Financial Statements and Financial Management

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Financial Statements and Financial Management

  1. 1. SMALL BUSINESS MANAGEMENT Financial Management and Financial Statements
  2. 2. The Need for Financial Records <ul><li>Uses of Accounting Information </li></ul><ul><ul><li>Entrepreneurs </li></ul></ul><ul><ul><ul><li>To plan and control </li></ul></ul></ul><ul><ul><ul><li>To motivate employees </li></ul></ul></ul><ul><ul><li>Investors </li></ul></ul><ul><ul><ul><li>To evaluate performance </li></ul></ul></ul><ul><ul><li>Lenders </li></ul></ul><ul><ul><ul><li>To evaluate creditworthiness </li></ul></ul></ul><ul><ul><li>Government </li></ul></ul><ul><ul><ul><li>To verify taxes owed </li></ul></ul></ul><ul><ul><ul><li>To approve new stock issues </li></ul></ul></ul>
  3. 3. The Accounting Cycle <ul><li>Recording Transactions </li></ul><ul><li>Classifying Transaction Totals </li></ul><ul><li>Summarizing Data </li></ul><ul><ul><li>Balance Sheet (Statement of Financial Position) </li></ul></ul><ul><ul><li>Income Statement (Statement of Profit and Loss) </li></ul></ul><ul><ul><li>Cash Flow Statement and/or Changes in Financial Position </li></ul></ul>
  4. 4. Accounting Systems for Small Business <ul><li>One-Book System </li></ul><ul><li>One-Write System </li></ul><ul><li>Multi-journal System </li></ul><ul><li>Outsourcing Financial Activities </li></ul>
  5. 5. Accounting Systems for Small Business <ul><li>Small Business Computer Systems </li></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Obsolescence </li></ul></ul><ul><ul><li>Employee Resistance </li></ul></ul><ul><ul><li>Capabilities </li></ul></ul><ul><ul><li>Setup Time </li></ul></ul><ul><ul><li>Failure to Compensate for Poor Bookkeeping </li></ul></ul>
  6. 6. Management of Financial Information for Planning <ul><li>Short Term Financial Planning </li></ul><ul><ul><li>Clarification of Objectives </li></ul></ul><ul><ul><li>Coordination </li></ul></ul><ul><ul><li>Evaluation and Control </li></ul></ul>
  7. 7. Management of Financial Information for Planning <ul><li>Long Term Financial Planning </li></ul><ul><ul><li>The Capital Investment Decision </li></ul></ul><ul><ul><ul><li>rate of return method </li></ul></ul></ul><ul><ul><ul><li>present value method </li></ul></ul></ul><ul><ul><ul><li>payback method </li></ul></ul></ul><ul><ul><li>The Capacity Decision </li></ul></ul><ul><ul><ul><li>break even point </li></ul></ul></ul>
  8. 8. Management of Financial Information for Planning <ul><li>Long Term Financial Planning (cont.) </li></ul><ul><ul><li>The Expansion Decision </li></ul></ul><ul><ul><ul><li>Effect of fixed cost adjustments </li></ul></ul></ul><ul><ul><ul><li>Effect of variable cost adjustments </li></ul></ul></ul>
  9. 9. Evaluation of Financial Performance <ul><li>Management of Current Financial Position </li></ul><ul><ul><li>length of time for payments </li></ul></ul><ul><ul><li>three essential components </li></ul></ul><ul><ul><ul><li>time taken to pay accounts payable </li></ul></ul></ul><ul><ul><ul><li>time taken to sell inventory </li></ul></ul></ul><ul><ul><ul><li>time taken to receive payment for inventory </li></ul></ul></ul>
  10. 10. Evaluation of Financial Performance <ul><li>Evaluation of Financial Statements </li></ul><ul><li>Ratio Analysis </li></ul><ul><ul><li>Liquidity ratios </li></ul></ul><ul><ul><ul><li>current ratio = current assets / current liabilities </li></ul></ul></ul><ul><ul><ul><ul><li>over 1:1, usually between 1:1 and 2:1 </li></ul></ul></ul></ul><ul><ul><ul><li>Acid test/ Quick ratio = current assets-inventories/ current liabilities </li></ul></ul></ul><ul><ul><ul><ul><li>1:1 is considered healthy </li></ul></ul></ul></ul>
