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SMALL BUSINESS MANAGEMENT
Chapter TenChapter Ten
Financial ManagementFinancial Management
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The Need for Financial Records
Uses of Accounting InformationUses of Accounting Information
– EntrepreneursEntrepreneurs To plan and controlTo plan and control To motivate employeesTo motivate employees
– InvestorsInvestors To evaluate performanceTo evaluate performance
– LendersLenders To evaluate creditworthinessTo evaluate creditworthiness
– GovernmentGovernment To verify taxes owedTo verify taxes owed To approve new stock issuesTo approve new stock issues
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The Accounting Cycle
Recording transactionsRecording transactions Classifying transaction toolsClassifying transaction tools Summarizing dataSummarizing data
– Balance Sheet(Statement of Financial Position)Balance Sheet(Statement of Financial Position)– Income Statement (Statement of Profit and Income Statement (Statement of Profit and
Loss)Loss)– Cash Flow Statement and/or Changes in Cash Flow Statement and/or Changes in
Financial PositionFinancial Position
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Accounting Systems for Small Business
One-Book SystemOne-Book System One-Write SystemOne-Write System Multi Journal SystemMulti Journal System Outsourcing Financial ActivitiesOutsourcing Financial Activities
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Accounting Systems for Small Business
Small Business Computer SystemsSmall Business Computer Systems– ApplicationsApplications
Accounts payable, Accounts receivable, Business Accounts payable, Accounts receivable, Business modeling, General ledger, Inventory control, Order modeling, General ledger, Inventory control, Order entry, Payroll, Word processing, The Internet.entry, Payroll, Word processing, The Internet.
– BenefitsBenefits Reduce labor expense, Shorten billing cycle, Carry Reduce labor expense, Shorten billing cycle, Carry
less inventory, Increase sales, Control costs, manage less inventory, Increase sales, Control costs, manage cash, Plan-control growth.cash, Plan-control growth.
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Accounting Systems for Small Business
Small Business Computer SystemsSmall Business Computer Systems FunctionsFunctions
– word processingword processing– general ledgergeneral ledger– database filesdatabase files– payrollpayroll– financial planningfinancial planning– capital investment decisionscapital investment decisions
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Accounting Systems for Small Business
Small Business Computer SystemsSmall Business Computer Systems DisadvantagesDisadvantages
– CostCost– ObsolescenceObsolescence– Employee resistanceEmployee resistance– CapabilitiesCapabilities– Setup timeSetup time– Failure to compensate for poor bookkeepingFailure to compensate for poor bookkeeping
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Management of Financial Information for Planning
Short Term Financial PlanningShort Term Financial Planning
– Clarification of ObjectivesClarification of Objectives
– CoordinationCoordination
– Evaluation and ControlEvaluation and Control
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Management of Financial Information for Planning
Long Term Financial PlanningLong Term Financial Planning– The Capital Investment DecisionThe Capital Investment Decision
rate of return methodrate of return method present value methodpresent value method payback methodpayback method
– The Capacity DecisionThe Capacity Decision break even pointbreak even point
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Management of Financial Information for Planning
Long Term Financial PlanningLong Term Financial Planning– The Expansion DecisionThe Expansion Decision
Effect of fixed cost adjustmentsEffect of fixed cost adjustments Effect of variable cost adjustmentsEffect of variable cost adjustments
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Evaluation of Financial Performance
Management of Current Financial PositionManagement of Current Financial Position– length of time for paymentslength of time for payments– three essential componentsthree essential components
time taken to pay accounts payabletime taken to pay accounts payable time taken to sell inventorytime taken to sell inventory time taken to receive payment for inventorytime taken to receive payment for inventory
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Evaluation of Financial Performance
Evaluation of Financial StatementsEvaluation of Financial Statements Ratio AnalysisRatio Analysis
– Liquidity ratiosLiquidity ratios current ratio = current assets / current liabilitiescurrent ratio = current assets / current liabilities
– over 1:1, usually between 1:1 and 2:1over 1:1, usually between 1:1 and 2:1
Acid test/ Quick ratio = current assets-inventories/ Acid test/ Quick ratio = current assets-inventories/ current liabilitiescurrent liabilities
– 1:1 is considered healthy1:1 is considered healthy
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Evaluation of Financial Performance
