Management 302 Chapter 7-8
Other areas to concentrate Cash Flow
Compensation supplies deliveries insurance borrowing Pg. 220
operational excellence
Creates a competitive advantage by holding down costs to provide customers with the lowest-priced products
Customer service
Customer service is your competitive advantage in a business
Leverage Ratios
Debt Ratio Leverage Ratio Times interest earned
How can financial records allow you to identify problems in your business?
It helps you know the financial health of your business. It helps you identify how much your receivable are worth, how old each account is, how quickly your inventory is turning over which items are not moving how much your firm owes, when are debts due and how much your business owes in taxes and FICA.
Online business (what successful web business must posses)
1. It's not just retail: E-commerce 2. target a niche community 3. Be mobile 4. Logistics are huge: specialize in key functions like order fulfillment, logistics, and warehousing 5. the holy grail of passive income: Passive income means exchanging your time once and getting paid over and over. Waiting to get paid, while exchanging your time. 6. Use the internet to save money: E-business is as much about reducing costs as it is about revenue. 7. Build your competitive advantage: E-business can be boiled down to 4 ideas: a.) accelerating the speed of business. speed b.) reducing costs. costs c) enhancing customer service. customer d) improving the business process. process
Some insights about a small business owner?
1.The median age for small business owner 50.3 years 2. 36% are female 3.. 1/3 have a 4-year college degree 39%, 28% have no more than a high school diploma, 33% have some college. 4. 77.5% own their home 5. 49% of Millenials intend to start their won business the next 3 years 6. the median revenue for all U.S small businesses is $390,000
sole prorietorship
A business owned by one person Form 1040 Schedule C or C-EZ or Schedule F if your business is farming.
Product Leadership
A business that creates a competitive advantage based on providing the highest quality products possible.
Capital business
A business that depends greatly upon equipment and capital for its operations. (manufacturing)
labor intensive
A business that is more dependent on the services of people than on money and equipment.
home-based business
A business that maintains its primary facility in the residence of its owner. According to SBA 52% of businesses are home based. (advantages and disadvantages pg. 170 )
online business (some key findings)
A business that shares information maintains customer relationships and conducts transactions by means of telecommunications networks. Multichannel marketing strategy. Some key findings by Omin channel retail 2017: 51% preferred to shop online over in store Millenials and Gen Xers shop online 6 hours per week men spent 28 % more online than women 30% of americans shop online at least weekly 80% of americans shop online at least monthly 46% small businesses do not have their own website 34% of total businesses sell via their own website.
Journals
A chronological record of different types of financial transactions of a business. Your accounting starts when you record raw data from sources, sales slips purchase invoices and check stubs in journals. A place to write your debited and credited accounts.
trend analysis
A comparison of a single firm present performance with its own past performance preferably for more than two years. Places to look for trouble liquidity, asset utilization, leverage, profitability
Quick ratio (acid-test) ratio
A financial ratio that measures a firms ability to meet its current obligations with the most liquid of its current assets. Quick ratio= Current assets-Inventory / Current liabilities Pg. 208
Current Ratio
A financial ratio that measures the number of times a firm can cover it current liabilities with its current assets. The current ratio assumes that both accounts receivable and inventory cash can be easily converted to cash. Ratio of 1.0 or less are considered low and indicative of financial difficulties. Ratios of 2.0 or more excessive liquidity that may adverse to the firms profitability. Current ratio = current assets / current liabilities pg. 207
common size financial statement (breakdown of each item)
A financial statement that includes a percentage breakdown of each item. What produces a Common size financial statement is being able to calculate the percentage relationship of each item of expense to sales. Comparing this to a balance sheet where on on side you can find on one column total assets, liabilities, and owner equity. Common size financial statement has on the other column Percentage of total assets. Example on pg. 200
Statement of Cash flow
A financial statement that shows the cash inflows and outflows of a business.Cashflow=Receipts-Disbursements. Negative cash flow happens when more cash goes out than comes in. If this happens you may be undercapitalized
Income Statement
A financial statement that shows the revenue and expenses of a firm allowing you to calculate the profit or loss produced in a specific period of time. Also called Profit- and-loss (p&l) statement, summarizes the income and expenses your company has totaled over time.
