changes
in
some
of
the
accounts
from
one
balance
sheet
to
the
next
Chapter
4:
Personal
Financial
Statements

17. Statement
of
Cash
Flows
Classifica)ons
• Cash
Flows
from
Opera)ons
• Cash
Flows
from
Inves)ng
Ac)vi)es
• Cash
Flows
from
Financing
Ac)vi)es
Chapter
4:
Personal
Financial
Statements

19. The
Statement
of
Changes
in
Net
Worth
• Summarizes
noncash
flow
changes
in
net
worth
not
recorded
on
either
the
income
or
the
cash
flow
statements.
Chapter
4:
Personal
Financial
Statements

20. Statement
of
Changes
in
Net
Worth
Transac)ons
• Changes
in
value
for
assets
due
to
apprecia)on
or
deprecia)on
• If
an
asset
other
than
cash
is
exchanged
for
some
other
assets
• If
assets
other
than
cash
are
received
by
gif
or
inheritance
• If
assets
other
than
cash
are
given
to
chari)es
or
noncharitable
donees
Chapter
4:
Personal
Financial
Statements

22. Uses
for
Decomposi)on
Statements
• Ideally
– Balance
Sheets
are
accurate
based
on
statements
– Income
Por)on
of
IE
is
accurate
because
income
is
fixed
and
constant
• So
if
our
statements
do
not
align,
it
is
likely
that
the
error
would
be
the
expenses.
• Why
do
so
many
people
fail
to
accurately
account
for
their
expenses?

23. Using
Statements:
What-­‐Ifs?
• Budget
– Deployment
– Post
deployment
• Helps
one
to
envision
needs
for
insurance
or
other
benefits
by
having
a
benchmark
budget
• Lets
explore
one
of
our
submi;ed
budgets
for
deployment
for
our
family?

24. Deployment:
So
How
Might
the
Budget
Change?
• Of
course,
there
will
be
the
increase
in
Bre;'s
pay
due
to
the
deployment.
– These
may
include
Imminent
Danger
Pay,
Hardship
Duty
Pay,
Deployed
Per
Diem
and
Career
Sea
Pay.
–
He
will
receive
FSA-­‐T,
Type
II
(Separa)on
Pay)
afer
31
days
which
will
be
back
dated.
– While
in
a
war
zone,
he
will
get
his
pay
tax
free
and
receive
a
refund
for
his
Combat
SGLI
and
TSGLI.
• Perhaps
he
will
re-­‐enlist
while
deployed
and
get
a
tax
free
bonus.
• Bre;
may
lose
special
pays
if
he
doesn't
receive
a
waiver.
Examples
are
Language
pays,
Diving
Duty
Pay
and
Halo
Duty
Pay.
Thank
you
Connie

25. Deployment:
So
How
Might
the
Budget
Change?
• Bri;any
may
have
to
reduce
work
hours
or
leave
her
employment.
– She
may
have
to
pay
more
for
child
care.
Quality
evening
and
weekend
child
care
can
be
very
difficult
to
secure
for
a
decent
price.
She
may
have
to
hire
a
nanny.
She
may
have
to
secure
a
pet
si;er.
• Depending
on
where
the
couple
is
residing,
Bri;any
may
decide
to
move
home
with
her
parents.
– That
may
reduce
housing
costs
such
as
u)li)es
but,
they
will
have
moving
fees
(twice)
and,
perhaps,
storage
fees.
Perhaps
they
will
decide
to
rent
their
home
while
he
is
deployed.
This
can
boost
income
but,
has
expenses
of
it's
own.
• Food
may
vary.
With
Bre;
gone,
the
family
grocery
bill
will
be
less.
However,
ea)ng
out
may
increase
because
of
it's
convenience.
If
she
hires
a
nanny,
food
costs
may
stay
the
same.
Entertainment
costs
may
alter.

26. Deployment:
So
How
Might
the
Budget
Change?
• Auto
costs
may
decrease.
– Since
they
are
a
two
car
family,
they
may
put
one
car
on
a
deployed
status
for
the
insurance.
The
gas
and
maintenance
will
also
be
lowered.
Or
Bri;any
may
provide
one
of
the
cars
for
a
nanny.
Which
may
increase
insurance
premiums,
gas
and
maintenance
costs.
Perhaps
they
will
sell
a
car
before
the
deployment
with
the
thought
of
buying
something
new
when
Bre;
returns.
• Added
expenses
will
be
care
package
items
and
shipping
for
care
packages,
ship
phone
cards/calling
cards,
and
ship/internet
purchases
by
Bre;.
• An
expense
they
should
budget
for
is
the
Savings
Deposit
Program.
• Pre-­‐deployment
and/or
post-­‐deployment
trip
home
to
visit
Bre;'s
family

27. CEU
Password
#1
Net
Worth

28. Using
Statements
• Is
there
sufficient
room
for
savings?
– Compare
with
goals

29. Savings
situa)on
Adequate
savings
• Con)nue
to
treat
savings
as
a
fixed
expense
• Explore
any
opportuni)es
for
tax
savings
• Monitor
progress
toward
goal
over
)me
Inadequate
savings
• Reduce
expenses
– If
possible
• Increase
income
– If
possible
• Adjust
tax
situa)on
– Keep
more
income
• Adjust
goal
– Amount
– Timing
– At
all?

