1. 1 SMALL BUSINESS MANAGEMENT Chapter Ten Financial Management

2. 2 The Need for Financial Records u Uses of Accounting Information –Entrepreneurs F To plan and control F To motivate employees –Investors F To evaluate performance –Lenders F To evaluate creditworthiness –Government F To verify taxes owed F To approve new stock issues

3. 3 The Accounting Cycle u Recording transactions u Classifying transaction tools u Summarizing data –Balance Sheet(Statement of Financial Position) –Income Statement (Statement of Profit and Loss) –Cash Flow Statement and/or Changes in Financial Position

4. 4 Accounting Systems for Small Business u One-Book System u One-Write System u Multi Journal System u Outsourcing Financial Activities

5. 5 Accounting Systems for Small Business u Small Business Computer Systems –Applications F Accounts payable, Accounts receivable, Business modeling, General ledger, Inventory control, Order entry, Payroll, Word processing, The Internet. –Benefits F Reduce labor expense, Shorten billing cycle, Carry less inventory, Increase sales, Control costs, manage cash, Plan-control growth.

6. 6 Accounting Systems for Small Business u Small Business Computer Systems u Functions –word processing –general ledger –database files –payroll –financial planning –capital investment decisions

7. 7 Accounting Systems for Small Business u Small Business Computer Systems u Disadvantages –Cost –Obsolescence –Employee resistance –Capabilities –Setup time –Failure to compensate for poor bookkeeping

8. 8 Management of Financial Information for Planning u Short Term Financial Planning –Clarification of Objectives –Coordination –Evaluation and Control

9. 9 Management of Financial Information for Planning u Long Term Financial Planning –The Capital Investment Decision F rate of return method F present value method F payback method –The Capacity Decision F break even point

10. 10 Management of Financial Information for Planning u Long Term Financial Planning –The Expansion Decision F Effect of fixed cost adjustments F Effect of variable cost adjustments

11. 11 Evaluation of Financial Performance u Management of Current Financial Position –length of time for payments –three essential components F time taken to pay accounts payable F time taken to sell inventory F time taken to receive payment for inventory

12. 12 Evaluation of Financial Performance u Evaluation of Financial Statements u Ratio Analysis –Liquidity ratios F current ratio = current assets / current liabilities –over 1:1, usually between 1:1 and 2:1 F Acid test/ Quick ratio = current assets-inventories/ current liabilities –1:1 is considered healthy

13. 13 Evaluation of Financial Performance u Evaluation of Financial Statements u Ratio Analysis –Productivity ratios F Inventory turnover = COGS / Average inventory at average cost F Inventory turnover = Sales / Average inventory at retail price F Collection period = Accounts receivable / Daily credit sales

14. 14 Evaluation of Financial Performance u Evaluation of Financial Statements u Ratio Analysis –Profitability ratios (4) F gross margin = sales - COGS F Profit on sales = net profit before tax / sales F Expense ratio = Expense item / Sales F Return on Investment = Net profit before tax / owner’s equity

15. 15 Evaluation of Financial Performance u Evaluation of Financial Statements u Ratio Analysis –Debt ratio F Total debt to equity = Total debt / owner’s equity –not greater than 4:1

16. 16 Credit and the Small Business u Advantages of Credit Use –will undoubtedly increase sales –necessary to remain competitive –credit customers exhibit more store loyalty –credit customers are more concerned with quality of service vs price –credit records can be used for future planning

17. 17 Credit and the Small Business u Disadvantages of Credit Use –will be some bad debts - depends on credit policy and monitoring –slow payers cause lost interest and principal –increases bookkeeping, mailing and collection expenses

18. 18 Credit and the Small Business u 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

19. 19 Credit and the Small Business u Use of Bank Credit Cards

20. 20 Appendices u A. Checklist for buying a small business computer u B. Use of Financial Ratios for a Small Business (Car Dealer)

21. 21 Concept Checks u 1. Describe the three steps in the accounting cycle. u 2. What are the three financial statements, as discussed in the text, that are valuable to a small business owner? u 3. List the accounting systems used by a small business.

22. 22 Concept Checks u 4. What are some of the capabilities of computers which can benefit small business? u 5. What are some possible disadvantages of computer ownership? u 6. In the short term why is budgeting a valuable tool?

23. 23 Concept Checks u 7. What are the three types of long-term financial planning decisions that could affect the business? u 8. What measure can be used to evaluate the results which are found in the financial statements? u 9. What is the business cycle of a small business? Why is it important?

24. 24 Concept Checks u 10. Why is ratio analysis important?