small business management chapter 10 financial management
TRANSCRIPT
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SMALL BUSINESS MANAGEMENT
Chapter 10Financial Management
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Accounting Information
EntrepreneursTo _____ and controlTo motivate employees
InvestorsTo _____ performance
LendersTo evaluate creditworthiness
GovernmentTo _____ taxes owedTo approve new stock issues
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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
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Financial Statements
Balance Sheet (Statement of Financial Position) _____ of what a business owns and what it owes
Income Statement (Statement of Profit and Loss) _____ of operations over a given period of time
Cash Flow Statement (Ch 7)
Changes in Financial Position _____ in balance sheet accouts of a set period of time
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Accounting Systems for Small Business
One-Book System One-Write System Multi-journal System Outsourcing Financial Activities
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Accounting Systems for Small Business
Small Business Computer Systems Top 5 Accounting Software For Small
Business Simply Accounting Accounting Software MYOB Plus Accounting Software Intuit QuickBooks Accounting Software Peachtree Complete Accounting Software AccountEdge Accounting Software
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Accounting Systems for Small Business
Disadvantages Cost Obsolescence Employee _____ Capabilities Setup Time Failure to Compensate for _____
Bookkeeping
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Management of Financial Information for Planning
Short Term Financial Planning Preparing an estimated future financial
result ( Proforma or budget )
Budget is valuable because Clarification of Objectives Coordination Evaluation and Control
Variance analysis
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Management of Financial Information for Planning
Long Term Financial Planning The Capital Investment Decision
Baron of _____ The Capacity Decision
Cottage _____ The Expansion Decision
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The Capital Investment Decision rate of return method (PG 315 )
payback method (PG 315 )
present value method NPV or IRR ( Get a financial calculator )
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The Capacity Decision break even point
which tells you the sales volume you need to break even, under different price or cost scenarios
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Management of Financial Information for Planning
The Expansion Decision Effect of fixed cost adjustments Effect of variable cost adjustments
Use BEP on incremental basis
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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
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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
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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
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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
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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
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Credit and the Small Business
Advantages of Credit Use will undoubtedly increase sales necessary to _____ competitive credit customers exhibit more store
loyalty credit customers are more concerned
with _____ of service vs. price credit records can be _____ for future
planning
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Credit and the Small Business
Disadvantages of Credit Use will be some bad debts - depends on
credit policy and monitoring slow _____ cause lost interest and
capital increases bookkeeping, _____ and
collection expenses
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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
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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
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Sam’s Paint and Drywall Pg 324
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.
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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.
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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?
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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?
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Concept Checks
10. Why is ratio analysis important?
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Appendices
A. Checklist for buying a small business computer
B. Use of Financial Ratios for a Small Business (Car Dealer)