Show Me the Money Resources I Link Link Built by Stambaugh/2008 Jeff Stambaugh Dillard College of Business/Rm 257A

Case Study: Should You Buy It? “Wings ‘R Us” (pg 408) Built by Stambaugh/2008 Variable costs Food15,000 Beverage 4,500 Supplies (napkins, cleaning materials) 2,000 Labor21,600 Total Variable Costs43,100 Fixed Costs (rent, insurance, etc)21,900 Do you replace existing fryer (bought used for $4K) with a new fryer that costs $25K (+ $5,500 for ship/install – total $30,550)? Saves $1,000 per month in utilities and insurance More capacity than existing fryer

Case Study: Should You Buy It? “Wings ‘R Us” (cont) Built by Stambaugh/2008 Your account says depreciation under MACR would be: Yr 1: 6,100Yr 2: 9,760Yr 3: 5,856KYr 4 & 5: 3,513 So, do you buy? What if accountant says depreciation should be $4,357 in years 1- 6 and $4,358 in year 7. How does that change your decision? What are the “costs” associated with the purchase?

Which Business Will Pose Greatest / Least Cash Management Issues? Built by Stambaugh/2008 ■ Furniture retail store ■ Custom home builder ■ Music concert promoter ■ Restaurant ■ Income tax preparation firm ■ Massage therapy firm ■ Used (very used) car dealership ■ Custom Machine Shop ■ Waterpark

The Money Cycle Built by Stambaugh/2008 Cash Spent to Generate Product Cash Received from Product Sales Fixed Costs

Maximizing Inflows Built by Stambaugh/2008 ■ Take deposits / require progress payments ■ Reward prompt payments ■ Ask to be paid ■ Take on non-core business (seasonal especially) ■ Factoring receivables (2-7% per month) ■ Borrow more cash

Credit Cards Built by Stambaugh/2008 ■ Pro: ■ Almost expected by customers ■ They bear risk for money loaned ■ Short cash cycle ■ Con: ■ Fees (2.5%) ■ Charge backs

Minimizing Outflows Built by Stambaugh/2008  Inventory Control (drawdown)  Curtailing non-essential expenses  Trade discounts (>1% for 30 days)  Know billing cycles  Employ non-cash incentives  Consignment goods  Barter (offer your services in lieu of payment)  Renegotiate terms

What I Need is a System Built by Stambaugh/2008  Accountants to the rescue … kind of

What’s Right About Accounting for Entrepreneurial Businesses? Built by Stambaugh/2008 ■ Needed to make sound financial decisions (Managerial Accounting) ■ Needed to get funds from investors / banks (Financial Accounting) ■ Needed to do your taxes (Tax Accounting)

What’s Wrong About Accounting for Entrepreneurial Businesses? Built by Stambaugh/2008 ■ Very specific lingo and application to keep it standardized ■ Some information may not paint useful picture ■ Can be manipulated by unscrupulous folks ■ Can be time consuming / expensive

Key Terms Built by Stambaugh/2008 ■ Cost: value given up to obtain something you want ■ Expense: decrease in owners equity caused by consuming your product or service ■ Revenue: Money generated from sale of goods / services, or any other use of assets associated with the main operations of firm ■ Assets = Liabilities + Owners Equity

Big 3 Statements Built by Stambaugh/2008 ■ Income statement ■ Balance sheet ■ Cash flow statement

Income Statement Built by Stambaugh/2008 Income Statement for year ending 12/31/20XX Sales revenue356,428 Less cost of goods sold105,200 Gross margin251,228 Less operating expenses Marketing30,000 SG&A30,000 Depreciation10,000 Total operating expenses 70,000 Operating income181,228 Less interest expense 6,000 Income before taxes175,228 Income tax expense 40,000 Net income135,228

Income Statement Issues Built by Stambaugh/2008 ■ Detail of “where money is going” ■ Operating income is key for many decisions ■ Does NOT track cash ■ What and when is revenue

Balance Sheet Built by Stambaugh/2008 Assets Current Assets Cash $ 52, Accounts receivable $ 11, Inventory $ 15, Total current assets $ 79, Fixed assets PPE $ 80, Accum depreciation $ (10,000.00) Net fixed assets $ 70, Total assets $149, Liabilities and Owner's Equity Current liabilities Accounts payable$5, Note payable to bank$2, Dep. from customers$6, Total current liabilities$14, Long term mortgage$50, Total liabilities$64, Owner's Equity Retained earnings$85, Total Owners' Equity$85, Total liability and equities$149,300.00

Balance Sheet Issues Built by Stambaugh/2008  Snapshot of business  Some useful ratios: quick, D/E  Assets probably do not reflect true market value  Many firm assets (and maybe liabilities) not captured

Cash Flow Statement Built by Stambaugh/ Cash Flow from Ops Net Income $ 130, $ 74, Additions (Cash Sources) Depreciation $ 13, $ 11, Decreases in Accounts Receivable $ 5, $ (2,000.00) Decrease in Inventory $ 2, $ 2, Subtractions (Uses of Cash) Decreases in Accounts Payable $ (5,000.00) $ 4, Net Cash from ops $ 145, $ 89, Cash Flow from Investing Purchase of Equipment $ (200,000.00) $ 5, Net Cash from Investing $ (200,000.00) $ 5, Cash flow from Financing Proceeds from L/T Debt $ 100, Principal/Interest Paid $ (15,000.00) $ (55,499.00) Net Cash from Financing $ 85, $ (55,499.00) Increase In Cash Flow $ 30, $ 39, Begin Cash $ 54, $ 15, End Cash $ 84, $ 54,391.00

Cash Flow Statement Issues Built by Stambaugh/2008  Critical to startups (month-by-month not uncommon)

Pro Forma Budgeting Built by Stambaugh/2008  Budget: Plan for future  Mechanism for control: Variance analysis

Class Takeaways Built by Stambaugh/2008 ■ Financial skills are very important to success as an entrepreneur (and this class!) ■ Understanding “where’s the money going” a matter of survival for a venture