financial management for small businesses
DESCRIPTION
45-slide presentation on all the introductory steps to financial management for a small startup business. Topics include budgeting, financial reporting, and pricing best practices.TRANSCRIPT
AnIntroductiontotheLifebloodofYourSmallBusiness
PersonalDevelopment
StrategicPlanning
BusinessPerspective
EntrepreneurshipTraining
FinancialPlanning
MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
THEBUDGET
Laysoutinitialinvestmentplan
Setsprioritiesforfinancingrevenue‐producingactivities
Dividesreasonablefromunreasonablepurchases
Identifiesallavailablesupportresources
Overview
Personal Savings
Business Partnerships
Individual Investors
Bank or Government Loans
THEBUDGETFinding an Initial Investment
THEBUDGET
HighestPriorities Purchasesthatarenecessarytoday‐to‐dayoperations
PrimaryConcerns Purchasesthataddsubstantiallytooperatingincome
SecondaryConcerns Purchasesthatsubstantiallyreduceoperatingexpenses
TertiaryConcerns Purchasesthatservetodifferentiateyourbusinessfromcompetition
AnyRemainingFunds Purchasesthatpromoteclienteleconfidenceinyourproduct
Identifying Priorities
THEBUDGETSetting Priorities
HIGHEST
PRIORITY
OBJECTIVE 2
OBJECTIVE 4
OBJECTIVE 1
OBJECTIVE 3
+$$
+$
‐$
‐$$
THEBUDGET
Whichoftheserepresentreasonablepurchases?
$$$$
$$$$$$
$$
$$$
$$$
Making Reasonable Purchases
THEBUDGET
VariousNon‐CashHoldingscanbecome… Sourcesofalternativerevenuestreams
Catalystsforachievingmarketdifferentiation
Toolsforstreamliningthevalue‐addedprocess
Devicesforcuttingcosts
Assessing Available Resources
STARTINGABUDGETPreparatory Questions
Doyouknowwhereyouwanttobefinanciallyinfiveyears?Intenyears?
Doyouknowhowmuchincomeyoucanexpecttoearninabudgetaryperiod?
Doyouknowhowmuchofyourmonthlyincomegoestobusinessexpenses?
Doyouknowhowmuchaboveexpensesyoucanaffordtosave?
Doyouknowwhatportionofyourexpendituresgotoluxuriesversusnecessities?
? ?? ??
Respondortoeachquestion.
STARTINGABUDGETSetting Financial Goals
YES NO
IfYouAnswered…
Quantifytheanticipatedcostofmeetingyourgoalsandcomputethemonthlyexpensetoyourbudget.Removeanynonessential
coststhatcannotbeaccommodated.
Identify3‐5majorfinancialgoalsyouwouldliketoseerealizedinthenext5years.Beconservative:assumethatyourmonthlyincomewillnothaveincreasedappreciablyinthattime.
STARTINGABUDGETForecasting Income
YES NO
IfYouAnswered…
Consideriftheexpectedincomealreadyexceedsthe
anticipatedmonthlyexpense.Ifitdoesnot,considerfurtherlimitingexpensesorfindingnew
sourcesofincome.
Multiplyexpectedsalesbyestablishedprices.Beconservative:takeinto
accountseasonalspendingchangesandcompetition.Whateverhappens,donotovershootactualsales.
STARTINGABUDGETKeeping Track Of Expenditures
YES NO
IfYouAnswered…
Calculatethepercentageofyourincomethatgoestobusinessexpenditures,anditschangebymonth.Isgrowthinexpenses
outstrippinggrowthinrevenues?
Keepaledgerofallbusinessactivities,andsumupallexpensesfor
thatmonth.Subtractyourexpensetotalfromthatmonth’srevenues:isthe
differencepositive?
STARTINGABUDGETPutting Away Savings
YES NO
IfYouAnswered…
Setupaspecialsavingsormoney‐marketaccount
andstarthavingthebankauto‐draftaportionof
yourmonthlybalanceintothataccount.Don’ttouchitexceptinanemergency.
Agoodruleofthumbistotakethefirst10%ofall
revenuesandstoreitinaseparatesavingsor
interest‐bearingaccount.If10%istoomuch,tryforasetmonthlydollaramount.
STARTINGABUDGETCategorizing Expenditures
YES NO
IfYouAnswered…
Identifyeachexpenseasapercentageofoperatingincomeortotalexpenses.Areluxurypurchasestakinguptoogreata
portionofyouroperatingbudget?
Usingyourexpenseledger,identifywhichpurchasescontributedstronglytooperatingincome,andwhichonesdidnot.
Reconsiderthefruitlesspurchasesinthefuture.
Value‐AddingActivities
STARTINGABUDGETPutting It All Together
PersonalSavings BankLoan FriendInvestor
BusinessCapital
PriorityPurchase PriorityPurchase
SecondaryPurchaseLuxuryPurchase ExtraResource
MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
THEBALANCESHEETOverview
DESCRIPTION Asnapshotoftheconditionofacompany’sfinancialposition.
