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Show Me the Money Resources I Link. Jeff Stambaugh Dillard College of Business/Rm 257A [email protected] http://faculty.mwsu.edu/business/jeff.stambaugh. Built by Stambaugh/2008. Case Study: Should You Buy It? “Wings ‘R Us” (pg 408). Variable costs Food 15,000

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Show me the money resources i link
Show Me the MoneyResources I Link

Jeff Stambaugh

Dillard College of Business/Rm 257A

[email protected]

http://faculty.mwsu.edu/business/jeff.stambaugh

Built by Stambaugh/2008


Case study should you buy it wings r us pg 408
Case Study: Should You Buy It?“Wings ‘R Us” (pg 408)

Variable costs

Food 15,000

Beverage 4,500

Supplies (napkins, cleaning materials) 2,000

Labor 21,600

Total Variable Costs 43,100

Fixed Costs (rent, insurance, etc) 21,900

Do you replace existing fryer (bought used for $4K) with a new fryer that costs $25K (+ $5,500 for ship/install – total $30,550)?

  • Saves $1,000 per month in utilities and insurance

  • More capacity than existing fryer

Built by Stambaugh/2008


Case study should you buy it wings r us cont
Case Study: Should You Buy It?“Wings ‘R Us” (cont)

Your account says depreciation under MACR would be:

Yr 1: 6,100 Yr 2: 9,760 Yr 3: 5,856K Yr 4 & 5: 3,513

So, do you buy?

What if accountant says depreciation should be $4,357 in years 1-6 and $4,358 in year 7. How does that change your decision?

What are the “costs” associated with the purchase?

Built by Stambaugh/2008


Which business will pose greatest least cash management issues
Which Business Will Pose Greatest / Least Cash Management Issues?

  • Furniture retail store

  • Custom home builder

  • Music concert promoter

  • Restaurant

  • Income tax preparation firm

  • Massage therapy firm

  • Used (very used) car dealership

  • Custom Machine Shop

  • Waterpark

Built by Stambaugh/2008


The money cycle
The Money Cycle Issues?

Cash Spent to Generate Product

Cash Received from Product Sales

Fixed Costs

Built by Stambaugh/2008


Maximizing inflows
Maximizing Inflows Issues?

  • Take deposits / require progress payments

  • Reward prompt payments

  • Ask to be paid

  • Take on non-core business (seasonal especially)

  • Factoring receivables (2-7% per month)

  • Borrow more cash

Built by Stambaugh/2008


Credit cards
Credit Cards Issues?

  • Pro:

    • Almost expected by customers

    • They bear risk for money loaned

    • Short cash cycle

  • Con:

    • Fees (2.5%)

    • Charge backs

Built by Stambaugh/2008


Minimizing outflows
Minimizing Outflows Issues?

  • Inventory Control (drawdown)

  • Curtailing non-essential expenses

  • Trade discounts (>1% for 30 days)

  • Know billing cycles

  • Employ non-cash incentives

  • Consignment goods

  • Barter (offer your services in lieu of payment)

  • Renegotiate terms

Built by Stambaugh/2008


What i need is a system
What I Need is a System Issues?

  • Accountants to the rescue … kind of

Built by Stambaugh/2008


What s right about accounting for entrepreneurial businesses
What’s Right About Accounting for Entrepreneurial Businesses?

  • Needed to make sound financial decisions (Managerial Accounting)

  • Needed to get funds from investors / banks (Financial Accounting)

  • Needed to do your taxes (Tax Accounting)

Built by Stambaugh/2008


What s wrong about accounting for entrepreneurial businesses
What’s Wrong About Accounting for Entrepreneurial Businesses?

  • Very specific lingo and application to keep it standardized

  • Some information may not paint useful picture

  • Can be manipulated by unscrupulous folks

  • Can be time consuming / expensive

Built by Stambaugh/2008


Key terms
Key Terms Businesses?

  • Cost: value given up to obtain something you want

  • Expense: decrease in owners equity caused by consuming your product or service

  • Revenue: Money generated from sale of goods / services, or any other use of assets associated with the main operations of firm

  • Assets = Liabilities + Owners Equity

Built by Stambaugh/2008


Big 3 statements
Big 3 Statements Businesses?

  • Income statement

  • Balance sheet

  • Cash flow statement

Built by Stambaugh/2008


Income statement
Income Statement Businesses?

Income Statement

for year ending 12/31/20XX

Sales revenue 356,428

Less cost of goods sold 105,200

Gross margin 251,228

Less operating expenses 

Marketing 30,000

  SG&A 30,000

  Depreciation 10,000

 Total operating expenses 70,000

Operating income 181,228

Less interest expense 6,000

Income before taxes 175,228

Income tax expense 40,000

Net income 135,228

Built by Stambaugh/2008


Income statement issues
Income Statement Issues Businesses?

  • Detail of “where money is going”

  • Operating income is key for many decisions

  • Does NOT track cash

    • What and when is revenue

Built by Stambaugh/2008


Balance sheet
Balance Sheet Businesses?

Liabilities and Owner's Equity

Current liabilities

  Accounts payable $5,300.00

  Note payable to bank $2,700.00

  Dep. from customers $6,000.00 Total current liabilities $14,000.00

Long term mortgage $50,000.00

Total liabilities $64,000.00

Owner's Equity

Retained earnings $85,300.00

Total Owners' Equity $85,300.00

Total liability and equities $149,300.00

 Assets

Current Assets

Cash $ 52,400.00

Accounts receivable $ 11,300.00

  Inventory $ 15,600.00

Total current assets $ 79,300.00

Fixed assets

PPE $ 80,000.00

Accum depreciation $ (10,000.00)

Net fixed assets $ 70,000.00

Total assets $149,300.00

Built by Stambaugh/2008


Balance sheet issues
Balance Sheet Issues Businesses?

  • Snapshot of business

  • Some useful ratios: quick, D/E

  • Assets probably do not reflect true market value

  • Many firm assets (and maybe liabilities) not captured

Built by Stambaugh/2008


Cash flow statement
Cash Flow Statement Businesses?

Built by Stambaugh/2008


Cash flow statement issues
Cash Flow Statement Issues Businesses?

  • Critical to startups (month-by-month not uncommon)

Built by Stambaugh/2008


Pro forma budgeting
Pro Forma Budgeting Businesses?

  • Budget: Plan for future

  • Mechanism for control: Variance analysis

Built by Stambaugh/2008


Class takeaways
Class Takeaways Businesses?

  • Financial skills are very important to success as an entrepreneur (and this class!)

  • Understanding “where’s the money going” a matter of survival for a venture

Built by Stambaugh/2008


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