show me the money resources i link link built by stambaugh/2008 jeff stambaugh dillard college of...

Show Me the MoneyResources I Link

Built by Stambaugh/2008

Jeff StambaughDillard College of Business/Rm 257A

[email protected]://faculty.mwsu.edu/business/jeff.stambaugh

http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1373

mailto:[email protected]

Case Study: Should You Buy It?“Wings ‘R Us” (pg 408)


Variable costsFood 15,000

Beverage 4,500

Supplies (napkins, cleaning materials) 2,000

Labor 21,600

Total Variable Costs 43,100

Fixed Costs (rent, insurance, etc) 21,900

Do you replace existing fryer (bought used for $4K) with a new fryer that costs $25K (+ $5,500 for ship/install – total $30,550)?

• Saves $1,000 per month in utilities and insurance• More capacity than existing fryer

Case Study: Should You Buy It?“Wings ‘R Us” (cont)


Your account says depreciation under MACR would be:

Yr 1: 6,100 Yr 2: 9,760 Yr 3: 5,856K Yr 4 & 5: 3,513

So, do you buy?

What if accountant says depreciation should be $4,357 in years 1-6 and $4,358 in year 7. How does that change your decision?

What are the “costs” associated with the purchase?

Which Business Will Pose Greatest / Least Cash Management Issues?


■ Furniture retail store■ Custom home builder■ Music concert promoter■ Restaurant■ Income tax preparation firm■ Massage therapy firm■ Used (very used) car dealership■ Custom Machine Shop■ Waterpark

The Money Cycle


Cash Spent to Generate

Product

Cash Received from Product

Sales

Fixed Costs

Maximizing Inflows


■ Take deposits / require progress payments■ Reward prompt payments■ Ask to be paid■ Take on non-core business (seasonal especially)■ Factoring receivables (2-7% per month)■ Borrow more cash

Credit Cards


■ Pro:■ Almost expected by customers■ They bear risk for money loaned■ Short cash cycle

■ Con:■ Fees (2.5%)■ Charge backs

Minimizing Outflows


Inventory Control (drawdown) Curtailing non-essential expenses Trade discounts (>1% for 30 days) Know billing cycles Employ non-cash incentives Consignment goods Barter (offer your services in lieu of payment) Renegotiate terms

What I Need is a System


Accountants to the rescue … kind of

What’s Right About Accounting for Entrepreneurial Businesses?


■ Needed to make sound financial decisions (Managerial Accounting)

■ Needed to get funds from investors / banks (Financial Accounting)

■ Needed to do your taxes (Tax Accounting)

What’s Wrong About Accounting for Entrepreneurial Businesses?


■ Very specific lingo and application to keep it standardized

■ Some information may not paint useful picture■ Can be manipulated by unscrupulous folks■ Can be time consuming / expensive

Key Terms


■ Cost: value given up to obtain something you want■ Expense: decrease in owners equity caused by

consuming your product or service■ Revenue: Money generated from sale of goods /

services, or any other use of assets associated with the main operations of firm

■ Assets = Liabilities + Owners Equity

Big 3 Statements


■ Income statement■ Balance sheet■ Cash flow statement

Income Statement


Income Statement for year ending 12/31/20XX

Sales revenue 356,428Less cost of goods sold 105,200Gross margin 251,228Less operating expenses

Marketing 30,000 SG&A 30,000 Depreciation 10,000 Total operating expenses 70,000Operating income 181,228Less interest expense 6,000Income before taxes 175,228Income tax expense 40,000Net income 135,228

Income Statement Issues


■ Detail of “where money is going”■ Operating income is key for many decisions■ Does NOT track cash

■ What and when is revenue

Balance Sheet


AssetsCurrent Assets Cash $ 52,400.00 Accounts receivable $ 11,300.00 Inventory $ 15,600.00Total current assets $ 79,300.00 Fixed assets PPE $ 80,000.00 Accum depreciation $ (10,000.00)Net fixed assets $ 70,000.00

Total assets $149,300.00

Liabilities and Owner's EquityCurrent liabilities Accounts payable $5,300.00 Note payable to bank $2,700.00 Dep. from customers $6,000.00 Total current liabilities $14,000.00 Long term mortgage $50,000.00 Total liabilities $64,000.00

Owner's Equity Retained earnings $85,300.00 Total Owners' Equity $85,300.00

Total liability and equities $149,300.00

Balance Sheet Issues


Snapshot of business Some useful ratios: quick, D/E Assets probably do not reflect true market value Many firm assets (and maybe liabilities) not captured

Cash Flow Statement


2007 2006Cash Flow from OpsNet Income $ 130,000.00 $ 74,000.00 Additions (Cash Sources)Depreciation $ 13,000.00 $ 11,000.00 Decreases in Accounts Receivable $ 5,000.00 $ (2,000.00)Decrease in Inventory $ 2,000.00 $ 2,500.00

Subtractions (Uses of Cash)Decreases in Accounts Payable $ (5,000.00) $ 4,150.00

Net Cash from ops $ 145,000.00 $ 89,650.00 Cash Flow from InvestingPurchase of Equipment $ (200,000.00) $ 5,000.00 Net Cash from Investing $ (200,000.00) $ 5,000.00

Cash flow from FinancingProceeds from L/T Debt $ 100,000.00

Principal/Interest Paid $ (15,000.00) $ (55,499.00)Net Cash from Financing $ 85,000.00 $ (55,499.00)

Increase In Cash Flow $ 30,000.00 $ 39,151.00 Begin Cash $ 54,391.00 $ 15,240.00 End Cash $ 84,391.00 $ 54,391.00

Cash Flow Statement Issues


Critical to startups (month-by-month not uncommon)

Pro Forma Budgeting


Budget: Plan for future Mechanism for control: Variance analysis

Class Takeaways


■ Financial skills are very important to success as an entrepreneur (and this class!)

■ Understanding “where’s the money going” a matter of survival for a venture

show me the money resources i link link built by stambaugh/2008 jeff stambaugh dillard college of...

Documents

stambaugh2008 cash

cash slide

stambaugh slide

stambaugh2008 accountants

stambaugh2008 pro

stambaugh2008 cost

existing fryer slide

taxes tax accounting