Times interest earned
A leverage ratio that calculates the firm's ability to meet its interest requirement. A high ratio indicates a low risk and a low ratio indicates immediate action should be taken. Times interest earned = Operating income/interest expense
Debt Ratio
A leverage ratio that measures the proportion of a firms total assets the is acquired with borrow funds. Includes short term debt, long term debt and long term obligations such as leases. Debt ratio = Total debt / total assets
Macro-aging schedule
A list of accounts receivable by age category. list categories of outstanding accounts with the percentage of accounts that fall within each category. This allows the business to forecast the collection of receivables. pg. 218 table
Micro-aging schedule
A list of accounts receivable showing each customer, the amount that customer owes, and the amount that is past due. This shows the status of each customer. Pg 218 table
Aging schedules
A listing of a firm's accounts receivable according to the length of time they are outstanding. This schedule allow the small business owner to forecast the collections of receivables. pg. 218
Average collection period
A measure of how long it takes a firm to convert a credit sale (internal store credit, not credit card sales) into a usable form (cash). Average collection period= Accounts receivable / Average sales per day example: $12000 / $450000/365 days = 9.93 pg. 209
Accrual basis method
A method of accounting in which income and expenses are recorded at the time they are incurred rather than when they are paid. Sales you make on credit are recorded as accounts receivable that have not yet been collected. For example, you may pay for the insurance twice a year, but you can record the payment monthly.
Cash-basis method
A method of accounting in which income and expenses are recorded at the time they are paid rather than when they are incurred. You record transactions when cash is actually received and expenses are actually paid. You shouldnt record credit expenses because you are not actually paying them till later.
cash budget
A plan for short term uses and sources of cash. (also know as cash forecast) When ever the firm is about to experience surplus shortage for periods of time it can plan to make a short term investment. Cash shortage for a period of time it can plan to get a short term loan. A cash budget typically covers a one year period that is divided into smaller intervals. pg. 217 Cash budget format
Return on assets
A profitability ratio that indicates the firms effectiveness in generating profits from its available assets also know as return on investment. Return on assets = Net profit after taxes / Total assets
Return on Assets
A profitability ratio that indicates the firms effectiveness in generating profits from its available assets also known as return on investment. The higher this ratio the better Return on assets = Net profit after taxes / total assets
Profitability Ratios
A profitability ratio that measures the percentage of each sale dollars that remains as profit after all expenses including taxes have been paid. Financial ratios are used to measure the ability of a company to turn sales into profits and to earn profits on assets and owners' equity committed. A low ratio may indicate that expenses are too high relative to sales. It can be obtained from a common income statement. Net Profit = Net income / Sales
Net Profit Margin
A profitability ratio that measures the percentage of each sales dollar that remains as profit after all expenses , including taxes have been paid. This ratio is widely used as a gauge of management efficiency. Low ratio may indicate that expenses are too high relative to sales. Net profit = Net income / Sales
Return on Equity
A profitability ratio that measures the return the firm earned on its owners investment in the firm. The higher the ration the better off financially the owner will be. Return on equity is highly affected by the amount of financial leverage (borrowed money) used by the firm and may not provide an accurate measure. Return on equity = Net profit after taxes / owners equity
General Ledger
A record of all financial transactions divided into accounts and usually compiled at the end of each month from your different journals.
corporation tax
A tax on the profits of limited companies. pg. 182
Strategies for Cash flow Management where to concentrate cash flow
Accounts receivable Inventory Accounts Payable Banks
Name the three elements accounting systems resolve?
Assets: Any resource that a business owes and expects to use to its benefits. Liabilities: A debt owed by a business to another organization or individual. Equity: The amount of money the owner of a business would receive if all of the asset were sold and all of the liabilities were paid. (also called capital or net worth)
Importance of planning to a start- up
Before launching your business you should write a business plan. Additionally you should record the important steps. 1. Market analysis 2. competitive analysis (what separates your business from other businesses) 3. start up costs (how much money will you need) 4. capital equipment assets (equipment you will need) 5. legal form of business 6. location of business. 7. Marketing plan
Start up challenges when starting your business.
Being the visionary ambiguity loneliness managing work and home decision making pg. 167
Three Financial ratios that can be employed for:
Benchmarking analysis: Compares firms to industries leaders. Benchmarking is taking an industry leader or major competitor, computing their ratios and then comparing the small business firm. Ratios take away the size of an Industry, this means even a new business can compare itself to the best firm Industry. Industry average analysis: compares firms financial ratios to the industry averages. Trend analysis: compares a singles firms present performance with its own past performance for more than two years.
hypergrowth
Business that are intentionally structured to grow at exceptionally rates. Scalability is key to creating such growth. Fast growth start ups.
Accounting process
Business transactions: All the source documents that represent the data of you business(sales slips, receipts, checks, invoices and other documents Journals: Transactions recorded in chronological order in general and subsidiary journals Ledgers: Transactions classified y type so they can be recorded in ledger accounts Financial statement: Data converted into information for future transaction decisions by preparing financial statements
Financial Ratios
Calculations that compose important financial aspects of a business. Financial ratios compare one firm financial with another firm financial comparison. Four important categories of financial ratios are liquidity, asset utilization, leverage and profitability ratios. It's important to use one of the categories when comparing ratios or use all four of them. The more you check the better.
