Financial Management for Small Businesses

An Introduction to the Lifeblood of Your Small Business

Financial Planning Personal

Development

Entrepreneurship Training

Strategic Planning

Business Perspective

MODULE OUTLINE THE BUDGET

THE

BALANCE SHEET

CASH FLOW

BREAK‐EVEN ANALYSIS

THE INCOME STATEMENT

MODULE OUTLINE THE BUDGET

THE

BALANCE SHEET

CASH FLOW

BREAK‐EVEN ANALYSIS

THE INCOME STATEMENT

THE BUDGET Overview  Lays out initial

investment plan  Sets priorities for financing revenue‐ producing activities  Divides reasonable from unreasonable purchases  Identifies all available support resources

THE BUDGET Finding an Initial Investment Personal Savings Business Partnerships Individual Investors Bank or Government Loans

THE BUDGET Identifying Priorities Highest Priorities

Purchases that are necessary to day‐to‐day operations

Primary Concerns

Purchases that add substantially to operating income

Secondary Concerns

Purchases that substantially reduce operating expenses

Tertiary Concerns

Purchases that serve to differentiate your business from competition

Any Remaining Funds

Purchases that promote clientele confidence in your product

THE BUDGET Setting Priorities HIGHEST PRIORITY

OBJECTIVE 1 +$$ OBJECTIVE 2

+$

OBJECTIVE 3

‐$

OBJECTIVE 4 ‐$$

THE BUDGET Making Reasonable Purchases

$$

$$

$$$

$$$

$$$$

$$$$

Which of these represent reasonable purchases?

THE BUDGET Assessing Available Resources Various Non‐Cash Holdings can become…  Sources of alternative revenue streams  Catalysts for achieving market differentiation  Tools for streamlining the value‐added process  Devices for cutting costs

STARTING A BUDGET

? ? ?

Preparatory Questions Do you know where you want to be financially in five years? In ten years?

Do you know how much of your monthly income goes to business expenses?

Do you know what portion of your expenditures go to luxuries versus necessities?

? ?

Do you know how much income you can expect to earn in a budgetary period?

Do you know how much above expenses you can afford to save?

Respond or to each question.

STARTING A BUDGET Setting Financial Goals If You Answered…

YES Quantify the anticipated cost of meeting your goals and compute the monthly expense to your budget.

Remove any nonessential costs that cannot be accommodated.

NO Identify 3‐5 major financial goals you would like to see realized in the next 5 years.

Be conservative: assume that your monthly income will not have increased appreciably in that time.

STARTING A BUDGET Forecasting Income If You Answered…

YES Consider if the expected income already exceeds the anticipated monthly expense. If it does not, consider further limiting expenses or finding new sources of income.

NO Multiply expected sales by established prices. Be conservative: take into account seasonal spending changes and competition.

Whatever happens, do not overshoot actual sales.

STARTING A BUDGET Keeping Track Of Expenditures If You Answered…

YES Calculate the percentage of your income that goes to business expenditures, and its change by month. Is growth in expenses outstripping growth in revenues?

NO Keep a ledger of all business activities, and sum up all expenses for that month. Subtract your expense total from that month’s revenues: is the difference positive?

STARTING A BUDGET Putting Away Savings If You Answered…

YES Set up a special savings or money‐market account and start having the bank auto‐draft a portion of your monthly balance into that account. Don’t touch it except in an emergency.

NO A good rule of thumb is to take the first 10% of all revenues and store it in a separate savings or interest‐bearing account.

If 10% is too much, try for a set monthly dollar amount.

STARTING A BUDGET Categorizing Expenditures If You Answered…

YES Identify each expense as a percentage of operating income or total expenses.

Are luxury purchases taking up too great a portion of your operating budget?

NO Using your expense ledger, identify which purchases contributed strongly to operating income, and which ones did not.

Reconsider the fruitless purchases in the future.

STARTING A BUDGET Putting It All Together Personal Savings

Bank Loan

Friend Investor

Business Capital Priority Purchase Luxury Purchase

Priority Purchase

Secondary Purchase

Value‐Adding Activities

Extra Resource

MODULE OUTLINE THE BUDGET

THE

BALANCE SHEET

CASH FLOW

BREAK‐EVEN ANALYSIS

THE INCOME STATEMENT

THE BALANCE SHEET Overview DESCRIPTION

A snapshot of the condition of a company’s financial position.

