Financial Management

1. Financial Management For Small Businesses Part ONE BUS 203 Bus Financial Mgt

2. What Every Small Business Owner Needs to Know about Financial Management • In this course we will review: • The Importance of Cash Flow vs. Profits. • The Main Culprits of Poor Cash Flow (the big three). • The Accounting-Financial Process Cycle in a business. • Basic Financial Statements: What they are and how to use them. • Interpreting the Financial Health of our businesses through “key indicators” or financial ratios. A little knowledge goes along way!

3. The Importance of Financial and (Cash) Management • Cash is a four letter word…CASH is also a “curse” to many small businesses. • Inadequate capital…and inadequate cash flow management is often the number one reason for small business failure. • Most mismanagement issues are related to financial and / or accounting issues. SIMPLY PUT :The inability to manage your finances and cash flow can mean you’re throwing money……perhaps your business, away!

4. Managing “Cash” and not just Profits Good Financial Managers are well-versed in managing the “traditional financial side” of the business. This means they can analyze the basic financial statements and figure out the profitability of their business. Great Financial Managers are AWARE of their businesses cash needs. They not only know when they are profitable, but know whether they will have the cash they need to grow and be successful!

5. How can I manage my Cash ? • The first step is to understand your own “cash flow cycle” (The longer the cycle the more likely your business will suffer a cash crunch) • Calculate your cash conversion cycle at least quarterly…and understand where the cash is on a daily basis. 3. The next step is to try to shorten the length of the cash flow cycle by shortening the Accounts Receivable and turning over the inventory faster. Cash Flow = the time lag between paying suppliers for merchandise and receiving payment from customers.

6. Cash Flow Cycle Cash Leakage 8 Accounts Receivable Accounts Payable Production/ Cash Purchases Cash Sales Inventory Leakage

7. Why Cash & Profits are not Created Equal: Profits are just a Piece of the Puzzle • Profit is the difference between a company’s total revenue and it’s total expenses. • Cash is the money that is readily available to use in a business. • Cash Flow measures liquidity…the ability to pay bills. • Profitability does not guarantee liquidity! • When business owners need to meet their obligations, they are required to do so with CASH!

8. The Big-Three Cash Management Monsters • The “BIG Three” of Cash Management include Accounts Receivables, Accounts Payable and Inventory. • These “3 Monsters” are the primary causes of cash flow problems and poor fiscal management. • By monitoring these three areas, a business owner can effectively manage their finances and cash resources. • The object is to “get the cash in the door as fast as you can, cut your costs and leakage, and pay people as late as possible.”

9. Monitoring Your Accounts Receivable (A/R) • According to the National Association of Credit Managers, “ A sale is not a sale until you collect the money.” • “Receivables are the second most important item on the balance sheet.” • This means the first rule is to establish a Credit & Collection policy and MONITOR it. • Many small businesses use “cycle billing”- where a company will bill a portion of its credit customers at different times of the month to even out cash receipts.

10. Other techniques for accelerating Accounts Receivables • Speed-up orders through fax or email. • Send invoices when goods are shipped. • Make your invoices CLEAR, with the terms. • Deposit customer checks and card receipts on a daily basis! • Identify the top 20% of your customers and create a separate A/R file for each of them. • Follow your Credit Policy. • Ask for a larger portion of a down-payment. • Consider using a billing system (on-line billing). • Restrict a customer’s credit until past bills are paid to date.

11. The Timing of Accounts Payable • Accounts Payables A/P are what you owe your creditors. • It is important to stretch out payables as long as possible without damaging your credit. • Strive to get the best credit terms 30,60, 90 day rather than C.O.D. • Regulate you’re A/P to your companies advantage! Stretch Your Cash

12. Methods to Monitor Your Payables for Optimum Cash Flow • Set scheduling goals (many businesses will pay their bills 45 days after invoice, and strive to collect 30 days after sell). • Keep paper work organized. Set up workable A/P files. • Prioritize your bills. This helps you realize what is needed and not just wanted. • Know your creditors…many will not allow you to stretch to 45 days. Develop trade terms with your creditors that work for your business. • Be consistent with your creditors. • Monitor and always look for “warning signs” of adequate cash on hand.

