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SMALL BUSINESS MANAGEMENT
Chapter 10Financial Management
Ocean Hotel
What issues concerning financial management did ocean hotel encounter?
Sugar High I & II Past Due Mohair
Fashion Diva
Accounting Information
EntrepreneursTo plan and controlTo motivate employees
InvestorsTo evaluate performance
LendersTo evaluate creditworthiness
GovernmentTo verify taxes owedTo approve new stock issues
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
The Accounting Cycle
Financial Statements
Balance Sheet (Statement of Financial Position) Snapshot of what a business owns and what it
owes
Income Statement (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
Outsourcing Financial Activities Manual Systems
Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.
Accounting Systems for Small Business
Small Business Computer Systems Disadvantages
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 Baron of Beer
The Capacity Decision 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 )
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
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
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 assets-
inventories/ current liabilities 1:1 is considered healthy
Evaluation of Financial StatementsRatio 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 StatementsRatio 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 StatementsRatio Analysis
Debt ratio Total debt to equity = Total debt /
owner’s equity not greater than 4:1
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
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
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:
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?