Small business management
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SMALL BUSINESS MANAGEMENT. Financial Management and Financial Statements. The Need for Financial Records. Uses of Accounting Information Entrepreneurs To plan and control To motivate employees Investors To evaluate performance Lenders To evaluate creditworthiness Government

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SMALL BUSINESS MANAGEMENT

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Small business management

SMALL BUSINESS MANAGEMENT

Financial Management and Financial Statements


The need for financial records

The Need for Financial Records

  • Uses of Accounting Information

    • Entrepreneurs

      • To plan and control

      • To motivate employees

    • Investors

      • To evaluate performance

    • Lenders

      • To evaluate creditworthiness

    • Government

      • To verify taxes owed

      • To approve new stock issues


The accounting cycle

The Accounting Cycle

  • Recording Transactions

  • Classifying Transaction Totals

  • Summarizing Data

    • Balance Sheet (Statement of Financial Position)

    • Income Statement (Statement of Profit and Loss)

    • Cash Flow Statement and/or Changes in Financial Position


Accounting systems for small business

Accounting Systems for Small Business

  • One-Book System

  • One-Write System

  • Multi-journal System

  • Outsourcing Financial Activities


Accounting systems for small business1

Accounting Systems for Small Business

  • Small Business Computer Systems

  • Disadvantages

    • Cost

    • Obsolescence

    • Employee Resistance

    • Capabilities

    • Setup Time

    • Failure to Compensate for Poor Bookkeeping


Management of financial information for planning

Management of Financial Information for Planning

  • Short Term Financial Planning

    • Clarification of Objectives

    • Coordination

    • Evaluation and Control


Management of financial information for planning1

Management of Financial Information for Planning

  • Long Term Financial Planning

    • The Capital Investment Decision

      • rate of return method

      • present value method

      • payback method

    • The Capacity Decision

      • break even point


Management of financial information for planning2

Management of Financial Information for Planning

  • Long Term Financial Planning (cont.)

    • The Expansion Decision

      • Effect of fixed cost adjustments

      • Effect of variable cost adjustments


Evaluation of financial performance

Evaluation of Financial Performance

  • Management of Current Financial Position

    • length of time for payments

    • three essential components

      • time taken to pay accounts payable

      • time taken to sell inventory

      • time taken to receive payment for inventory


Evaluation of financial performance1

Evaluation of Financial Performance

  • Evaluation of Financial Statements

  • Ratio Analysis

    • Liquidity ratios

      • current ratio = current assets / current liabilities

        • over 1:1, usually between 1:1 and 2:1

      • Acid test/ Quick ratio = current assets-inventories/ current liabilities

        • 1:1 is considered healthy


Evaluation of financial performance2

Evaluation of Financial Performance

  • Evaluation of Financial Statements

  • Ratio Analysis

    • Productivity ratios

      • Inventory turnover = COGS / Average inventory at average cost

      • Inventory turnover = Sales / Average inventory at retail price

      • Collection period = Accounts receivable / Daily credit sales


Evaluation of financial performance3

Evaluation of Financial Performance

  • Evaluation of Financial Statements

  • Ratio Analysis

    • Profitability ratios

      • Gross margin = sales - COGS

      • Profit on sales = net profit before tax / sales

      • Expense ratio = Expense item / Sales

      • Return on Investment = Net profit before tax / owner’s equity


Evaluation of financial performance4

Evaluation of Financial Performance

  • Evaluation of Financial Statements

  • Ratio Analysis

    • Debt ratio

      • Total debt to equity = Total debt / owner’s equity

        • not greater than 4:1


Credit and the small business

Credit and the Small Business

  • Advantages of Credit Use

    • will undoubtedly increase sales

    • necessary to remain competitive

    • credit customers exhibit more store loyalty

    • credit customers are more concerned with quality of service vs. price

    • credit records can be used for future planning


Credit and the small business1

Credit and the Small Business

  • Disadvantages of Credit Use

    • will be some bad debts - depends on credit policy and monitoring

    • slow payers cause lost interest and capital

    • increases bookkeeping, mailing and collection expenses


Credit and the small business2

Credit and the Small Business

  • Management of a Credit Program

    • Determine Administrative Policies

    • Set Criteria for Granting Credit

    • Set up a System to Monitor Accounts

    • Establish a Procedure for Collection


Credit and the small business3

Credit and the Small Business

  • Use of Bank Credit Cards


Concept checks

Concept Checks

  • 1. Describe the three steps in the accounting cycle.

  • 2. What are the three financial statements , as discussed in the text, that are valuable to a small business owner?

  • 3. List the bookkeeping systems used by a small business.


Concept checks1

Concept Checks

  • 4. What are some of the capabilities of computers which can benefit small business?

  • 5. What are some possible disadvantages of computer ownership?

  • 6. In the short term, why is budgeting a valuable tool?


Concept checks2

Concept Checks

  • 7. What are the three types of long-term financial planning decisions that could affect the business?

  • 8. What measure can be used to evaluate the results which are found in the financial statements?

  • 9. What is the business cycle of a small business? Why is it important?


Concept checks3

Concept Checks

  • 10. Why is ratio analysis important?


Appendices

Appendices

  • A. Checklist for buying a small business computer

  • B. Use of Financial Ratios for a Small Business (Car Dealer)


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