SMALL BUSINESS
MANAGEMENT
Chapter 10
Financial Management
Entrepreneurs
To _____ and control
To motivate employees
Investors
To _____ performance
Accounting Information
Lenders
To evaluate creditworthiness
Government
To _____ 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
Financial Statements
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Balance Sheet
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_____ of what a business owns and what it
owes
Income Statement
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(Statement of Financial Position)
(Statement of Profit and Loss)
_____ of operations over a given period of time
Cash Flow Statement (Ch 7)
Changes in Financial Position

_____ in balance sheet accouts of a set period of time
Accounting Systems for Small Business
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One-Book System
One-Write System
Multi-journal System
Outsourcing Financial Activities
Accounting Systems for Small Business
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Small Business Computer Systems
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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
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Accounting Systems for Small Business
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Disadvantages
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Cost
Obsolescence
Employee _____
Capabilities
Setup Time
Failure to Compensate for _____
Bookkeeping
Management of Financial Information for Planning

Short Term Financial Planning

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Preparing an estimated future financial
result ( Proforma or budget )
Budget is valuable because

Clarification of Objectives

Coordination
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Evaluation and Control

Variance analysis
Management of Financial Information for Planning
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Long Term Financial Planning

The Capital Investment Decision

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The Capacity Decision
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Baron of _____
Cottage _____
The Expansion Decision
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The Capital Investment Decision

rate of return method (PG 315 )

payback method (PG 315 )
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present value method

NPV or IRR ( Get a financial calculator )
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The Capacity Decision
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break even point

which tells you the sales volume you need to
break even, under different price or cost
scenarios
Management of Financial Information for Planning

The Expansion Decision
Effect of fixed cost adjustments
 Effect of variable cost adjustments


Use BEP on incremental basis
Evaluation of Financial Performance
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Management of Current Financial
Position
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Making profit but cash poor

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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
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Evaluation of Financial Statements
Ratio Analysis
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Liquidity ratios
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current ratio = current assets / current
liabilities

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over 1:1, usually between 1:1 and 2:1
Acid test/ Quick ratio = current assetsinventories/ current liabilities

1:1 is considered healthy
Evaluation of Financial Performance

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Evaluation of Financial Statements
Ratio Analysis
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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
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Evaluation of Financial Statements
Ratio Analysis
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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
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Evaluation of Financial Performance
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Evaluation of Financial Statements
Ratio Analysis
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Debt ratio

Total debt to equity = Total debt /
owner’s equity

not greater than 4:1
Credit and the Small Business
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Advantages of Credit Use

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will undoubtedly increase sales
necessary to _____ competitive
credit customers exhibit more store
loyalty
credit customers are more concerned
with _____ of service vs. price
credit records can be _____ for future
planning
Credit and the Small Business
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Disadvantages of Credit Use
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will be some bad debts - depends on
credit policy and monitoring
slow _____ cause lost interest and
capital
increases bookkeeping, _____ and
collection expenses
Credit and the Small Business

Management of a Credit Program
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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


Maybe cheaper and easier than running
your own credit program
Usually 2%-6% of transaction
Sam’s Paint and Drywall Pg 324
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6a.
From the above balance sheet and
income statement of Sam's Paint and Drywall
determine the following ratios:
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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.
Concept Checks
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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
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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
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7. What are the three types of longterm 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
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10. Why is ratio analysis important?
Appendices
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A. Checklist for buying a small
business computer
B. Use of Financial Ratios for a
Small Business (Car Dealer)