Marketing Management Indicator 2.03Implement accounting procedures to track money flow and to determine financial status.
The Importance of Adequate Cash Flow to Business Success• Making sure there is enough cash to operate is one of business’s most important financial activities• Movement of cash is important • Determines the amount can work with at any given time • If running low • May not be able to cover expenses • May not be able to pay the employees • May fail• Businesses that are profitable may experience cash-flow problems • Sources of cash that flow into a business • Some sources are more reliable and steady than others
Sources of Cash• Start-up money • Funds to cover expenses until revenue starts to come in• Sale of products • Main source of cash for established businesses• Loans • Businesses borrow cash to expand • Possibly needed when sales are slow• Interest • Invest extra cash to earn interest• Sale of assets • Anything of value a business owns that can be sold
Sources of Cash That Flow Out of a• Operating expenses Business materials Raw • • Payroll and benefits • Assets • Health insurance • Furniture, land, vehicles • Paid vacation and sick time • Loan payments • Retirement fund contributions • Taxes • Rent or mortgage payment • Property • Utility Costs • Income • Electric • Sales • Gas • Payroll • Water • Miscellaneous • Supplies • Legal fees • Shipping and delivery expenses • Maintenance and repairs • Advertising • Uncollectable accounts • Insurance • Unexpected emergencies• Cost of goods
How do Cash Flow Statements Tell When, Where, and How Much?• When • Warns when business will be low on cash • Identifies high and low points • Identifies months when certain sources of income will be collected• Where • What source • Debit cards, cash, credit cards• How much • Tells how much cash is flowing into the business • Can plan ahead for expected shortages
How New and EstablishedBusinesses Estimate their Cash Flow Figures • New businesses • Often a problem because do not have data from previous years • Rely on figures gained from marketing research • Established businesses • Review profit and loss statement to determine cash coming into and going out of business • Also use industry trends and predictions • Rely on previous financial information to be safe
Components of a Cash Flow Statement• Beginning cash balance • amount of money business has available at the beginning of each month, can include cash remaining from previous month • Includes loans, personal savings, investors • Same as listed amount from previous month’s ending balance• Cash receipts • Sale of goods and services • Loans • Sale of assets • Interest income • ONLY CASH• Total cash receipts • ALL sources of income listed under cash receipts • Examples include selling products, interest on investments, taking out loans
Components of a Cash Flow Statement• Total cash available • Amount of cash available to spend each month • Add total cash receipts to beginning cash balance• Cash payments • Flow out of the business each month • Three parts • Cost of goods sold • Variable expenses (shipping, taxes) • Fixed expenses (payroll, rent)• Total cash paid out • All of business’s cash payments • Includes cost of goods sold, variable expenses, and fixed expenses)• Ending cash balance • Amount of cash a business has left at the end of the month • Subtract total cash paid from total cash available • Is the beginning cash balance for the next month
How is cash flow calculated?• Write down Beginning Cash Balance• List them items under Cash Receipts • Sale of goods and services • Loans • Asset sales • Interest income• Add all items under Cash Receipts to get Total Cash Receipts• Add Beginning Cash Balance to Total Cash Receipts to get Total Cash Available• List all Cash Payments in one of three areas • Cost of goods to be sold (raw material, and resale inventory) • Fixed expenses (stay the same) • Variable expenses (change according to sales volume)• Add all items under Cash Payments to get Total Cash Paid Out• Subtract Total Cash Paid Out FROM Total Cash Available to get Ending Cash Balance
Balance Sheet Example Company Balance Sheet December 31, 2010ASSETS LIABILITIESCurrent Assets Current LiabilitiesCash $ 2,100 Notes Payable $ 5,000Petty Cash 100 Accounts Payable 35,900Temporary Investments 10,000 Wages Payable 8,500Accounts Receivable - net 40,500 Interest Payable 2,900Inventory 31,000 Taxes Payable 6,100Supplies 3,800 Warranty Liability 1,100Prepaid Insurance 1,500 Unearned Revenues 1,500 Total Current Assets 89,000 Total Current Liabilities 61,000 -Investments 36,000 Long-term Liabilities Notes Payable 20,000Property, Plant & Equipment Bonds Payable 400,000Land 5,500 Total Long-term Liabilities 420,000Land Improvements 6,500Buildings 180,000Equipment 201,000 Total Liabilities 481,000Less: Accum Depreciation (56,000) Prop, Plant & Equip - net 337,000 -Intangible Assets STOCKHOLDERS EQUITY Goodwill 105,000 Common Stock 110,000 Trade Names 200,000 Retained Earnings 229,000 Total Intangible Assets 305,000 Less: Treasury Stock (50,000) Total Stockholders Equity 289,000Other Assets 3,000 -Total Assets $770,000 Total Liab. & Stockholders Equity $770,000The notes to the sample balance sheet have been omitted.
