SMALL BUSINESS
MANAGEMENT
Chapter Ten
Financial Management
1
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
2
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
3
Accounting Systems for Small Business
 One-Book
System
 One-Write System
 Multi Journal System
 Outsourcing Financial Activities
4
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.
5
Accounting Systems for Small Business
 Small
Business Computer Systems
 Functions
–
–
–
–
–
–
word processing
general ledger
database files
payroll
financial planning
capital investment decisions
6
Accounting Systems for Small Business
 Small
Business Computer Systems
 Disadvantages
–
–
–
–
–
–
Cost
Obsolescence
Employee resistance
Capabilities
Setup time
Failure to compensate for poor bookkeeping
7
Management of Financial Information for
Planning
 Short Term
Financial Planning
– Clarification of Objectives
– Coordination
– Evaluation and Control
8
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
9
Management of Financial Information for
Planning
 Long Term
Financial Planning
– The Expansion Decision
 Effect
of fixed cost adjustments
 Effect of variable cost adjustments
10
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
11
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
12
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
13
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 /
owner’s equity
14
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
15
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
16
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
17
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
18
Credit and the Small Business
 Use
of Bank Credit Cards
19
Appendices
 A.
Checklist for buying a small business
computer
 B. Use of Financial Ratios for a Small
Business (Car Dealer)
20
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.
21
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?
22
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?
23
Concept Checks
 10.
Why is ratio analysis important?
24