SMALL BUSINESS FINAL EXAM

What is the balance sheet equation?

(Assets = Liabilities + Owners' equity)

What are the primary causes of cash flow shortages?

1) Difficulty collecting $ from customers 2) Seasonal variations in sales 3) Sporadic large priced$ items such as truck breaks and need a new truck

What are some techniques to increase cash flows?

1. Deposits and progress payments (selling season tickets for waterpark in off season) 2. Discounts for prompt payment 3. Asking for your money 4. Taking on noncore paying projects 5. Factoring receivables (last resort) you show how much money is going to come in and get a loan (high interest)

What are the steps to take for effective cash flow management?

1. Review your cash needs on a set schedule 2. Arrange a business line of credit or revolving load before you need it 3. Obtain a business credit card 4. Collect receivables$ asap 5. Plan and schedule your payments 6. Use online collection and payments

How can you control cash shortages?

1. Use personal money 2. Borrow 3. Adjust scheduled purchases 4. Adjust scheduled payments 5. Try to collect money due 6. Sell investments 7. Sell receivables 8. Lay off employees

What is a credit reporting agency?

A business that collects, collates, and reports information concerning an entity's use of debt

Define Accounts Payable

A current liability representing the amount owed by a business to a creditor for the merchandise or services purchased on open account

Define Assets

A resource controlled by an entity, as a result of past events, and from which future economic benefits are expected to flow to the entity. carrying amount.

Define Financial Accounting

A specialized branch of accounting that keeps track of a company's financial transactions. (the transactions are recorded, summarized, and presented in a financial report or financial statement)

What are angel investors?

A wealthy individual who invests in companies in relatively early stages of development

Define Accounts Receivables

Amounts owed by customers due to the sale of goods and services (payment usually due within 30 days)

What is the operating cycle?

Book definition is see cash-to-cash cycle

Distinguish between cash and cash equivalents.

Cash is immediately available to spend vs cash equivalent is noncash currency (checks, credit card, stocks bonds)

What are the 4 Cs of Borrowing?

Character of the managers of the business Capacity of the business to repay both principle and interest on time Conditions of the industry and economy in which the business operates Collateral that can be used to secure the loan

Discuss the importance of cash management.

Collect cash ASAP as we need to use it Keep safe from theft as employees and accountants steal.

Understand financing with debt - including the drawbacks.

Debt is a claim on the value of assets that a business owns, it is easier to obtain than it is equity. Drawbacks debt has repayment obligations that specify exactly how and when the debt must be paid back Debt gives lenders the legal right to enforce payment under the contract terms without any consideration of the businesses ability to pay at the time payment is due

Discuss equity capital from the investors' view

Equity capital is the money contributed to the business in return for part ownership of the business

Discuss equity capital from the owner's view.

Financing with equity is expensive and guaranteed to create problems of control and decision making. Once you sell, you are also selling part of your business including future profits, growth, and wealth. Many investors can inspect account records at any time they choose and can even boot you out of your own business, question all of your decisions, or sue for supposed damages.

What are fixed costs

Fixed costs remain the same regardless of production output. Fixed costs may include lease and rental payments, insurance, and interest payments.

What are the sources of financing for small businesses?

From the owners themselves Family and friends Credit cards Banks and other commercial lenders

What is Gift Giving?

Gift giving is giving money or loans to a business but it is not always free. It costs time and money. You are convincing someone to give your business money.

How can companies protect themselves from cash being stolen?

Hire honest employees, run credit checks, criminal records, background checks. Only certain employees have access to cash separate employees have access to records

Why is accounting important for small businesses?

It communicates so much of the information that owners, managers, and investors need to evaluate a company's financial performance.

Know the breakeven equation. Review all examples completed in class.

Know the breakeven equation. Review all examples completed in class.

What are some techniques used to decrease cash outflows?

Make wise purchasing decisions Avoid waste of resources

how you can use bootstrapping to get your business going and to keep it going?

