Test 4
Protect from Cash drain
1. Hire honest and ethical people 2. Pre-employment background checks 3. Credit checks 4. Indentify opportunities where employees can steal from you. 5. Divide financial duties 6. Investigate budget variances carefully 7. Have a formal audit conducted 8. Provide coaching, counseling, and training to employees to ensure they understand the ethical standards set for you business. 9. Terminate the employee who cannot reach standards within a reasonable amount of time. 10. Provide education about the economics of your business to employees.
What are some of the tasks an accounting system should be able to perform in order to ensure that a business's accounting information is accurate, reliable, and useful?
1. Provide a simple, easy-to-understand user interface. 2. Have an exhaustive context-sensitive help function. 3. Produce an income statement that clearly lists revenues and expenses by appropriate categories for your industry and type of business. 4. Produce a classified balance sheet that clearly shows the financial position of your business. 5. Facilitate the development of a cash budget. 6. Facilitate the task of developing operating and investment budgets. 7. Produce financial statements in approved formats to be furnished to outside investors, bankers, and regulators. 8. Produce multiple-year comparison financial statements for management use. 9. Provide a method for you to define and produce custom reports to meet your management needs. 10. Be able to export financial data in a form that can be used by your accountant and can be imported into tax preparation and spreadsheet programs. 11. Maintain an internal "audit trail" that records all entries and changes to the accounting system in order to facilitate the identification and correction of errors. 12. Enforce security measures to reduce the opportunity for employee misuse or fraud. 13. Have provisions that will either allow the program to grow with your business or to easily export its data into programs that can handle larger businesses.
What are the benefits of borrowing money for capital investment?
Borrowing money for capital investment provides two benefits: (1) It enhances the potential for higher rates of return for the owners. (2) It allows the owners to keep a greater level of control of the business. Borrowing increases potential profits by lowering the weighted average cost of capital and by providing capital funds that allow the business to consider additional opportunities.
Compare the costs and drawbacks of each of the three types of capital financing.
Businesses can finance through equity, debt, and gifts. Equity can come from the entrepreneur or from others. The amount you may contribute to your business is determined by just how much you are worth and how easy it is for you to use what you have. Parts of your wealth are not cash in the bank, but made up of things rarely seen or thought about, such as retirement funds and the cash value of life insurance policies. Not all personal wealth is easily available for use as a source of capital, such as the equity in your house. Outside equity is money from selling part of your business to people who are not and will not be involved in the management of the business. These people are called outside equity investors. Outside equity financing is only available if your organization is one of three broad types of legal forms of business: a partnership, a corporation, or a limited liability company. Debt is a claim on the value of assets that a business owns. Secured debt provides a lender with the right to seize specific assets if the loan is not paid back as specified in the loan contract. Unsecured debt does not give a lender the right to seize any specific asset in the event of non-payment. A lender generally must use court action, a lawsuit, or forced bankruptcy to collect unpaid unsecured debt. Even though debt is easier to obtain than is equity, here are two reasons that cause many owners of small businesses to avoid using debt as a source of capital. First is that debt has repayment obligations that specify exactly how and exactly when the debt must be repaid. Second is the fact that debt gives lenders legal right to enforce payment under the contract terms without any consideration of the business' ability to pay at the time the payment is due. Few, if any small businesses have been able to obtain gift funding for the purpose of start-up. Gift capital is available (with a few exceptions) only to established businesses who have a history of some number of years of successful operations. Virtually all gift financing available to small business comes either from governments or from private foundations. Few foundations exist to support small business and none exist to specifically provide start-up or working capital funding. Gifts also come with strings attached. If you win a small business grant, you will be required to make mandatory periodic reports that detail how the grant is being used and what impact that use is having on attaining the granting institutions' goals.
Describe the mechanics of a cash flow statement.
Cash flow statements can be either direct statements or indirect statements. The direct statement is developed solely from the cash records of the business (only those things bought and sold) and does not make any reconciliation to the income statement. The indirect statement of cash flows starts with net income and adjusts the accruals and deferrals to provide cash flow information that can be easily reconciled to the other financial statements. Most owners, lenders, and investors prefer the indirect method because it explicitly links net income and the balance sheet to cash flows.
