Financial Statements and Financial Management
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Financial Statements and Financial Management

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Financial Statements and Financial Management Financial Statements and Financial Management Presentation Transcript

  • SMALL BUSINESS MANAGEMENT Financial Management and Financial Statements
  • 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)