small business management chapter 10 financial management

SMALL BUSINESS MANAGEMENT

Chapter 10Financial Management

Accounting Information

EntrepreneursTo _____ and controlTo motivate employees

InvestorsTo _____ performance

LendersTo evaluate creditworthiness

GovernmentTo _____ taxes owedTo approve new stock issues

Recording Transactions

Classifying Transaction Totals

Summarizing Data

Balance Sheet (Statement of Financial Position)Income Statement (Statement of Profit and Loss)Cash Flow Statement and/or Changes in Financial Position

The Accounting Cycle

Financial Statements

Balance Sheet (Statement of Financial Position) _____ of what a business owns and what it owes

Income Statement (Statement of Profit and Loss) _____ of operations over a given period of time

Cash Flow Statement (Ch 7)

Changes in Financial Position _____ in balance sheet accouts of a set period of time

Accounting Systems for Small Business

One-Book System One-Write System Multi-journal System Outsourcing Financial Activities

Accounting Systems for Small Business

Small Business Computer Systems Top 5 Accounting Software For Small

Business Simply Accounting Accounting Software MYOB Plus Accounting Software Intuit QuickBooks Accounting Software Peachtree Complete Accounting Software AccountEdge Accounting Software

Accounting Systems for Small Business

Disadvantages Cost Obsolescence Employee _____ Capabilities Setup Time Failure to Compensate for _____

Bookkeeping

Management of Financial Information for Planning

Short Term Financial Planning Preparing an estimated future financial

result ( Proforma or budget )

Budget is valuable because Clarification of Objectives Coordination Evaluation and Control

Variance analysis

Management of Financial Information for Planning

Long Term Financial Planning The Capital Investment Decision

Baron of _____ The Capacity Decision

Cottage _____ The Expansion Decision

The Capital Investment Decision rate of return method (PG 315 )

payback method (PG 315 )

present value method NPV or IRR ( Get a financial calculator )

The Capacity Decision break even point

which tells you the sales volume you need to break even, under different price or cost scenarios

Management of Financial Information for Planning

The Expansion Decision Effect of fixed cost adjustments Effect of variable cost adjustments

Use BEP on incremental basis

Evaluation of Financial Performance

Management of Current Financial Position Making profit but cash poor

length of time for payments three essential components

time taken to pay accounts payable time taken to sell inventory time taken to receive payment for

inventory

Evaluation of Financial Performance

Evaluation of Financial Statements Ratio Analysis

Liquidity ratios current ratio = current assets / current

liabilities over 1:1, usually between 1:1 and 2:1

Acid test/ Quick ratio = current assets-inventories/ current liabilities

1:1 is considered healthy

Evaluation of Financial Performance

Evaluation of Financial Statements Ratio Analysis

Productivity ratios Inventory turnover = COGS / Average

inventory at average cost Inventory turnover = Sales / Average

inventory at retail price Collection period = Accounts receivable /

Daily credit sales

Evaluation of Financial Performance

Evaluation of Financial Statements Ratio Analysis

Profitability ratios Gross margin = sales - COGS Profit on sales = net profit before tax /

sales Expense ratio = Expense item / Sales Return on Investment = Net profit before

tax / owner’s equity

Evaluation of Financial Performance

Evaluation of Financial Statements Ratio Analysis

Debt ratio Total debt to equity = Total debt /

owner’s equity not greater than 4:1

Credit and the Small Business

Advantages of Credit Use will undoubtedly increase sales necessary to _____ competitive credit customers exhibit more store

loyalty credit customers are more concerned

with _____ of service vs. price credit records can be _____ for future

planning

Credit and the Small Business

Disadvantages of Credit Use will be some bad debts - depends on

credit policy and monitoring slow _____ cause lost interest and

capital increases bookkeeping, _____ and

collection expenses

Credit and the Small Business

Management of a Credit Program Determine Administrative Policies Set Criteria for Granting Credit Set up a System to Monitor Accounts Establish a Procedure for Collection

Credit and the Small Business

Use of Bank Credit Cards Maybe cheaper and easier than running

your own credit program Usually 2%-6% of transaction

Sam’s Paint and Drywall Pg 324

6a. From the above balance sheet and income statement of Sam's Paint and Drywall determine the following ratios:

1. Current 2. Inventory turnover 3. Profit to sales 4. Return on investment 5. Total debt to equity

6b. From Dunn & Bradstreet's Key Business Ratios on industry norms, evaluate each of the above ratios.

Concept Checks

1. Describe the three steps in the accounting cycle.

2. What are the three financial statements , as discussed in the text, that are valuable to a small business owner?

3. List the bookkeeping systems used by a small business.

Concept Checks

4. What are some of the capabilities of computers which can benefit small business?

5. What are some possible disadvantages of computer ownership?

6. In the short term, why is budgeting a valuable tool?

Concept Checks

7. What are the three types of long-term financial planning decisions that could affect the business?

8. What measure can be used to evaluate the results which are found in the financial statements?

9. What is the business cycle of a small business? Why is it important?

Concept Checks

10. Why is ratio analysis important?

Appendices

A. Checklist for buying a small business computer

B. Use of Financial Ratios for a Small Business (Car Dealer)