TIMEFRAME

A single point in time, usually the start of one day at the end of a budgetary period.

PRIMARY FOCUS

Consider what moneys the company currently holds against what moneys the company owes.

ONE THING IT CAN DO

Determine if a company can pay back its short‐term debts with anticipated short‐term income.

ONE THING IT CAN’T DO

Determine how much time the company can survive on its current resources.

THE BALANCE SHEET

Leftover moneys reinvested in the company

Details Small capital purchases for everyday operations.

Assets

Other investors’ stake in your business

Liabilities & Equity

Cash

$1,000 Accounts Payable

$500

Accounts Receivable

$250 Total Liabilities

$500

Tools and Supplies

$750 Capital Stock

PP&E (Property, Plant, & Equipment)

$4,500 Retained Earnings Total Owners’ Equity

Total Assets

$6,500 Total Liabilities & Equity

$4,000 $2,000 $6,000 $6,500

A = L + E!

THE BALANCE SHEET Example Assets

Liabilities & Equity

Cash

$4,500 Accounts Payable

Accounts Receivable

$750

$500 Total Liabilities

Tools and Supplies

$1,500 Capital Stock

PP&E (Property, Plant, & Equipment)

$10,000

$13,500 Retained Earnings Total Owners’ Equity

Total Assets

Total Liabilities & Equity

A = L + E!

Fill in the highlighted missing entries.

THE BALANCE SHEET Accounts Payable and Receivable le b a v i ece R

s t un

Acco

Acco

e l b a y a P

s t n u

Anticipated moneys for Goods or Services rendered unto a partner business that have not yet been collected.

Anticipated moneys that have not yet been paid for Goods or Services rendered by a partner business unto you.

THE BALANCE SHEET

Current Receivables Current Debts

Healthy Current Ratio Cash + A/R

Interest + A/P

Ratio

$1,000 + $500/4

$150 + $750/14

1.667

$200 + $600/7

$250 + $500/10

1.067

$500 + $400/21

$250 + $500/10

1.200

$200 + $600/7

$500 + $500/3

0.800

# # – #

THE BALANCE SHEET When purchasing When purchasing operating supplies operating supplies on credit. on credit.

When paying off credit balance.

Debit Equipment

$600

Accounts Payable

$600 Debit

Accounts Payable Cash

$600

Cash

$90

Accounts Receivable

$60

Sales Revenue When recouping payment for sales.

Accounts Receivable

Credit

$150 Debit

Cash

Credit

$600

Debit When selling goods or services on account.

Credit

Credit

$60 $60

MODULE OUTLINE THE BUDGET

THE

BALANCE SHEET

CASH FLOW

BREAK‐EVEN ANALYSIS

THE INCOME STATEMENT

CASH FLOW Overview Revenues, Income Your Business Expenditures, Bills

CASH FLOW Details Revenues, Income

Initial Investment

First Sales

Growth Sales

Your Business

Expenses, Bills

PP&E Purchases

Advertising

Business Reinvestment

Google Calendar is a useful tool!

CASH FLOW Forecasting You have laid out your anticipated major sales and expenditures for the week. You know you need to replace a $300 mixer to continue offering certain mixed drinks.

Sunday

Busy Day: $700

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Holiday: $0

End of Month Bills: ($500)

Purchase Supplies: ($200)

Guest Visit: $300

New Promo: ($100)

Busy Day: $700

On what day should you make the $300 purchase?

CASH FLOW Improving Cash Flow

3 TIPS

Avoid Extraneous Purchases

Send Out Invoices Quickly

Maintain Inventory Turnover

CASH FLOW Inventory Turnover

Selling inventory generates cash. The quicker the turnaround, the higher the rate of cash flow.

Production



Stockpiling unused inventory does not generate cash; in fact storage expenses can deplete cash reserves.

CASH FLOW Common Issues PROBLEM No standing cash to replace operationally‐necessary capital investments.

SUGGESTION Leave a secondary savings account untouched for emergency needs.

Not having enough cash at end of month to pay for utility bills.

Budget anticipated monthly bills at the beginning of every pay cycle.

Business partners being slow to pay for product or services rendered.

Offer payment‐term discounts.

Take 5% off the selling price for payments made within 2 weeks.

Delaying delivery time of goods or services, and subsequent payments.

Set a company policy to never exceed 1 week of delivery of goods or services.