Evaluation of Financial StatementsEvaluation of Financial Statements Ratio AnalysisRatio Analysis
– Productivity ratiosProductivity ratios Inventory turnover = COGS / Average inventory at Inventory turnover = COGS / Average inventory at
average costaverage cost Inventory turnover = Sales / Average inventory at Inventory turnover = Sales / Average inventory at
retail priceretail price Collection period = Accounts receivable / Daily Collection period = Accounts receivable / Daily
credit salescredit sales
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Evaluation of Financial Performance
Evaluation of Financial StatementsEvaluation of Financial Statements Ratio AnalysisRatio Analysis
– Profitability ratios (4)Profitability ratios (4) gross margin = sales - COGSgross margin = sales - COGS Profit on sales = net profit before tax / sales Profit on sales = net profit before tax / sales Expense ratio = Expense item / SalesExpense ratio = Expense item / Sales Return on Investment = Net profit before tax / Return on Investment = Net profit before tax /
owner’s equityowner’s equity
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Evaluation of Financial Performance
Evaluation of Financial StatementsEvaluation of Financial Statements Ratio AnalysisRatio Analysis
– Debt ratioDebt ratio Total debt to equity = Total debt / owner’s equityTotal debt to equity = Total debt / owner’s equity
– not greater than 4:1not greater than 4:1
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Credit and the Small Business
Advantages of Credit UseAdvantages of Credit Use– will undoubtedly increase saleswill undoubtedly increase sales– necessary to remain competitivenecessary to remain competitive– credit customers exhibit more store loyaltycredit customers exhibit more store loyalty– credit customers are more concerned with credit customers are more concerned with
quality of service vs pricequality of service vs price– credit records can be used for future planningcredit records can be used for future planning
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Credit and the Small Business
Disadvantages of Credit UseDisadvantages of Credit Use– will be some bad debts - depends on credit will be some bad debts - depends on credit
policy and monitoringpolicy and monitoring– slow payers cause lost interest and principalslow payers cause lost interest and principal– increases bookkeeping, mailing and collection increases bookkeeping, mailing and collection
expensesexpenses
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Credit and the Small Business
Management of a credit programManagement of a credit program– Determine Administrative PoliciesDetermine Administrative Policies– Set Criteria for Granting CreditSet Criteria for Granting Credit– Set up a System to Monitor AccountsSet up a System to Monitor Accounts– Establish a Procedure for CollectionEstablish a Procedure for Collection
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Credit and the Small Business
Use of Bank Credit CardsUse of Bank Credit Cards
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Appendices
A. Checklist for buying a small business A. Checklist for buying a small business computercomputer
B. Use of Financial Ratios for a Small B. Use of Financial Ratios for a Small Business (Car Dealer)Business (Car Dealer)
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Concept Checks
1. Describe the three steps in the accounting 1. Describe the three steps in the accounting
cycle.cycle.
2. What are the three financial statements , as 2. What are the three financial statements , as
discussed in the text, that are valuable to a discussed in the text, that are valuable to a
small business owner?small business owner?
3. List the accounting systems used by a 3. List the accounting systems used by a
small business. small business.
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Concept Checks 4. What are some of the capabilities of 4. What are some of the capabilities of
computers which can benefit small computers which can benefit small business?business?
5. What are some possible disadvantages of 5. What are some possible disadvantages of computer ownership?computer ownership?
6. In the short term why is budgeting a 6. In the short term why is budgeting a valuable tool? valuable tool?
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Concept Checks
7. What are the three types of long-term 7. What are the three types of long-term financial planning decisions that could financial planning decisions that could affect the business?affect the business?
8. What measure can be used to evaluate the 8. What measure can be used to evaluate the results which are found in the financial results which are found in the financial statements?statements?
9. What is the business cycle of a small 9. What is the business cycle of a small business? Why is it important? business? Why is it important?
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Concept Checks
10. Why is ratio analysis important?10. Why is ratio analysis important?
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