1. SMALL BUSINESS MANAGEMENT
Chapter 10
Financial Management
Managing Your Business Finances
If you want to succeed in business, you need to know about financial management. No matter how skilled you are at creating a product, providing a service, or marketing your wares, the money you earn will slip between your fingers if you don't know how to efficiently collect it, keep track of it, save it, and spend or invest it wisely.
Poor financial management is one of the leading reasons that businesses fail. In many cases, failure could have been avoided if the owners had applied sound financial principles to all their dealings and decisions.
Financial management is not something that you can leave to your banker, financial planner, or accountant — you need to understand the basic principles yourself and use them on a daily basis, even if you plan to leave the more complicated work to hired professionals
What issues concerning financial management did ocean hotel encounter?
Accounting cycle
Profitability
Productivity
financing
Short term financial planning
Long term financial planning
What issues concerning financial management did ocean hotel encounter?
Ocean Hotel
Ocean Hotel

2. To evaluate performance
Entrepreneurs
To plan and control
To motivate employees
Investors
To evaluate performance
Accounting Information
Lenders
To evaluate creditworthiness
Uses of Accounting information
Unless your business is accounting or bookkeeping, keeping financial records is probably not what you do best. Most likely, you'd rather spend your time selling your product or service. However, if you are going to run a successful business, accurate and timely financial information is a must. Here are some of the reasons why you need a good financial recordkeeping system:
Monitoring the success or failure of your business. Providing the information you need to make decisions. Obtaining bank financing..
Obtaining other sources of capital.
Budgeting.
Preparing your income tax return.
Submitting sales taxes.
Distributing profits.
Government
To verify taxes owed
To approve new stock issues

3. The Accounting Cycle Recording Transactions
Classifying Transaction Totals
Summarizing Data
Your Basic Bookkeeping
To succeed in business, one of your most important tools is financial analysis, based on your business records. Accurate financial records will help you answer some very important questions. Are you making money, or losing it? How much? Is your business on sound financial ground, or are troubles lurking ahead?
A sound bookkeeping system is the foundation on which all of this valuable financial information can be built.As a small business owner, you probably rely on an outside accountant to do your taxes and prepare financial statements.
However, like many small business owners, you may find that it's too expensive to pay an accountant to do routine bookkeeping chores. Someone in your organization must take on the responsibility of keeping an accurate set of financial records. Fortunately, you may find this task easier than you thought, especially if you use your computer.
Balance Sheet (Statement of Financial Position)
Income Statement (Statement of Profit and Loss)
Cash Flow Statement and/or Changes in Financial Position

4. Financial Statements Balance Sheet (Statement of Financial Position)
Snapshot of what a business owns and what it owes
Income Statement (Statement of Profit and Loss)
Results of operations over a given period of time
Cash Flow Statement (Ch 7)
Changes in Financial Position
Changes in balance sheet accounts of a set period of time

5. Accounting Systems for Small Business
Small Business Computer Systems
Top 5 Accounting Software For Small Business
Simply Accounting Accounting Software
MYOB Plus Accounting Software
Intuit QuickBooks Accounting Software
Peachtree Complete Accounting Software
AccountEdge Accounting Software

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

7. Short term Financial Planning
Short-term corporate finance decisions are called working capital management
deal with the balance of current assets and current liabilities;
the focus here is on
managing cash,
inventories,
short-term borrowing and lending (e.g., the credit terms extended to customers).

8. Preparing an estimated future financial result
Management of Financial Information for Planning Short Term Financial Planning
Preparing an estimated future financial result
( Pro forma income statement or budget )
Budget is valuable because
Clarification of Objectives
Coordination
Evaluation and Control
Variance analysis

9. Long term Financial Planning
Capital investment decisions comprise
the long-term choices about which projects receive investment,
whether to finance that investment with equity or debt,
when or whether to pay dividends to shareholders.

10. The Capital Investment Decision The Capacity Decision
Management of Financial Information for Planning Long Term Financial Planning
The Capital Investment Decision
Baron of Beer
The Capacity Decision
Cottage Cheesecake
The expansion Decision
Suger high
Sugar high
Sugar high

11. Clodhoppers
What are some of the problems of growth of Kraves Candy Company?
What could Chris emery and Larry Finson do to solve these problems?
What are the advantages and disadvantages of diversifying to other products besides clodhoppers?
What are some of the problems of growth of Kraves Candy Company?
owner-manager fatigue and stress,
lack of communication,
lack of coordination,
shortage of cash,
low profitability,
breakdown in production efficiency,
lack of information
and possible decreasing employee morale.
What could Chris emery and Larry Finson do to solve these problems?
What are the advantages and disadvantages of diversifying to other products besides clodhoppers?