TIMEFRAMEAsinglepointintime,usuallythestartofonedayattheendofabudgetaryperiod.
PRIMARYFOCUS
Considerwhatmoneysthecompanycurrentlyholdsagainstwhatmoneysthecompanyowes.
ONETHINGITCANDO
Determineifacompanycanpaybackitsshort‐termdebtswithanticipatedshort‐termincome.
ONETHINGITCAN’TDO
Determinehowmuchtimethecompanycansurviveonitscurrentresources.
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
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!
THEBALANCESHEET
AccountsRece
ivable
Accounts Payable and Receivable
AccountsPaya
ble
AnticipatedmoneysforGoodsorServicesrendereduntoapartnerbusinessthathave
notyetbeencollected.
AnticipatedmoneysthathavenotyetbeenpaidforGoodsorServicesrenderedbya
partnerbusinessuntoyou.
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�
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.
MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
CASHFLOWOverview
Revenues,Income
Expenditures,Bills
YourBusiness
CASHFLOW
Revenues,Income
Expenses,Bills
Details
InitialInvestment
FirstSalesGrowthSales
PP&EPurchases Advertising
BusinessReinvestment
YourBusiness
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.
CASHFLOWImproving Cash Flow
3 TIPS
AvoidExtraneousPurchases
SendOutInvoicesQuickly
MaintainInventoryTurnover
CASHFLOWInventory Turnover
Production
Sellinginventorygeneratescash.Thequickertheturnaround,thehighertherateofcashflow.
Stockpilingunusedinventorydoesnotgeneratecash;infactstorageexpensescandepletecashreserves.
CASHFLOW
PROBLEM SUGGESTION
Nostandingcashtoreplaceoperationally‐necessarycapitalinvestments.
Leaveasecondarysavingsaccountuntouchedfor
emergencyneeds.
Nothavingenoughcashatendofmonthtopayforutilitybills.
Budgetanticipatedmonthlybillsatthebeginningof
everypaycycle.
Businesspartnersbeingslowtopayforproductorservicesrendered.
Offerpayment‐termdiscounts.Take5%offthesellingpriceforpaymentsmadewithin2weeks.
Delayingdeliverytimeofgoodsorservices,andsubsequentpayments.
Setacompanypolicytoneverexceed1weekof
deliveryofgoodsorservices.
Common Issues
MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
THEINCOMESTATEMENTOverview
DESCRIPTION Anoverviewoftheearningsorlossesofacompany.
TIMEFRAME Onebudgetaryperiod,e.g.1month,1year,1fiscalyear…
PRIMARYFOCUS
Considerhowrevenuesarebeingdivviedupbetweenexpendituresandnetprofit.
ONETHINGITCANDO
Determineifyourcompanyisearningenoughtosustainlong‐termoperations.
ONETHINGITCAN’TDO
Determineifyourcompanyhasenoughcashonhandtofinanceanemergencycapitalpurchase.
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
THEINCOMESTATEMENTaSSESSING COSTS OF GOODS SOLD (COGS)
WhichoftheserepresentCOGS?
MATERIALSEXPENSE LABOUREXPENSE SALESREVENUE
$50 $25 $100
THEINCOMESTATEMENTFixed Costs vs. Variable Costs
ProductionCosts
ProductionCosts
AsProductionincreases,FIXEDCOSTSremainthesame.
AsProductionincreases,VARIABLECOSTS
increaseproportionately.
MAINTENANCE
UTILITIES
RENT
SUPPLIES
WAGES
EQUIPMENT
THEINCOMESTATEMENTForecasting
MonthlyFixedCosts:
$500
MonthlyIncomeNeededforLiving:
$5,000
Cashfrom1Sale:
$20COGSfrom1Sale:
$9
Profitfrom1Sale:
$11
SalesNeededtoReachIncomeGoal:
500
THEINCOMESTATEMENT
EBIT=OperatingRevenues–OperatingExpenses
IFEBITIS…
BELOW$0
EQUALTO$0
ABOVE$0
RaisePricesorCutCosts
EITHER/BOTH
MaintainorIncrease
Production
Calculating and Using EBIT
MODULEOUTLINE
THEBUDGET
CASHFLOWTHE
BALANCESHEET
THEINCOMESTATEMENT
BREAK‐EVENANALYSIS
BREAK‐EVENANALYSISVocabulary Review
Break‐EvenPoint
Thedateatwhichincomingrevenuefortheperiodequals
outgoingexpenditures,zeroingoutoperationalprofits.
Price&Profit
Themarketvalueofthegoodorserviceforsale,andthemarginabovethecostofmanufacturingthatisretainedinthe
company.
BREAK‐EVENANALYSIS
$0
$150
$300
$450
$600
$750
June
TotalCostsTotalRevenues
Overcoming Production Costs
Break‐EvenPoint
NetProfit
FixedCosts
VariableCosts
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
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
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?
BREAK‐EVENANALYSIS
ProfitMargin
ProfitMargin
$
$$$× =× =
× $ =
Strategies for Shrewd Pricing