SMALL BUSINESS MANAGEMENT Chapter 10 Financial Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit and the Small Business Use of Bank Credit Cards

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.

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?

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?

Concept Checks 10. Why is ratio analysis important?

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