CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)1 This chapter describes the importance of managing your business finances. Create a cash budget Examine the role of credit Improve your business cash flow

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)2 MANAGE YOUR CASH FLOW Create a Cash Budget As a business owner, you will have to make sure that you have enough cash to cover your expenses. A Cash Budget shows projections of your cash coming in and going out; shows estimated, actual, and the difference between the two. Use an electronic spreadsheet.

CASH BUDGET EstimatedActualDifference Cash receipts$14,000$18,000$4,000 Cash sales$2,000$4,000$2,000 Accounts receivable payments$11,150$13,150$2,000 Tax refund$850 $0 Total cash receipts$14,000$18,000$4,000 Cash disbursements$8,300$10,125-$1,825 Salaries$4,500$5,500-$1,000 Gasoline$2,500$3,125-$625 Vehicle maintenance$350$400-$50 Utilities$50 $0 Advertising$150$300-$150 Insurance$500 $0 Other$250 $0 Total cash disbursements$8,300$10,125-$1,825 Net cash increase/decrease$5,700$7,875$2,175 CASH BUDGET FOR MARKS SNOW REMOVAL SERVICE A minus sign for cash receipts means less cash was received than estimated. A minus sign for cash disbursements means more cash was disbursed than estimated.

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)4 MANAGE YOUR CASH FLOW Examine the Role of Credit Recently there has been much in the news about frozen credit markets. What does this mean and what are some outcomes? As a business begins operation, there will be costs that will be too expensive for you to pay all at once.

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)5 MANAGE YOUR CASH FLOW Examine the Role of Credit Businesses wont make payroll or have capital to stock their shelves. Frozen credit markets means credit is frozen or very hard to get, even for people or businesses with good credit. Consumers cant get car loans or mortgages, and credit card spending limits might be lowered.

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)6 MANAGE YOUR CASH FLOW Examine the Role of Credit Trade Credit (credit offered by one business to another) Consumer Credit (loans and credit cards) Types of credit: two types

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)7 MANAGE YOUR CASH FLOW Examine the Role of Credit The negotiated price of goods purchased on trade credit will often be higher than the cash price. Trade Credit

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)8 MANAGE YOUR CASH FLOW Examine the Role of Credit The two basic forms are loans and credit cards. An unsecured loan is granted based on credit history. A secured loan (installment loans cars) Consumer Credit

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)9 MANAGE YOUR CASH FLOW Examine the Role of Credit Previous credit history Employment record Assets owned Money available for making payments Financial references Once an entrepreneur decides to extend credit, policies (Credit Procedures) must be developed.

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)10 MANAGE YOUR CASH FLOW Even when you are careful about extending credit, some customers just dont pay their account balancesUncollectible Accounts. Who pays for this loss to the entrepreneur? Examine the Role of Credit

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)11 MANAGE YOUR CASH FLOW Improve Your Cash Flow Increase cash receipts Decrease cash disbursements Do both If your cash receipts will not cover your expenses, you will need to take action to improve your cash flow:

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)12 MANAGE YOUR CASH FLOW Improve Your Cash Flow Offer discounts on bills paid right away. Establish tighter credit policies. Establish a follow-up system for collecting unpaid accounts receivable (collection agency). Increase Cash Receipts:

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)13 MANAGE YOUR CASH FLOW Improve Your Cash Flow Control inventory and payroll. Slow bill payment to your suppliers. Cut other expenses (reduce variable expenses like advertising). Decrease Cash Disbursements:

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)14 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Analyze your sales (by product or dept.) Analyze net profit on sales (net income after taxes/net sales) Set and meet profit goals Analyzing financial statements can help your sales and profits, as well as help you set and meet goals.