13. Managing Inventory:The Third Cash Issue • One of the biggest capital “investments” for small businesses • Many companies have a lot of money “tied” up in the wrong inventory. • If companies want to grow, they have to “turn” their inventory quickly. • Lenders look closely at how well businesses manage their inventory assets.

14. Tips for Managing Inventory • Track your inventory: separate into specific categories so you know what is moving, and what is stagnate, and what is lost! • Understand the cost of “carrying” inventory, especially if it is perishable. • Don’t carry too much, and don’t carry too little. • Shed your “slow-moving” inventory. • Monitor the turn-around time of your inventory.

15. The Accounting Cycle and how that relates to Financial Management

16. The Accounting-Financial Cycle 1) Sources Pieces of paper, receipts 2) Journals 3) General Ledger - Chart of Accounts 4) Trial Balance 5) Balance Sheet 6) Income Statement 7) Cash Flow Statement

17. Accounting- Financial Cycle Sources Business transactions • Receipts • Checks • Invoices 8 Accounts e Financial Statements Journals Recording the raw data • Income Statement • Balance Sheet • Cash Flow Statement Ledgers Post the transactions on the General Ledger “Chart of Accounts” Leakge

18. General Ledger & Chart of Accounts The General Ledger is a summary book that records all transactions and balances and is organized into 5 distinct categories. For computerized accounting it is essential that these are set-up accurately in your Chart of Accounts 1 – Assets - a record of all item the business owns 2 – Liabilities - a record of all debts the business owes 3 – Capital - a record of all ownership or equity 4 – Revenue or Sales - a record of all income earned for a specific period 5 – Expenses - a record of all expenditures incurred during a given time

19. Financial Statements • Good records will allow you to develop Financial Statements. • Financial Statements are used to provide information for preparing taxes and needed for borrowing. • Savvy business owners use their financial statements to evaluate the condition of their businesses and determine strengths & weaknesses. • Bankers utilize these statements to determine if you are a good risk.

20. Glossary of Income Statement Terms • Net Sales - the total dollar volume of all cash or credit sales less returns, discounts and rebates. • COGS - Cost of Goods Sold - the total cost of products sold (retail) plus the cost of delivery. For manufacturing it is everything that it costs to make and deliver it. • Gross Profit - Profit before expenses and federal taxes have been deducted. • Expenses - The cost of doing businesses. Often called “overhead”. It includes wages, telephone, supplies, insurance, marketing, interest. • Net Profit - The amount left over (if any) after expenses. Often called NP before taxes.

21. The Most Important Financial Statements • The Three Most Important Statements are: • Balance Sheet • Income Statement - also called Profit & Loss Statement or P&L • Statement of Cash Flows

22. The Balance Sheet • Shows the condition of a business at a fixed date (the end of an accounting period). • It is a “snap shot” of your company’s financial condition at any given moment. • Lists the businesses’ assets…everything your business owns that has a monetary value. • Lists the businesses’ liabilities…everything you owe, your debts & obligations. • Lists your “Net Worth” or Owner’s Equity…the cumulative profits and losses of a company.

23. Why does a Balance Sheet have to balance? • Assets = Liabilities + Net Worth • This is the Accounting Equation! • This is true even if liabilities exceeds assets. In this case, you have a “negative net worth.” Assets - Liabilities = Net Worth OR Assets = Liabilities + Net Worth

24. Anatomy of a Balance Sheet: Separating Current from Fixed and Long Term Balance Sheet

25. The Income Statement • Shows the total actions of a business over a period of time; be it monthly, quarterly or annually. • Also called the Profit & Loss or P&L Statement. • Unlike the Balance Sheet - the P&L is a ‘moving picture’ of the company’s profitability over time. • The statement begins when a sale is made. So the first entry is sales!

26. Anatomy of a P & L Statement Profit & Loss Statement Beth’s Beanie Babies June 2004 Sales $25,000 Cost of Goods Sold $15,000 Gross Profit $10,000 Expenses Wages $1,000 Lease $1,000 Marketing500 Insurance 200 Supplies 300 Total Expenses $3,000 Net Profit Before Taxes $7,000

27. The Statement of Cash Flows • Shows the changes in the firm’s “working capital” from the beginning of the year. Used as an internal document. • It can be a “Pro-Forma” or projected statement used to show how much money will flow in and out of your business. • A Cash Flow Statement is like a budget. • It identifies when cash is received, and when cash must be spent to pay bills.