1. SMALL BUSINESS MANAGEMENT
Chapter 10
Financial Management

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

3. The Accounting Cycle 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

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

5. Accounting Systems for Small Business
Small Business Computer Systems
Disadvantages
Cost
Obsolescence
Employee Resistance
Capabilities
Setup Time
Failure to Compensate for Poor Bookkeeping

6. Management of Financial Information for Planning
Short Term Financial Planning
Clarification of Objectives
Coordination
Evaluation and Control

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

8. Management of Financial Information for Planning
Long Term Financial Planning (cont.)
The Expansion Decision
Effect of fixed cost adjustments
Effect of variable cost adjustments

9. Evaluation of Financial Performance
Management of Current Financial Position
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

10. 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

11. 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

12. 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

13. 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

14. Credit and the Small Business
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

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

16. 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

17. Credit and the Small Business
Use of Bank Credit Cards

18. 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.

19. 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?

20. 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?

21. Concept Checks
10. Why is ratio analysis important?

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