30. Ra)o
Analysis
• The
key
to
ra)o
analysis
is:
– Does
the
ra)o
get
to
the
answer
for
the
ques)on
asked?
– Is
there
some
standard
or
benchmark
to
determine
whether
the
result
is
appropriate
for
this
par)cular
client?
Chapter
4:
Personal
Financial
Statements

31. Ra)o
Analysis—The
Objec)ve
• The
objec)ve
of
ra)o
analysis
is
twofold:
– To
gain
addi)onal
insight
into
the
financial
situa)on
and
behavior
of
the
client
– To
generate
ques)ons
for
the
client
to
answer
to
further
gain
such
insight
Chapter
4:
Personal
Financial
Statements

32. Types
of
Ra)o
Analysis
• Liquidity
ra)os
–
emergency
fund
ra)o
and
current
ra)o
• Debt
ra)os
–
total
debt
to
net
worth,
long-­‐term
debt
to
net
worth,
debt
to
total
assets,
long-­‐term
debt
to
total
assets,
housing
costs
to
gross
income,
housing
and
debt
payments
to
gross
income
• Performance
ra)os
–
savings
ra)os
and
investment
performance
ra)os
Chapter
4:
Personal
Financial
Statements

33. Emergency
Fund
Ra)o
EFR
=
Current
Assets
Monthly
Nondiscre)onary
Expenses
Target
of
3
to
6
months
Chapter
4:
Personal
Financial
Statements

34. For
Our
Case
Study
EMF
=
1600
/
(1/12
X
(6920+3816+4000+1,920+6540+7080+2820+390
+4056+1200+168+600+624)
=
=
1600
/
(40134/12)
=
1600
/
3344.5
=
0.478
Less
than
a
month,
this
is
cri)cally
low.
Lower
resiliency
for
this
family
to
a
resource
shock

35. Current
Ra)o
CR
=
Current
Assets
Current
Liabili)es
Target
of
1.0
to
2.0
Chapter
4:
Personal
Financial
Statements

36. For
Our
Case
Study
CR
=
1600
/
10275
CR
=
0.156
CR
=
1600
/
4045
CR
=
0.395
Either
way
it
is
too
low.
How
do
we
interpret
this?

37. Debt
Ra)o
=
Total
Liabili)es
Total
Assets
This
should
be
less
than
0.4
or
40%

38. For
Our
Case
Study
DR
2012=210364/260828
DR
2012=0.80
or
80%
DR
2013=
215535/330534
DR
2013=
0.652
or
65%
This
is
also
too
high,
should
be
0.4
or
less,
but
it
is
geung
be;er…

39. Long-­‐Term
Debt
Coverage
Ra)o
=
Annual
gross
income
Total
annual
long
term
debt
payments
Should
exceed
2.5

40. For
Our
Case
Study
LTDCR
=
83,593.36
/
(6540+7080+2820+4056)
83,593.36/20496
=
4.08
With
CC
debt
it
is
83593.36/(20496+6230)
=
3.13
In
either
care,
the
debt
coverage
is
reasonable.

41. Debt-­‐to-­‐Income
Ra)o
=
Annual
consumer
credit
payment
Annual
afer-­‐tax
income
Should
be
less
than
15%

42. For
Our
Case
Study
• So
here
we
will
count
car
loans,
credit
cards.
Now
I
include
student
loans
too
so
we
capture
debt
burden
but
Not
the
mortgage.
DIR
=
(6230+2820+4056)/(83593.36-­‐23839.31)
DIR
=
13106/72860.05
=
17.99%
Debt
is
not
overwhelming
but
becoming
burdensome

43. Credit
Usage
Ra)o
=
Total
Credit
Used
Total
Credit
Available
Should
be
less
than
30%
(Consistent
with
FICO
measure)

44. For
Our
Case
Study
So
since
you
now
know
our
family
has
a
credit
limit
of
$15,000
on
their
credit,
what
is
their
usage?
CUR
2012=
7980/15000
=
0.532
or
53.2%
CUR
2013=
6230/15000
=
0.415
or
41.5%
So
it
is
improving
but
s)ll
rela)ve
to
FICO
benchmark
of
30%

45. Lending
Ra)os
–
Front
End
• Housing
Costs
(Mortgage
payment
+
Property
tax
+
Homeowners
insurance)
to
Gross
Income
– Target
of
≤
28%
Chapter
4:
Personal
Financial
Statements

