SMALL BUSINESS MANAGEMENT

1
SMALL BUSINESS MANAGEMENT

• Chapter Ten
• 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

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The Accounting Cycle

• Recording transactions
• Classifying transaction tools
• Summarizing data
• Balance Sheet(Statement of Financial Position)
• Income Statement (Statement of Profit and Loss)
• Cash Flow Statement and/or Changes in Financial
  Position

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Accounting Systems for Small Business

• One-Book System
• One-Write System
• Multi Journal System
• Outsourcing Financial Activities

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Accounting Systems for Small Business

• Small Business Computer Systems
• Applications
• Accounts payable, Accounts receivable, Business
  modeling, General ledger, Inventory control,
  Order entry, Payroll, Word processing, The
  Internet.
• Benefits
• Reduce labor expense, Shorten billing cycle,
  Carry less inventory, Increase sales, Control
  costs, manage cash, Plan-control growth.

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Accounting Systems for Small Business

• Small Business Computer Systems
• Functions
• word processing
• general ledger
• database files
• payroll
• financial planning
• capital investment decisions

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Accounting Systems for Small Business

• Small Business Computer Systems
• Disadvantages
• Cost
• Obsolescence
• Employee resistance
• Capabilities
• Setup time
• Failure to compensate for poor bookkeeping

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Management of Financial Information for Planning

• Short Term Financial Planning
• Clarification of Objectives
• Coordination
• Evaluation and Control

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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

10
Management of Financial Information for Planning

• Long Term Financial Planning
• The Expansion Decision
• Effect of fixed cost adjustments
• Effect of variable cost adjustments

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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

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Evaluation of Financial Performance

• Evaluation of Financial Statements
• Ratio Analysis
• Liquidity ratios
• current ratio current assets / current
  liabilities
• over 11, usually between 11 and 21
• Acid test/ Quick ratio current
  assets-inventories/ current liabilities
• 11 is considered healthy

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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

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Evaluation of Financial Performance

• Evaluation of Financial Statements
• Ratio Analysis
• Profitability ratios (4)
• gross margin sales - COGS
• Profit on sales net profit before tax / sales
• Expense ratio Expense item / Sales
• Return on Investment Net profit before tax /
  owners equity

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Evaluation of Financial Performance

• Evaluation of Financial Statements
• Ratio Analysis
• Debt ratio
• Total debt to equity Total debt / owners
  equity
• not greater than 41

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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

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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 principal
• increases bookkeeping, mailing and collection
  expenses

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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

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Credit and the Small Business

• Use of Bank Credit Cards

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Appendices

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

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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 accounting systems used by a small
  business.

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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?

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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?

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Concept Checks

• 10. Why is ratio analysis important?