Components of a Balance Sheet• Assets – resources of monetary value • Current Assets • Cash • Cash equivalents • Accounts receivable • Inventory • Intangible Assets (life insurance, copyrights, franchises, patents)• Liabilities – debts owed by the company • Current liabilities • Accounts payable • Taxes • Dividends• Equity – value of a business to its owners after all the commitments have been met
Examples of a Business’s Current Assets• Cash• Money market funds• Short term investments• Accounts receivable• Notes receivable• Inventory
Examples of Current Liabilities• Accounts payable• Taxes• Dividends• Short-term loans• Interest payable• Consumer deposits• Tax reserves
Examples of Long-term Liabilities• Debts that will take longer than one year to pay off• Mortgage• Leases• Deferred taxes
Sources of Stockholder Equity• Original money invested in business• Stock sales (sell portion of company for money)• Retained earnings (profits put back into the business)
A Balance Sheet is a Snapshot of a Business’s Financial Condition• Gives a fairly clear picture of the business at the moment• Gives the business’s financial condition at a specific moment in time• Allows a business owner to quickly get a handle on the financial strength and capabilities of the business• Allows a creditor to see what a company owns as well as what it owes to other parties as of the date it was run.
An income statement• Tells total revenue, expenses, and profit/loss• is prepared to tell you how much money a corporation made or lost and is a record of the company’s profitability.A balance sheet• tells assets, liabilities, and capital• is prepared to tell investors how much money the company has, how much it owes, and what is left for the stockholders.• it can identify and analyze trends.
Ways a Business Can Use Its Balance Sheet• Easily understand their current financial state• Keeps business up to speed on the current state of relevant finances• Get a quick handle on the financial strength and capabilities of the business• Identify and analyze trends
Purpose of an Income Statement• Summarizes where the business’s money came from and where it went• Summary of a business’s income and expenses over a period of time• Also known as • earnings statement • operating statement • profit-and-loss statement
Categories of Components of Income Statements• Revenue revenue • Sales of business’s goods and services • Total profit BEFORE all remaining • Interest earned expenses have been deducted • Return on investments • Operating expenses (variable/fixed) • Sale of business’s assets • Employee wages/salaries• Cost of goods sold • Insurance • Raw materials • Utilities • Packaging • Mortgage/rent • Shipping • Advertising • Labor • Interest on outstanding loans • Supplies • Net income • Return/unsold/stolen items • Known as the bottom line• Gross profit • Final profit of the business • Subtract cost of goods sold from
Income Statement is Cumulative• Shows a business’s total financial picture• Represents a total for specific period of time
Who Analyzes the Information found in Income Statements• Top executives and managers• Creditors• Investors
What is the Difference Between Depreciation Expense and Accumulated Depreciation? • Accumulated depreciation is all of the depreciation ever accumulated against the assets currently in service. It is shown on the balance sheet as a contra (negative) asset, directly below the assets it relates to. Depreciation expense is the current periods depreciation of the assets currently in service. It is shown on the income (P&L) statement as an expense.