12. The Capital Investment Decision
rate of return method (PG 315 )
payback method (PG 315 )
present value method
NPV or IRR ( Get a financial calculator )
Using ARR can give you a quick estimate of the project's net profits, and can provide a basis for comparing several different projects. Under this method of analysis, returns for the project's entire useful life are considered (unlike the payback period method, which considers only the period it takes to recoup the original investment). However, the ARR method uses income data rather than cash flow and it completely ignores the time value of money.
There are a couple of drawbacks to using the payback period method. For one thing, it ignores any benefits that occur after the payback period, so a project that returns $1 million after a six-year payback period is ranked lower than a project that returns zero after a five-year payback. But probably the major criticism is that a straight payback method ignores the time value of money.

13. Factors affecting the investment in this business are:
1. Prime rate of interest - usually an investor will want a return at least two to three times the prime rate.
2. There is also some tax, personality and personal considerations. Refer to chapter five for all the considerations on buying a business
Question 3. Calculate the rate of return for the following investment. The total cost of the investment is $250,000, the depreciable life of the investment is 10 years and the annual profit (net of depreciation) is $30, What considerations other than financial ones exist?
Answer:
Rate of Return = Average profit / average investment
= $30,000/125,000
= 24%

14. Assume the annual depreciation charge for the investment in problem 3 is $25,000. Determine the payback period of the investment.
Payback period =
Total Investment / (Annual Depreciation + Annual Profit).
= $250,000 /($25,000 + $30,000)
= years

15. The Capacity Decision break even point
which tells you the sales volume you need to break even, under different price or cost scenarios

16. Determine the break-even point in dollars for an investment with fixed costs of $100,000 and an estimated contribution of 60 percent. How much revenue would it need to produce before your would invest?
Answer:
B.E.P. = Fixed Costs /Contribution per unit
= $100,000 /.6
= $166,667

17. Effect of fixed cost adjustments Effect of variable cost adjustments
Management of Financial Information for Planning The Expansion Decision
Effect of fixed cost adjustments
Effect of variable cost adjustments
Use BEP on incremental basis

18. Making profit but cash poor
Evaluation of Financial Performance Management of Current Financial Position
Making profit but cash poor
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

19. Mohair Sock
Explain how this firm could have a strong net income as reflected on the income statement but be cash poor so as not to meet their short term obligations?
Mohair Socks
Mohair Socks

20. 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
Liquidity Ratios
< Liquidity ratios are probably the most commonly used of all the business ratios. Your creditors may often be particularly interested in these because they show the ability of your business to quickly generate the cash needed to pay your bills. This information should also be highly interesting to you, since the inability to meet your short-term debts would be a problem that deserves your immediate attention.Liquidity ratios are sometimes called working capital ratios because that, in essence, is what they measure.The liquidity ratios are:
the current ratio
the quick ratio
Liquidity ratios are commonly examined by banks when they are evaluating a loan application. Once you get the loan, your lender may also require that you continue to maintain a certain minimum ratio, as part of the loan agreement. For that reason, steps to improve your liquidity ratios are sometimes necessary.

21. 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

22. 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

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

24. 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

25. 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

26. 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

27. Credit and the Small Business
Use of Bank Credit Cards
Maybe cheaper and easier than running your own credit program
Usually 2%-6% of transaction

28. Sam’s Paint and Drywall Pg 324
6a. From the above balance sheet and income statement of Sam's Paint and Drywall determine the following ratios:
1. Current
2. Inventory turnover
3. Profit to sales
4. Return on investment
5. Total debt to equity
6b. From Dunn & Bradstreet's Key Business Ratios on industry norms, evaluate each of the above ratios.

29. Appliance Recyclers Discuss the financial problems created by growth?
What strategy was followed to improve cash flow
What finally helped Anthony to be successful?
Appliance recyclers

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

31. Cash Flow Experience
Dick's Draperies has gross sales of $15,000 per month, one half which are on credit (paid within 30 days). Monthly expenses are as follows: wages, $3,000; utilities and rent, $2,000; advertising, $300; miscellaneous, $500. Inventory is purchased every three months and totals $30,000 for each order. Yearly expenses paid for in advance are insurance of $1,000 and a rent deposit of $700. Prepare a six-month cash flow statement for Dick's Draperies. What advice would you give this business based on the cash flow statement?

33. Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or a sales invoice.
A journal is a place to record the transactions of a business. The typical journals used to record the chronological, day-to-day transactions are sales and cash receipts journals and a cash disbursements journal. A general journal is used to record special entries at the end of an accounting period.
While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the accounts they affect. The general ledger is a collection of all balance sheet, income, and expense accounts used to keep a business's accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the general ledger accounts. This procedure is called "posting."
A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The sum of the debit balances should equal the sum of the credit balances. If total debits don't equal total credits, you must track down the errors.
Finally, financial statements are prepared from the information in your trial balance.

34. Accounting Systems for Small Business
One-Book System
One-Write System
Multi-journal System
Outsourcing Financial Activities
One-Book System
For very small businesses with very few transactions fig 10-8 in text gives example
One-Write System
Similar to one book but uses a carbon to reduce transcription errors
Multi-journal System
Used more and more because of inexpensive computers and software systems
Outsourcing Financial Activities
Usually keep journal transaction recording and ledger preparation in house and farm out the production of financial statements