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![Page 1: Financial Management for Small Businesses](https://reader035.fdocuments.us/reader035/viewer/2022070506/568c52a21a28ab4916b77344/html5/thumbnails/1.jpg)
AnIntroductiontotheLifebloodofYourSmallBusiness
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PersonalDevelopment
StrategicPlanning
BusinessPerspective
EntrepreneurshipTraining
FinancialPlanning
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MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
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MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
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THEBUDGET
Laysoutinitialinvestmentplan
Setsprioritiesforfinancingrevenue‐producingactivities
Dividesreasonablefromunreasonablepurchases
Identifiesallavailablesupportresources
Overview
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Personal Savings
Business Partnerships
Individual Investors
Bank or Government Loans
THEBUDGETFinding an Initial Investment
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THEBUDGET
HighestPriorities Purchasesthatarenecessarytoday‐to‐dayoperations
PrimaryConcerns Purchasesthataddsubstantiallytooperatingincome
SecondaryConcerns Purchasesthatsubstantiallyreduceoperatingexpenses
TertiaryConcerns Purchasesthatservetodifferentiateyourbusinessfromcompetition
AnyRemainingFunds Purchasesthatpromoteclienteleconfidenceinyourproduct
Identifying Priorities
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THEBUDGETSetting Priorities
HIGHEST
PRIORITY
OBJECTIVE 2
OBJECTIVE 4
OBJECTIVE 1
OBJECTIVE 3
+$$
+$
‐$
‐$$
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THEBUDGET
Whichoftheserepresentreasonablepurchases?
$$$$
$$$$$$
$$
$$$
$$$
Making Reasonable Purchases
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THEBUDGET
VariousNon‐CashHoldingscanbecome… Sourcesofalternativerevenuestreams
Catalystsforachievingmarketdifferentiation
Toolsforstreamliningthevalue‐addedprocess
Devicesforcuttingcosts
Assessing Available Resources
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STARTINGABUDGETPreparatory Questions
Doyouknowwhereyouwanttobefinanciallyinfiveyears?Intenyears?
Doyouknowhowmuchincomeyoucanexpecttoearninabudgetaryperiod?
Doyouknowhowmuchofyourmonthlyincomegoestobusinessexpenses?
Doyouknowhowmuchaboveexpensesyoucanaffordtosave?
Doyouknowwhatportionofyourexpendituresgotoluxuriesversusnecessities?
? ?? ??
Respondortoeachquestion.
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STARTINGABUDGETSetting Financial Goals
YES NO
IfYouAnswered…
Quantifytheanticipatedcostofmeetingyourgoalsandcomputethemonthlyexpensetoyourbudget.Removeanynonessential
coststhatcannotbeaccommodated.
Identify3‐5majorfinancialgoalsyouwouldliketoseerealizedinthenext5years.Beconservative:assumethatyourmonthlyincomewillnothaveincreasedappreciablyinthattime.
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STARTINGABUDGETForecasting Income
YES NO
IfYouAnswered…
Consideriftheexpectedincomealreadyexceedsthe
anticipatedmonthlyexpense.Ifitdoesnot,considerfurtherlimitingexpensesorfindingnew
sourcesofincome.
Multiplyexpectedsalesbyestablishedprices.Beconservative:takeinto
accountseasonalspendingchangesandcompetition.Whateverhappens,donotovershootactualsales.
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STARTINGABUDGETKeeping Track Of Expenditures
YES NO
IfYouAnswered…
Calculatethepercentageofyourincomethatgoestobusinessexpenditures,anditschangebymonth.Isgrowthinexpenses
outstrippinggrowthinrevenues?
Keepaledgerofallbusinessactivities,andsumupallexpensesfor
thatmonth.Subtractyourexpensetotalfromthatmonth’srevenues:isthe
differencepositive?
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STARTINGABUDGETPutting Away Savings
YES NO
IfYouAnswered…
Setupaspecialsavingsormoney‐marketaccount
andstarthavingthebankauto‐draftaportionof
yourmonthlybalanceintothataccount.Don’ttouchitexceptinanemergency.
Agoodruleofthumbistotakethefirst10%ofall
revenuesandstoreitinaseparatesavingsor
interest‐bearingaccount.If10%istoomuch,tryforasetmonthlydollaramount.
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STARTINGABUDGETCategorizing Expenditures
YES NO
IfYouAnswered…
Identifyeachexpenseasapercentageofoperatingincomeortotalexpenses.Areluxurypurchasestakinguptoogreata
portionofyouroperatingbudget?
Usingyourexpenseledger,identifywhichpurchasescontributedstronglytooperatingincome,andwhichonesdidnot.
Reconsiderthefruitlesspurchasesinthefuture.