What equation describes the Cash flow statement?
Cash flow = Receipts - Disbursements The money you have on hand at any given time equals the money your bring in minus what you have to pay.
illustrate the importance of and procedures for managing cash flow.
Cash flow is the difference between the amount of cash actually brought into your business and the amount paid out in a given period time. Cash flow represents the lifeblood of your business because if you do not have enough money to pay for your operating expenses your are out of business.
Explain the difference between cash and accrual accounting?
Cash you record expenses at the time they are paid. Accrual accounting is when you record the expenses when they are incurred, not when they are paid.
Mention they types of business
Labor intensive capital intensive online business home based business hypergrowth
Types of New Businesses
Labor intensive capital intensive online business home based business hypergrowth
Assets = Liabilities + owners equity. How would you restate this equation if you wanted to know what your liabilities are? Your owner equity?
Liabilities is what the business owes, Owner equity is what the owner have invested, Assets what your business owns.
Liquidity Ratios
Liquidity Ratios Current Ratios Quick Ratio
Customer Intimacy
Maintaining a long-term relationship with customers through superior service that results in a competitive advantage
Net Profit Margin
Measures the percentage of each sales dollar that remains as profit after all expenses including taxes have been paid.
Independent Contractor
One who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer. An independent contractor is not an employee but may be an agent. End Chapter 7
Income Statement Equation
Profit = Revenue - Expenses This statement can be broken into the following sections: Net sales Cost of goods sold Gross margin Expenses Operating income Net income (or loss) Example of income statement PG: 199
What equation represents the activity described on the Income statement?
Profit = Revenue - Expenses The money you get to keep equals the money your business brings in minus what you have to spend.
In the last step in the accounting process, you take certain numbers from your financial statements to compute what that can be compared to industry averages or historical figures from your own business to help you make financial decisions.
Ratios
Generally accepted accounting principles (GAAP)
Standards established so that all businesses produce comparable financial statements. To turn data into management information you need to follow certain guidelines or standards called (GAAP) The group that monitors the appropriateness of these principles is the Financial Accounting Standards Board (FASB). The GAAP guidelines are intended to create financial statement formats that are uniform across industries.
Corridor principle
States that once an entrepreneur starts a firm and becomes immersed in an industry, "corridors" leading to new venture opportunities become more apparent to the entrepreneur than to someone looking in from the outside.
What are the advantages of a single-entry account?
The ability to integrate your online bank account, create a tracking system of who has done what in record keeping and provides access to information to specific employees or your accountant.
Itemize the accounting records needed for a small business.
The accounting records of your small business need to follow the standards of generally accepted accounting principles (GAAP) From your source documents, such as sales slips, purchase invoices, and check stubs your should record all the transactions in journals. Information from your journals should then be posted in a general ledger. Financial statements like your balance sheet, income statement, and statement of cash flow are produced from the transactions in your general ledge.
Name an advantage of using a General ledger?
The advantages of using a computerized system is that can perform several tasks electronically. To speed the posting process and to facilitate access to account. 1 for assets 2 liabilities 3 for a capital 4 for income 5 for expenses.
Define hypergrowth companies and evaluate the reasons for their phenomenal rate of growth. What are the most valid explanations for the rate of success found in these companies.
They are headed by people who have experience for at least 10 years, people who had been founders. They are financed with their own money. They are better prepared for business. pg. 173
Accounting systems first transfer all the information where?
They first record the first transaction in to Journals then transferring the entries into Ledgers. From the ledger you make financial statements like a balance sheet, income statement and statement of cash flow.
Evaluate potential start-up and suggest sources of business ideas.
When new product ideas introduced to the market, the window of opportunity i open the widest (assuming it is a product that people want and will buy), because little competition exists. As a product progresses through the product life cycle, the window of opportunity closes, as more competition enters the market and demand declines. Most people get ideas for new businesses from their prior employment. Turning a hobby or outside interest into a business is also a common tactic. Ideas may come from other people's suggestions or spring from information gained while taking a class. Sometimes business ideas even occur by chance.
Discuss the advantages and disadvantages of starting a business from scratch. (Summary Chapter 7)
When starting a business from scratch, the small business owner is free to establish a distinct competitive advantage. There are no negative images or prior mistakes to overcome as may occur when purchasing an existing business. The creation of a new business builds pride of ownership. However, the risk of failure is higher for a startup because there are more uncertainties regarding the size and existence of a market for the business.