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)15 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Analyzing your sales by product can help you make decisions about the kind of inventory to stock. Analyze Your Sales

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)16 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Analyze Your Sales...Which department would you reduce? DEPARTMENTAL SALES - LEE GARDEN AND PATIO DepartmentSalesPercent of total Outdoor furniture$110, % Outdoor grills$37, % Plants$24, % Garden tools$23, % Total$194, %

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)17 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Net sales is the dollar amount of all sales, after returns have been subtracted (gross sales – returns). Gross sales is the dollar amount of all sales, including returns. Analyze Net Profit on Sales Net income after taxes ÷ Net sales = Net profit on sales

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)18 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements How do you find net income after taxes? Gross profit Net income from operations Net income before taxes Analyze Net Profit on Sales… Net income after taxes ÷ Net sales = Net profit on sales

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)19 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Gross profit: profit before operating expenses are deducted. Net income from operations: gross profit minus operating expenses. Net income before taxes: net income from operations minus interest expense. Analyze Net Profit on Sales… Net income after taxes ÷ Net sales = Net profit on sales

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)20 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Analyze Net Profit on Sales…Example Net income after taxes ÷ Net sales = Net profit on sales $27,255 ÷ $231,800 = or 11.8% In this example, profits represent 11.8% of sales. These numbers can be seen on your income statement. Compare with the previous year or with industry ratios.

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)21 HENDRICK'S AUTOMOTIVE SUPPLY INCOME STATEMENT YEAR 2009 Revenue from sales Gross sales (all sales including returns)$235,000 Less returns$3,200 Net sales (Gross sales – returns)$231,800 Cost of goods sold (inventory)$150,000 Gross profit (Net sales – Cost of goods sold)$81,800 Operating expenses Salaries$26,200 Advertising$1,200 Rent$8,400 Utilities$1,800 Insurance$1,300 Other$1,000 Total expenses$39,900 Net income from operations (Gross profit – Operating expenses)$41,900 Less interest expense$2,400 Net income before taxes (Net income from operations – interest expense)$39,500 Less income tax paid$12,245 Net income after taxes (Net income before taxes – income taxes)$27,255

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)22 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Your goals reflect the amount of profit you hope to earn during a particular year. A goal could be to increase your profit ratio to 15.0% Set and Meet Profit Goals $27,255 ÷ $231,800 = or 11.8%

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)23 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements The breakeven point is the volume of sales that must be made to cover all the expenses of a business. Perform Breakeven Analysis

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)24 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements The breakeven point is the volume of sales that must be made to cover all the expenses of a business. Perform Breakeven Analysis: Breakeven Formula Total fixed costs = Breakeven point Selling price per unit – Variable cost per unit Total variable costs ÷ Number of units = Variable cost per unit

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)25 ANALYZE YOUR FINANCIAL PERFORMANCE Analyze Financial Statements Charlenes fixed costs are $40,000 a year. Her selling price is $3.50 per unit. Her variable cost is $0.95 per unit. How many units does she have to sell to break even? Perform Breakeven Analysis: Example 40,000 = 15,686 units 3.50 –.95

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)26 ANALYZE YOUR FINANCIAL PERFORMANCE Hire Experts Various professionals provide financial management services: Hiring a Professional Bankers (read financial statements) Attorneys (know financial laws) Accountants (prepare financial statements) Financial Planners (help manage assets) Investment Brokers (advice on investing excess cash)

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)27 ANALYZE YOUR FINANCIAL PERFORMANCE Hire Experts Experts can help with various types of planning: The Services of Financial Experts Financial planning (make recommendations on increasing sales and reducing costs) Strategic planning (make decisions that affect your business in the long term) Tax planning (minimize the amount of tax you will have to pay)

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)28 ANALYZE YOUR FINANCIAL PERFORMANCE Hire Experts The Internal Revenue Service (IRS) randomly selects individuals and businesses to investigate. Investigation of a tax return is an audit. You and/or your tax preparer will have to explain how the return was prepared. Tax Audit

CHAPTER 12 FINANCIAL MANAGEMENT February 12, 2014ENTREPRENEURSHIP (Ms. Hawkins)29 The End!