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Value‐AddingActivities
STARTINGABUDGETPutting It All Together
PersonalSavings BankLoan FriendInvestor
BusinessCapital
PriorityPurchase PriorityPurchase
SecondaryPurchaseLuxuryPurchase ExtraResource
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MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
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THEBALANCESHEETOverview
DESCRIPTION Asnapshotoftheconditionofacompany’sfinancialposition.
TIMEFRAMEAsinglepointintime,usuallythestartofonedayattheendofabudgetaryperiod.
PRIMARYFOCUS
Considerwhatmoneysthecompanycurrentlyholdsagainstwhatmoneysthecompanyowes.
ONETHINGITCANDO
Determineifacompanycanpaybackitsshort‐termdebtswithanticipatedshort‐termincome.
ONETHINGITCAN’TDO
Determinehowmuchtimethecompanycansurviveonitscurrentresources.
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THEBALANCESHEET
Assets Liabilities&Equity
Cash $1,000 AccountsPayable $500
AccountsReceivable $250 TotalLiabilities $500
ToolsandSupplies $750 CapitalStock $4,000
PP&E(Property,Plant,&Equipment) $4,500 RetainedEarnings $2,000
TotalOwners’Equity $6,000
TotalAssets $6,500 TotalLiabilities&Equity $6,500
A = L + E!
Smallcapitalpurchasesforeverydayoperations.
Otherinvestors’stakeinyourbusiness
LeftovermoneysreinvestedinthecompanyDetails
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THEBALANCESHEET
Fillinthehighlightedmissingentries.
Assets Liabilities&Equity
Cash $4,500 AccountsPayable $750
AccountsReceivable $500 TotalLiabilities
ToolsandSupplies $1,500 CapitalStock $10,000
PP&E(Property,Plant,&Equipment) $13,500 RetainedEarnings
TotalOwners’Equity
TotalAssets TotalLiabilities&Equity
Example
A = L + E!
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THEBALANCESHEET
AccountsRece
ivable
Accounts Payable and Receivable
AccountsPaya
ble
AnticipatedmoneysforGoodsorServicesrendereduntoapartnerbusinessthathave
notyetbeencollected.
AnticipatedmoneysthathavenotyetbeenpaidforGoodsorServicesrenderedbya
partnerbusinessuntoyou.
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1.067�
1.200�
0.800�
THEBALANCESHEETHealthy Current Ratio
Cash + A/R Interest + A/P Ratio
$1,000 + $500/4� $150 + $750/14� 1.667�
$200 + $600/7� $250 + $500/10�
$500 + $400/21� $250 + $500/10�
$200 + $600/7� $500 + $500/3�
#
#
#–
Current Receivables�Current Debts�
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THEBALANCESHEETDebit Credit
Equipment $600
AccountsPayable $600
Debit Credit
Cash $90
AccountsReceivable $60
SalesRevenue $150
Debit Credit
Cash $60
AccountsReceivable $60
Debit Credit
AccountsPayable $600
Cash $600
Whenpurchasingoperatingsupplies
oncredit.
Whenpurchasingoperatingsupplies
oncredit.
Whenpayingoffcreditbalance.
Whensellinggoodsorservices
onaccount.
Whenrecoupingpaymentforsales.
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MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
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CASHFLOWOverview
Revenues,Income
Expenditures,Bills
YourBusiness
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CASHFLOW
Revenues,Income
Expenses,Bills
Details
InitialInvestment
FirstSalesGrowthSales
PP&EPurchases Advertising
BusinessReinvestment
YourBusiness
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CASHFLOWForecasting
GoogleCalendarisausefultool!
Onwhatdayshouldyoumakethe$300purchase?
Sunday Monday Tuesday Wednesday Thursday Friday Saturday
BusyDay:$700
Holiday:$0
EndofMonthBills:($500)
PurchaseSupplies:($200)
GuestVisit:$300
NewPromo:($100)
BusyDay:$700
Youhavelaidoutyouranticipatedmajorsalesandexpendituresfortheweek.Youknowyouneedtoreplacea$300mixertocontinueofferingcertain
mixeddrinks.
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CASHFLOWImproving Cash Flow
3 TIPS
AvoidExtraneousPurchases
SendOutInvoicesQuickly
MaintainInventoryTurnover
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CASHFLOWInventory Turnover
Production
Sellinginventorygeneratescash.Thequickertheturnaround,thehighertherateofcashflow.
Stockpilingunusedinventorydoesnotgeneratecash;infactstorageexpensescandepletecashreserves.
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CASHFLOW
PROBLEM SUGGESTION
Nostandingcashtoreplaceoperationally‐necessarycapitalinvestments.
Leaveasecondarysavingsaccountuntouchedfor
emergencyneeds.
Nothavingenoughcashatendofmonthtopayforutilitybills.
Budgetanticipatedmonthlybillsatthebeginningof
everypaycycle.
