SMALL BUSINESS MANAGEMENT Chapter 10 Financial Management

Accounting Information Entrepreneurs To _____ and control To motivate employees Investors To _____ performance Lenders To evaluate creditworthiness Government To _____ taxes owed To 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 Simply Accounting Accounting Software  MYOB Plus Accounting Software MYOB Plus Accounting Software  Intuit QuickBooks Accounting Software Intuit QuickBooks Accounting Software  Peachtree Complete Accounting Software Peachtree Complete Accounting Software  AccountEdge 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 DrywallSam’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)