1. Show Me the Money Resources I Link Link Built by Stambaugh/2008 Jeff Stambaugh Dillard College of Business/Rm 257A jeff.stambaugh@mwsu.edu http://faculty.mwsu.edu/business/jeff.stambaugh

2. 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

3. 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?

4. 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

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

6. 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

7. 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

8. 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

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

10. 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)

11. 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

12. 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

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

14. 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

15. 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

16. Balance Sheet Built by Stambaugh/2008 Assets Current Assets Cash $ 52,400.00 Accounts receivable $ 11,300.00 Inventory $ 15,600.00 Total current assets $ 79,300.00 Fixed assets PPE $ 80,000.00 Accum depreciation $ (10,000.00) Net fixed assets $ 70,000.00 Total assets $149,300.00 Liabilities and Owner's Equity Current liabilities Accounts payable$5,300.00 Note payable to bank$2,700.00 Dep. from customers$6,000.00 Total current liabilities$14,000.00 Long term mortgage$50,000.00 Total liabilities$64,000.00 Owner's Equity Retained earnings$85,300.00 Total Owners' Equity$85,300.00 Total liability and equities$149,300.00

17. 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

18. Cash Flow Statement Built by Stambaugh/2008 20072006 Cash Flow from Ops Net Income $ 130,000.00 $ 74,000.00 Additions (Cash Sources) Depreciation $ 13,000.00 $ 11,000.00 Decreases in Accounts Receivable $ 5,000.00 $ (2,000.00) Decrease in Inventory $ 2,000.00 $ 2,500.00 Subtractions (Uses of Cash) Decreases in Accounts Payable $ (5,000.00) $ 4,150.00 Net Cash from ops $ 145,000.00 $ 89,650.00 Cash Flow from Investing Purchase of Equipment $ (200,000.00) $ 5,000.00 Net Cash from Investing $ (200,000.00) $ 5,000.00 Cash flow from Financing Proceeds from L/T Debt $ 100,000.00 Principal/Interest Paid $ (15,000.00) $ (55,499.00) Net Cash from Financing $ 85,000.00 $ (55,499.00) Increase In Cash Flow $ 30,000.00 $ 39,151.00 Begin Cash $ 54,391.00 $ 15,240.00 End Cash $ 84,391.00 $ 54,391.00

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

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

21. 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