  11. 11. Evaluation of Financial Performance <ul><li>Evaluation of Financial Statements </li></ul><ul><li>Ratio Analysis </li></ul><ul><ul><li>Productivity ratios </li></ul></ul><ul><ul><ul><li>Inventory turnover = COGS / Average inventory at average cost </li></ul></ul></ul><ul><ul><ul><li>Inventory turnover = Sales / Average inventory at retail price </li></ul></ul></ul><ul><ul><ul><li>Collection period = Accounts receivable / Daily credit sales </li></ul></ul></ul>
  12. 12. Evaluation of Financial Performance <ul><li>Evaluation of Financial Statements </li></ul><ul><li>Ratio Analysis </li></ul><ul><ul><li>Profitability ratios </li></ul></ul><ul><ul><ul><li>Gross margin = sales - COGS </li></ul></ul></ul><ul><ul><ul><li>Profit on sales = net profit before tax / sales </li></ul></ul></ul><ul><ul><ul><li>Expense ratio = Expense item / Sales </li></ul></ul></ul><ul><ul><ul><li>Return on Investment = Net profit before tax / owner’s equity </li></ul></ul></ul>
  13. 13. Evaluation of Financial Performance <ul><li>Evaluation of Financial Statements </li></ul><ul><li>Ratio Analysis </li></ul><ul><ul><li>Debt ratio </li></ul></ul><ul><ul><ul><li>Total debt to equity = Total debt / owner’s equity </li></ul></ul></ul><ul><ul><ul><ul><li>not greater than 4:1 </li></ul></ul></ul></ul>
  14. 14. Credit and the Small Business <ul><li>Advantages of Credit Use </li></ul><ul><ul><li>will undoubtedly increase sales </li></ul></ul><ul><ul><li>necessary to remain competitive </li></ul></ul><ul><ul><li>credit customers exhibit more store loyalty </li></ul></ul><ul><ul><li>credit customers are more concerned with quality of service vs. price </li></ul></ul><ul><ul><li>credit records can be used for future planning </li></ul></ul>
  15. 15. Credit and the Small Business <ul><li>Disadvantages of Credit Use </li></ul><ul><ul><li>will be some bad debts - depends on credit policy and monitoring </li></ul></ul><ul><ul><li>slow payers cause lost interest and capital </li></ul></ul><ul><ul><li>increases bookkeeping, mailing and collection expenses </li></ul></ul>
  16. 16. Credit and the Small Business <ul><li>Management of a Credit Program </li></ul><ul><ul><li>Determine Administrative Policies </li></ul></ul><ul><ul><li>Set Criteria for Granting Credit </li></ul></ul><ul><ul><li>Set up a System to Monitor Accounts </li></ul></ul><ul><ul><li>Establish a Procedure for Collection </li></ul></ul>
  17. 17. Credit and the Small Business <ul><li>Use of Bank Credit Cards </li></ul>
  18. 18. Concept Checks <ul><li>1. Describe the three steps in the accounting cycle. </li></ul><ul><li>2. What are the three financial statements , as discussed in the text, that are valuable to a small business owner? </li></ul><ul><li>3. List the bookkeeping systems used by a small business. </li></ul>
  19. 19. Concept Checks <ul><li>4. What are some of the capabilities of computers which can benefit small business? </li></ul><ul><li>5. What are some possible disadvantages of computer ownership? </li></ul><ul><li>6. In the short term, why is budgeting a valuable tool? </li></ul>
  20. 20. Concept Checks <ul><li>7. What are the three types of long-term financial planning decisions that could affect the business? </li></ul><ul><li>8. What measure can be used to evaluate the results which are found in the financial statements? </li></ul><ul><li>9. What is the business cycle of a small business? Why is it important? </li></ul>
  21. 21. Concept Checks <ul><li>10. Why is ratio analysis important? </li></ul>
  22. 22. Appendices <ul><li>A. Checklist for buying a small business computer </li></ul><ul><li>B. Use of Financial Ratios for a Small Business (Car Dealer) </li></ul>

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