MODULE OUTLINE THE BUDGET

THE

BALANCE SHEET

CASH FLOW

BREAK‐EVEN ANALYSIS

THE INCOME STATEMENT

THE INCOME STATEMENT Overview DESCRIPTION

An overview of the earnings or losses of a company.

TIMEFRAME

One budgetary period, e.g. 1 month, 1 year, 1 fiscal year…

PRIMARY FOCUS

Consider how revenues are being divvied up between expenditures and net profit.

ONE THING IT CAN DO

Determine if your company is earning enough to sustain long‐term operations.

ONE THING IT CAN’T DO

Determine if your company has enough cash on hand to finance an emergency capital purchase.

THE INCOME STATEMENT Details Revenue From Sales Operating Revenues

All Revenues from sales of Merchandise or Services

$1,000 $1,000

Cost of Goods Sold

$250

Administrative Expenses

$100

‐ Operating Expenses

$350

Operating Income (EBIT)

$650

Interest Expense

$75

Tax Expense

$125

‐ Non‐Operating Expenses

$200

Net Income

$450

Expenses associated with running Day‐to‐ Day Operations

Earnings Before Interest and Taxes

Also called Net Profit, the amount that can be Reinvested in the Business

THE INCOME STATEMENT aSSESSING COSTS OF GOODS SOLD (COGS) MATERIALS EXPENSE

LABOUR EXPENSE

$50

$25

SALES REVENUE

$100

Which of these represent COGS?

THE INCOME STATEMENT Fixed Costs vs. Variable Costs As Production increases, FIXED COSTS remain the same.

As Production increases, VARIABLE COSTS increase proportionately.

Production

Production

Costs

Costs

SUPPLIES

UTILITIES

RENT

MAINTENANCE

EQUIPMENT

WAGES

THE INCOME STATEMENT Forecasting Monthly Income Needed for Living:

$5,000 Monthly Fixed Costs: Cash from 1 Sale:

$500

$20

Profit from 1 Sale:

COGS from 1 Sale:

$11

$9 Sales Needed to Reach Income Goal:

500

THE INCOME STATEMENT Calculating and Using EBIT EBIT = Operating Revenues – Operating Expenses BELOW $0

IF EBIT IS…

Raise Prices or Cut Costs

EQUAL TO $0 EITHER/BOTH

ABOVE $0

Maintain or Increase Production

MODULE OUTLINE THE BUDGET

THE

BALANCE SHEET

CASH FLOW

BREAK‐EVEN ANALYSIS

THE INCOME STATEMENT

BREAK‐EVEN ANALYSIS Vocabulary Review

Break‐Even Point

Price & Profit

The date at which incoming revenue for the period equals outgoing expenditures, zeroing out operational profits.

The market value of the good or service for sale, and the margin above the cost of manufacturing that is retained in the company.

BREAK‐EVEN ANALYSIS Overcoming Production Costs $750 $600

Total Costs

Net Profit

Total Revenues

$450

Variable Costs

$300 Break‐Even Point $150 $0

Fixed Costs

June

BREAK‐EVEN ANALYSIS Overcoming Production Costs Sales Revenue $2,000

Sales Revenue $1,000

Sales Revenue $1,250

All Revenues $2,000

All Revenues $1,000

All Revenues $1,250

COGS

$500

COGS

$550

Admin

$200

Admin

$200

OpEx

$700

OpEx

$750

COGS $1,000 Admin

$150

OpEx $1,150 EBIT

$850

EBIT

$300

EBIT

$500

Interest

$150

Interest

$100

Interest

$250

Taxes

$350

Taxes

$300

Taxes

$250

Non‐OpEx

$500

Non‐OpEx

$400

Non‐OpEx

$500

Net Income

$350

Net Income ($100)

Net Income

What stage are each of these 3 businesses in?

$0

BREAK‐EVEN ANALYSIS Overcoming Startup Costs $750 $600 $450 $300

Costs Revenues Cumulative Net Profit Turnaround Point

$150 Equity

$0 ($150)

Initial Investment Returned

($300) January February March

April

May

June

July

August

BREAK‐EVEN ANALYSIS Net Gain

Profit Margin

Value Added

by You

Production Costs

What You Pay Suppliers

The Buyer’s Willingness to Pay

Cost of Goods Sold Material Costs

Which of these represents the Price?

BREAK‐EVEN ANALYSIS

Strategies for Shrewd Pricing

$$$

$

$

= = =

 

Profit Margin

Profit Margin