SMALL BUSINESS
MANAGEMENT
Chapter 10
Financial Management
Fashion Diva
What issues concerning financial management did ocean hotel encounter?
Sugar High I & II
Ocean Hotel
Past Due
Mohair
Entrepreneurs
To plan and control
To motivate employees
Investors
To evaluate performance
Accounting Information
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
Financial Statements

Balance Sheet



Snapshot of what a business owns and what it
owes
Income Statement


(Statement of Financial Position)
(Statement of Profit and Loss)
Results of operations over a given period of time
Cash Flow Statement (Ch 7)
Changes in Financial Position

Changes in balance sheet accounts of a set period of time
Accounting Systems for Small
Business
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
Outsourcing Financial Activities
Manual Systems
Copyright © 2014 McGraw-Hill Ryerson.
All rights reserved.
Accounting Systems for Small
Business
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
Small Business Computer Systems
Disadvantages
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
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Cost
Obsolescence
Employee Resistance
Capabilities
Setup Time
Failure to Compensate for Poor
Bookkeeping
Copyright © 2014 McGraw-Hill Ryerson.
All rights reserved.
Management of Financial Information for Planning
Short Term Financial Planning

Preparing an estimated future financial
result


( Pro forma income statement or budget )
Budget is valuable because

Clarification of Objectives

Coordination

Evaluation and Control

Variance analysis
Management of Financial Information for Planning
Long Term Financial Planning

The Capital Investment Decision
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
The Capacity Decision


Baron of Beer
Cottage Cheesecake
The expansion Decision

Suger high
Sugar high I & II
Clodhoppers



What are some of the problems of
growth of Kraves Candy Company?
What could Chris emery and Larry
Finson do to solve these problems?
What are the advantages and
disadvantages of diversifying to other
products besides clodhoppers?
The Capital Investment Decision

rate of return method (PG 312 )

payback method (PG 313 )

present value method

NPV or IRR ( Get a financial calculator )
Factors affecting the investment in this business are:
1.
Prime rate of interest - usually an investor will want a return at
least two to three times the prime rate.
2.
There is also some tax, personality and personal considerations.
Refer to chapter five for all the considerations on buying a business
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

Question 3. Calculate the rate of return for the
following investment. The total cost of the
investment is $250,000, the depreciable life of the
investment is 10 years and the annual profit (net
of depreciation) is $30,000. What considerations
other than financial ones exist?
Answer:
Rate of Return = Average profit / average
investment


Assume the annual depreciation charge
for the investment in problem 3 is
$25,000. Determine the payback period
of the investment.
Payback period =


=
Total Investment / (Annual Depreciation +
Annual Profit).
The Capacity Decision

break even point

which tells you the sales volume you need
to break even, under different price or cost
scenarios
Determine the break-even point in dollars for
an investment with fixed costs of $100,000
and an estimated contribution of 60 percent.
How much revenue would it need to produce
before your would invest?
Answer:
B.E.P. = Fixed Costs /Contribution per unit
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
Management of Current Financial Position

Making profit but cash poor


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

Mohair Sock

Explain how this firm could have a
strong net income as reflected on
the income statement but be cash
poor so as not to meet their short
term obligations?
Mohair Socks
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 assetsinventories/ current liabilities

1:1 is considered healthy
Evaluation of Financial Statements
Ratio Analysis

Productivity ratios

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
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 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 Statements
Ratio Analysis

Debt ratio

Total debt to equity = Total debt /
owner’s equity

not greater than 4:1
Advantages of Credit Use



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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
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
Past Due
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 326

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.
Appendices


A. Checklist for buying a small
business computer
B. Use of Financial Ratios for a
Small Business (Car Dealer)
Cash Flow Experience (pg 326)

Dick's Draperies has gross sales of $15,000
per month, one half which are on credit (paid
within 30 days). Monthly expenses are as
follows: wages, $3,000; utilities and rent,
$2,000; advertising, $300; miscellaneous,
$500. Inventory is purchased every three
months and totals $30,000 for each order.
Yearly expenses paid for in advance are
insurance of $1,000 and a rent deposit of
$700. Prepare a six-month cash flow
statement for Dick's Draperies. What advice
would you give this business based on the
cash flow statement?