46. For
Our
Case
Study
FER
=
(6540+7080+4692)/83593.36
FER
=
18312/83593.36
=
21.9%

47. Lending
Ra)o
–
Back-­‐End
• Housing
and
Debt
Payments
(i.e.
credit
card,
auto
loan)
to
Gross
Income
– Target
of
≤
36%

48. For
Our
Case
Study
BER
=
(6540+7080+4692+4056+6230)/83593.36
BER
=
28598/83593.36
=
34.2%
So
housing
wise
our
family
is
not
in
too
bad
of
shape,
other
debt
yes…

49. Savings
Ra)os
• Rate
of
Savings
=
Annual
Savings
Annual
Gross
Income
Target
of
≥
10%
(age
dependent)
• Includes
Personal
and
Employer
Contribu)ons
Chapter
4:
Personal
Financial
Statements

50. For
Our
Case
Study
SR
=
(2731+1488+2000)/83593.36
SR
=
6219/83593.36
SR
=
0.074
or
7.4%
Is
this
okay?

51. Investment
Ra)os
• Income
on
Investments
=
Income
from
Investments
Average
Invested
Assets
• ROI
=
EI
–
BI
–
Addi)onal
Investments
Average
Invested
Assets
Target
of
9
to
12%
• Investment
Assets
to
Gross
Income
Chapter
4:
Personal
Financial
Statements

52. For
Our
Case
Study
ROI
=
(33871+1727)/
[(24598+4591+2000+61200+8699+2000)/2]
ROI
=
35598
/
51544
=
69%
WOW
what
a
return…

53. So
let’s
summarize
• Liquidity
– Family
has
insufficient
capital
to
meet
current
obliga)ons
– Family
is
not
adequately
prepared
for
an
emergency
without
addi)onal
support
or
resources
from
others
• Debt
– This
family
has
a
high
debt
load
• It
presents
issues
for
level
of
debt
and
amount
of
debt
payments

54. So
let’s
summarize
• Housing
– Housing
is
not
too
burdensome
for
this
family
• Savings/Inves)ng
– Investments
did
great,
but
they
probably
need
to
be
saving
more

55. Ver)cal
&
Growth
Analysis
• Ver)cal
analysis:
– Balance
sheet
–
each
item
presented
as
a
percent
of
total
assets
– Income
statement
–
each
item
presented
as
a
percent
of
total
income
• Growth
analysis:
– Calculates
the
growth
rate
of
certain
financial
variables
over
)me
using
TVM
tools
Chapter
4:
Personal
Financial
Statements

56. For
Our
Case
Study
• We
have
seen
– Income
not
dras)cally
change
– Expenses
change
– Loss
of
value
on
the
home
– Increase
of
value
on
investments
– Deprecia)on
on
tangible
assets

57. CEU
Password
#2
Ra)o

58. What
would
we
tell
a
family
interested
in
some
of
the
following
issues?
SO
BASED
ON
FINANCIAL
POSITION…

59. So
let’s
explore
various
strategies
•
•
•
•
Refinance
a
mortgage
with
FRM
Obtain
an
ARM
Use
HELOC
to
consolidate
debts
Use
HELOC
for
emergency
fund

60. So
let’s
explore
various
strategies
• Payoff
unsecured
debt
with
assets
earning
lower
rates
of
return
• Reduce
expenses

61. Limita)ons
of
Financial
Statement
Analysis
• Infla)on
• Use
of
es)mates
• Few
benchmarks
for
individuals
Chapter
4:
Personal
Financial
Statements

62. Sensi)vity
Analysis
&
Risk
Analysis
• Sensi)vity
analysis
allows
manipula)on
of
input
variables
by
small
increments
to
determine
the
impact
on
the
ra)o
• Risk
analysis
examines
the
uncertainty
of
cash
flows
to
the
individual
– Business
or
investment
risk
– Financial
risk
Chapter
4:
Personal
Financial
Statements

63. Iden)fying
SWOT
•
•
•
•
Strengths
Weaknesses
Opportuni)es
Threats

64. Iden)fying
SWOT
• Think
in
terms
of
the
ques)ons
we
asked
earlier
in
our
analysis
– Cash
flow
constraints
– Liquidity
– Savings
– Debt
burden
• Cash
flows
• Net
worth
• Credit
worthiness
– Housing
burden

65. Strengths
• Produc)ve
investments
• Commitment
to
saving

66. Weaknesses
• Carrying
consumer
debt
• Li;le
Discre)onary
Cash
Flow
to
address
debt
issue
• Earnings
growth
is
minimal

67. Opportuni)es
• Invest
more
• Trim
expenses
to
improve
DCF
• Stable
income
currently

68. Threats
• Heavy
debt
load
• Lack
of
liquidity
creates
vulnerability
to
income
and
resource
shocks

69. CEU
Informa)on
• Send
an
email
to:
FSAWebinars@gmail.com
• Include:
– Both
CEU
Passwords
given
in
this
presenta)on
– Your
first
and
last
name
• Emails
must
be
received
by:
Wednesday,
April
17,
2013
at
5
p.m.
ET