Minimize overhead costs - cloud computing, use microsoft office , G suite etc. Virtual store fronts - use website instead of purchasing a location for business Business incubators - offer office space at low cost Co-working spaces - split the rent Maximize returns from employee expense - student interns, overtime is less expensive than multiple employees Minimize operating costs - rent equipment and work from home Maximize the results of marketing - word of mouth, discounts, facebook, donate product Crowdfunding for equity

Review table on page 475.

Need enough around to pay bills and other expenditures but not so much extra that you could be investing it. Can use incentives to help customers make payments on time.

what type of financing is right for your business.

Personal funding or borrowing funds

Why do Accounting?

Provides information for external decision makers such as outside investors, lenders, customers, and the federal government.

Define noncore projects.

Revenue producing tasks and activities related to bit not part of the primary strategy of a business

What items are you likely to find on an income statement?

Revenue, cost of goods sold, gross margin, expenses, taxes, net income, or net loss

What is the income statement equation?

Sales - Expenses = Net Income.

Distinguish between skimming, phony disbursements and embezzlement.

Skimming = most prevalent... pocketing money and not recording sale Phony disbursements = fake invoice Larceny and embezzlement = employees steal cash after it has been received and recorded

What are some of the uses of a balance sheet?

The balance sheet covers its assets, liabilities and shareholders' equity. The purpose of the balance sheet is to give users an idea of the company's financial position along with displaying what the company owns and owes.

What items are you likely to find on a balance sheet? (Assets, liabilities, owners' equity)

The balance sheet lists: the company's assets (what it owns) liabilities (what it owes) stockholders' equity (the residual claims of its owners) as of a point in time

Interest definition

The cost of borrowing money (usually a %)

Define Owner's Equity

The net worth of the business the total assets of an entity, minus its total liabilities.

What is the cash-to-cash cycle?

The time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale. EX. I use cash to buy the materials then sell the product I get cash back, this cycle... Broken down into payables($ out) and receivables($ in)

Define financial risk.

Uncertainty of returns; the probability of losing money

What are variable costs?

Variable costs change based on the amount of output produced. Variable costs may include labor, commissions, and raw materials.

Why should companies worry about managing cash flows?

You need cash to make payables to keep operating Keep it safe from thieves. Larceny or embezzlement, skimming , phony disbursements.

What is a balance sheet?

a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Define Liabilities

an amount of debt owed by a firm or an individual.

Understand financial management for: Operations

build owner wealth, conserve assets, match cash inflows and outflows, and to maximize return on capital assets by making optimal investing decisions

Understand financial management for: Start up

conserving what little cash you have (bootstrapping)

What is GAAP?

generally accepted accounting principles (GAAP) a set of accounting standards that is used in the preparation of financial statements.

Define Personal Gifts

gifts from anyone else like cash, picking up the tab, free work, overpayment, and piggybacking

Define Institutional Gifts

gifts from governments and foundations like tax abatements, tax credits, and grants from other businesses

What is Unsecured Debt?

loans that do not allow a lender to seize specific assets in the event of nonpayment

What is Secured Debt?

loans that provide the lender with the legal right to seize specific assets in the event of nonpayment.

Understand financial management for: Growth

obtain increasing amounts if cash inflows to pay for added inventory, productive assets, and employees needed

What is an income statement?

reports the revenues earned less the expenses incurred by a business over a period of time.

What is the contribution margin?

shows how much additional revenue is generated by making each additional unit product after the company has reached the breakeven point.

Define Collateral

something of value given or pledged as security for payment of a loan; collateral may consist of financial instruments such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings

Define Profit

the amount that revenues exceed expenses

Definition of Managerial Accounting

the gathering and preparing of accounting information that is used within a company to help ensure the organization's goals are met effectively and efficiently

What is risk?

the level of probability that an investment will not produce expected gains

What is Gain on investment?

the percentage amount that the payout of an investment differs from the original cost (payout - investment + dividends)/investment

Define Tax accounting

the subsector of accounting that deals with the preparations of tax returns and tax payments. (an individual focuses on income, qualifying deductions, donations, and any investment gains or losses.)

What is diversity?

to invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risk

Understand financial management for: Business Exit

transfer business to family, sell business, or terminate business