Businesspartnersbeingslowtopayforproductorservicesrendered.
Offerpayment‐termdiscounts.Take5%offthesellingpriceforpaymentsmadewithin2weeks.
Delayingdeliverytimeofgoodsorservices,andsubsequentpayments.
Setacompanypolicytoneverexceed1weekof
deliveryofgoodsorservices.
Common Issues
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MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
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THEINCOMESTATEMENTOverview
DESCRIPTION Anoverviewoftheearningsorlossesofacompany.
TIMEFRAME Onebudgetaryperiod,e.g.1month,1year,1fiscalyear…
PRIMARYFOCUS
Considerhowrevenuesarebeingdivviedupbetweenexpendituresandnetprofit.
ONETHINGITCANDO
Determineifyourcompanyisearningenoughtosustainlong‐termoperations.
ONETHINGITCAN’TDO
Determineifyourcompanyhasenoughcashonhandtofinanceanemergencycapitalpurchase.
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THEINCOMESTATEMENT
RevenueFromSales $1,000
OperatingRevenues $1,000
CostofGoodsSold $250
AdministrativeExpenses $100
‐OperatingExpenses $350
OperatingIncome(EBIT) $650
InterestExpense $75
TaxExpense $125
‐Non‐OperatingExpenses $200
NetIncome $450
AllRevenuesfromsalesofMerchandise
orServices
ExpensesassociatedwithrunningDay‐to‐
DayOperations
EarningsBeforeInterestandTaxes
AlsocalledNetProfit,theamountthatcanbe
ReinvestedintheBusiness
Details
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THEINCOMESTATEMENTaSSESSING COSTS OF GOODS SOLD (COGS)
WhichoftheserepresentCOGS?
MATERIALSEXPENSE LABOUREXPENSE SALESREVENUE
$50 $25 $100
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THEINCOMESTATEMENTFixed Costs vs. Variable Costs
ProductionCosts
ProductionCosts
AsProductionincreases,FIXEDCOSTSremainthesame.
AsProductionincreases,VARIABLECOSTS
increaseproportionately.
MAINTENANCE
UTILITIES
RENT
SUPPLIES
WAGES
EQUIPMENT
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THEINCOMESTATEMENTForecasting
MonthlyFixedCosts:
$500
MonthlyIncomeNeededforLiving:
$5,000
Cashfrom1Sale:
$20COGSfrom1Sale:
$9
Profitfrom1Sale:
$11
SalesNeededtoReachIncomeGoal:
500
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THEINCOMESTATEMENT
EBIT=OperatingRevenues–OperatingExpenses
IFEBITIS…
BELOW$0
EQUALTO$0
ABOVE$0
RaisePricesorCutCosts
EITHER/BOTH
MaintainorIncrease
Production
Calculating and Using EBIT
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MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
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BREAK‐EVENANALYSISVocabulary Review
Break‐EvenPoint
Thedateatwhichincomingrevenuefortheperiodequals
outgoingexpenditures,zeroingoutoperationalprofits.
Price&Profit
Themarketvalueofthegoodorserviceforsale,andthemarginabovethecostofmanufacturingthatisretainedinthe
company.
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BREAK‐EVENANALYSIS
$0
$150
$300
$450
$600
$750
June
TotalCostsTotalRevenues
Overcoming Production Costs
Break‐EvenPoint
NetProfit
FixedCosts
VariableCosts
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BREAK‐EVENANALYSIS
Whatstageareeachofthese3businessesin?
Overcoming Production Costs
SalesRevenue $1,000
AllRevenues $1,000
COGS $500
Admin $200
OpEx $700
EBIT $300
Interest $100
Taxes $300
Non‐OpEx $400
NetIncome ($100)
SalesRevenue $2,000
AllRevenues $2,000
COGS $1,000
Admin $150
OpEx $1,150
EBIT $850
Interest $150
Taxes $350
Non‐OpEx $500
NetIncome $350
SalesRevenue $1,250
AllRevenues $1,250
COGS $550
Admin $200
OpEx $750
EBIT $500
Interest $250
Taxes $250
Non‐OpEx $500
NetIncome $0
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BREAK‐EVENANALYSIS
($300)
($150)
$0
$150
$300
$450
$600
$750
January February March April May June July August
CostsRevenuesCumulativeNetProfit
Equity
Overcoming Startup Costs
InitialInvestmentReturned
TurnaroundPoint
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BREAK‐EVENANALYSIS
MaterialCosts
ProductionCosts
ProfitMargin The Buyer’s Willingness to Pay
Cost of Goods Sold What You
Pay Suppliers
Value Added by You
Net Gain
WhichoftheserepresentsthePrice?
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BREAK‐EVENANALYSIS
ProfitMargin
ProfitMargin
$
$$$× =× =
× $ =
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