Entrepreneurship and Small Business Management

1. Entrepreneurship and Small Business Management Chapter 14 Cash Flow and Taxes

2. Ch. 14 Performance Objectives • Understand the importance of cash flow management. • Know the difference between cash and profits. • Read a cash flow statement. • Create a cash budget. • File appropriate business tax returns for your business.

3. Cash Flow Is Critical • Cash flow refers to money coming in and going out of your business. • Without cash on hand, your business will not be able to pay crucial bills. • Goal: Never have a negative cash balance.

4. Tracking Cash Flow • Income statement is poor gauge of cash flow. • Showing a profit does not mean adequate cash is on hand, due to lag time between… • …making sales and receiving customer payments. • …paying for labor/materials and receiving finished goods. • Noncash expenses, such as depreciation, can distort the picture. • Cash flow statement shows inflows and outflows of money as they occur.

5. Rules to Keep Cash Flowing • Collect cash as soon as possible. • Pay your bills by the due date, not earlier. • Check your available cash every day. • Lease or finance instead of buying equipment, where practical. • Avoid buying inventory that you do not need.

6. Keep an Eye on Working Capital • Working capital equals: • Current assets minus current liabilities • Amount of cash that would remain if all short-term debt was paid with the cash on hand • If a firm runs out of working capital, it: • Will not be able to spend the cash needed to bring a new product to market • Will still have ongoing bills to pay • May not be able to stay in business

7. Cycles That Affect Cash Flow • Transaction cycles—based on operations • A manufacturer may have to pay its suppliers and employees before getting paid by customers. • A residential cleaning firm may collect customer payments on the same day as service is provided. • Seasonal cycles—based on time of year • A flower store may have more cash around holidays but less at other times. • A college bookstore has more cash after school starts but less when it has to buy the inventory.

8. The Cash Flow Statement • Sections of statement: • “Inflows” (cash receipts) • “Outflows” (cash disbursements) • Net change in cash flow • Categories of inflows and outflows: • Operations • Investment • Financing

9. Sample Cash Flow Statement

10. Sample Cash Flow Statement (cont.)

11. Steps to Forecast Cash Flow • Project cash receipts from all possible sources. • Includes cleared checks, credit card payments, and cash itself (no orders) • Note assumptions made when estimating • Subtract expenses that must be paid during the forecast time period.

12. Managing Inventoryto Manage Cash • Inventory creates risk because it might not be sold at a profit. • Sell inventory at a price that covers COGS, storage costs, and pilferage (theft), and still earn a profit. • Keep timely and accurate inventory records. • Control stock levels to minimize amount of cash tied up in inventory, and prevent waste.

13. Managing Receivablesto Manage Cash • Bill and collect monies owed to your business, in a timely manner. • Use Aging Schedule to track Accounts Receivable and estimate cash flow. • Consider factoring—receivables financing.

14. Managing Accounts Payableto Manage Cash • Use credit (the ability to borrow money) wisely. • Negotiate favorable payment terms when opportunities arise. • Track payables with an Aging Schedule.

15. Capital Budgeting and Cash Flow • Capital assets affect cash outflows when purchased and cash inflows when liquidated. • Use capital budgeting to understand the cash flow required for investments and the expected impact on operating cash flows. • Calculate depreciation associated with capital investment to anticipate the tax effects. • Plan and analyze each potential capital project separately to determine feasibility.

16. Burn Rate • Pace at which your company will need to spend capital to cover overhead costs before generating a positive cash flow (Cash Available + Revenue) Negative Cash Outflow per Month = Number of Months Before Cash Runs Out

17. The Time Value of Money • Future value—amount it will accrue (gain) over time through investment • Present value—amount an investment is worth discounted back to the present • Reasons to have your money “now”: • Inflation • Risk • Opportunity

18. Self-Employment Tax is: • A federal tax that business owners pay on the wages paid to themselves • The Social Security tax obligation for those who are self-employed • The combined equivalent of the employee and employer taxes paid for employees • Paid quarterly, so cash should be put aside for making payments on the due dates

19. Income and Sales Taxes • Entrepreneurs pay income tax to federal and state governments. • Businesses are also subject to local taxes. • Tax returns must be filed (mailed or submitted online) by specific dates each year. • In most states, if you sell products or services to the public, you must collect sales tax and submit it quarterly.

20. Tax Issues Vary By Legal Structure • Sole proprietorship—all profits reported as personal income by owner • Partnership—profits and losses are shared by partners and reported on their individual tax returns • Limited partnership—similar to a partnership except losses can be used as a tax shelter without exposure to personal liability

21. Tax Issues Vary By Legal Structure(continued) • C corporation—has “double” taxation: • Profits are taxed whether or not a share of the profits is distributed to the owners. • Owners also pay personal income tax on any profit distribution they receive. • S corporation—profit is taxed only once, as owner income on personal tax returns • Limited liability company (LLC)—separates the owner/partners from personal liability

22. How to Avoid Tax Problems • Keep accurate financial records throughout the year. • Store all ledgers, receipts, and invoices in an organized manner. • Hire a tax accountant or attorney as a consultant. • If you prepare your own tax returns: • Purchase tax software. • Ask a tax professional to review your paperwork.