Cash and Cash Equivalents
Cash is made of three forms of money that can be immediately used for payements: Currency, Demand Deposits, and Traveler's Checks. Cash Equivalents are assets that can be turned into cash after a longer period of time has passed. This can range from a few hours to a few days. Examples are: Marketable Securities, Commerical paper, and debt investments that will mature in less than three months.
There are six items that go inside of the cash flow statement
Operating Activities: This includess all of the functions that are performed to create a product or provide a service. Investing Activities: This includes all acquisition and dispoal of property, plant, equipment, and investment securities of other securities of other firms. The cash out flows are the cash investments made by the company to acquire "noncash" assets. Investment outflows spawn from sale or disposal of noncash assets that came from prior investments. Financing Activites: Refers to actions taken by management to finance the operations of the company. In terms of the cash flow statement, only owner investments by owners and borrowed money will be reported as cash inflows. Cash outflows are compiled of capital that is repaid to owners and other borrowings . Net Effect of Foreign Exchange Rates is reported on the cash flow statement because it affects the value of contracts and sales made in other currencies besides the primary used by the business. Net Change in Cash Balance is included because it reconciles the net increases and decreases in the beginning cash balance and the ending cash balance. Noncash Investing and Financing are compiled of transactions in where the exchange of value other than cash occurs.
Describe the goals of financial management in preparation for a business exit.
Successfully leaving a business requires maximizing the value of the business for successors. The goals of financial management in preparation for exiting the business depend, in part, on the nature of the exit that is planned. If the plan is to transfer the business to family members, then one will want to ensure that the business is in sound financial condition. The entrepreneur should be working to minimize debt and to increase asset value. It is essential that they establish internal controls over assets by establishing policies and procedures that are clearly stated and understood by everyone involved in management. If the entrepreneur plans to sell the business, their goals should be to optimize capital structure for profits.Investors usually will not pay to "buy" cash in a business. Therefore, it is important to remove all surplus cash and tighten the cash-to-cash cycle to the shortest time possible. The condition and age of assets will greatly affect the final selling price, so now is the time to ensure that all equipment is in good working order, that the facilities are clean and organized, and that accounts receivable and accounts payable are up to date. Termination of a business is also very common. Many small businesses are extensions of the owner. For example, CPA firms, beauty salons, real estate brokerages, indeed any business that provides personal services, often depend solely on the reputation and personality of the owner. In reality, there is no business to sell. In cases such as these, exit usually involves finishing all outstanding projects, collecting all money due, disposing of all business assets, and finally paying off any outstanding debt. Thus, the goals of financial management are to recover all asset value possible, cover any indebtedness, and use the remainder for personal purposes.
What are the different types of institutional gifts? Explain how a business can benefit from them.
Tax abatements, tax credits, and grants are the different types of institutional gifts. Tax abatements are legal reductions in taxes by a government. They are provided primarily to encourage specific activities that are expected to improve blighted areas or to provide additional employment. Most governments that impose a tax on real estate have some form of tax reduction to encourage rehabilitating old dwellings, providing housing for low-income citizens, and maintaining buildings that are deemed to be historic. Tax credits are provided for the purpose of encouraging investment in specific types of assets, to increase economic activity in specified disadvantaged geographical areas, increase the welfare of specific groups of citizens, or support industries that are held to be of national strategic interest. Credits provided include those for empowerment zone employment, employing (American) Indians, purchasing electric automobiles, or using ethyl alcohol for fuel. Grants of money are available from the U.S. government, most state governments, and semiprivate and private economic development agencies. The stated purpose of the grant programs is to encourage development of small businesses, thereby increasing the economic activity of the country. As with the federal program, the rationale for providing grants to small business is to increase economic activity, provide job growth, and provide increases in the overall standard of living of the citizens of the state.
Identify the Four Cs of Borrowing.
The Four Cs of Borrowing are: 1. Character of the managers of the business. 2. Capacity of the business to repay both principal and interest on time. 3. Conditions of the industry and economy in which the business operates. 4. Collateral that can be used to secure the loan.
What are the three primary purposes of money and the different forms of money?
The three primary purposes of Money are: 1. To facilitate exchanges of unlike assets, such as your labor for a grocer's food. 2. To measure the value of things, both tangible, such as jewelry, and intangible, such as pain and suffering. 3. To keep track of wealth. What are the different forms of money? Debit cards, online bill payments, electronic drafts, wire transfers, BitCoin.