Discuss the importance and uses of financial records in small businesses. (Summary Chapter 8)
You need financial records so you can make managerial decisions on topics concerning how much money is owed to your business, how much money you owne, and how to identify financial problems before they become serious dilemmas,. Financial records are also needed to prepare your tax returns and to inform your banker and investors abut your business financial status. Without accurate financial records, you can not exercise the kind of clear sighted management control needed to survive in a competitive marketplace.
industry average analysis
a comparison of a firm's financial ratios to the industry averages pg. 206-207 chart
Name the 11 ratios used to analyze financial statements?
d
pro forma financial statements
financial statements that project what a firm's financial condition will be in the future. You are making full or partial estimates instead of recording actual estimates. This is good when you are starting a new business.
serendipity
luck, finding good things without looking for them. Sometimes business opportunities come to you without looking for them.
In providing value to your customers we can identify three grounds on which companies compete: How will you compete?
operational excellence, product leadership, customer intimacy
Taxes
taxes are due in four quarterly installments on the fifteenth day of april, june, september and january.
Asset utilization Ratios
Asset utilization ratios Inventory turnover Average Collection Period Fixed Asset turnover Total asset turnover
What equation is the basis of the balance sheet?
Assets = Liabilities + Owners equity Any entry you do on one side must be done on the other side to maintain a balance. pg. 195
Name the three equations which are the foundation of the business language.
Assets = Liabilities+Owners equity Profit = Revenue - Expenses Cash flow = Receipts - Disbursements
How can profitability ratios provide insight into the effectiveness of management? Liquidity ratios? Assets utilization ratios? Leverage ratios?
It gives an insight how the team management is managing the firm. It covers three parts of a firm net profit margin, return on assets, return on equity. pg.212
Entrepreneurs get their ideas for business start up from various sources. Name these sources, and identify the ones most likely to lead to success.
1. I experienced a pain point 2. I met someone talented 3. I have a special skill 4. I saw a customer need 5. I researched many ideas
What do you need to ask yourself when hiring an accountant?
1. Ask what kinds of businesses the accountant works with. 2. How does the accounting firm bill for services 3. What are the accountants credentials 4. How accessible will they be 5. How well does this accountant communicate with you 6. Does the accountants conservative/aggressive approach fit with your philosophy 7. Can you look over my quick books 8. What if I get audited. Pg. 194
Compare and contrast the advantages and disadvantages of starting a business from the ground up.
Advantages: 1. freedom to mold you new business 2. ability to create your distinctive competitive advantage. 3. You can feel pride when creating something new. 4. there is no carryover baggage of someone else's mistakes, locations, employees, or products. 5. you established your own image Disadvantages: 1. the risk of failure is higher. 2. you may have trouble identifying market needs. 3. you must make people aware that your business exist. 4. how to choose the right vendor, where to find motivated employees.
Single-entry account
An accounting system in which the flow of income and expenses is recorded in a running log, basically like a checkbook. May be used by small sole proprietorship. You record the flow of income and expenses in a running log basically like a checkbook. It allows you to make a monthly statement but not a balance sheet, income statement, or other financial records.
double-entry accounting
An accounting system which every business transactions is recorded in an asset account and a liability or owners equity account, so that the system will balance. All transactions are recorded in two ways once as debit to one account and again as a credit to another account. Every plus must be balanced by a minus. A double-entry account increases the accuracy of our system and provides a self checking audit.
Fixed Asset turnover
An asset utilization ratio that measures how efficiently a firm is using its assets to generate sales. This ratios is very helpful for businesses with a lot of equipment or buildings. A low ratio indicates that sales are off due to marketing or the equipment is too old. Fixed asset turnover = sales / net fixed assets
Total Asset Turnover
An asset utilization ratio that measures how efficiently the firm uses all the its assets to generate sales, a high ratio generally reflects good overall management. A low ratio may indicate flaws in the firms strategy poor marketing or improper capital expenditures. Total asset turnover = sales / total assets
Inventory Turnover
An asset utilization ratio that measures the liquidity of the firms inventory how quickly goods are sold and replenished. Inventory turnover = costs of goods sold / inventory
The accounting process begins with
Analysis of business transactions and source documents.
Business ideas can come from
Disrupt: In business context disruption is making significant changes to the way business is done in a specific industry. Bringing products that have never been used. Window of opportunity: A period of time in which an opportunity is available. When the opportunity opens for a product to be sold at the right time. Product life cycle: Stages that products in a marketplace pass through over time. Products go through stages of opportunity: introduction, growth, maturity, and decline. During the introduction, the opportunity is open because no competition exists but as time goes by that changes.
Itemized the accounting records for a small business
Double and single-entry systems Accrual basis method Cash basis method General ledger Income statement Common size financial statement Statement of cash flow Pro forma financial statements pg 194-204
Describe types of new businesses and discuss the characteristics commonly shared by fast growth companies.
E-Business have completely changed the small business landscape. Other types of new businesses and part-time businesses. Some small businesses start with the intention of becoming hyper growth companies. These companies are generally led by teams of people with prior experience in starting that type of business (usually high tech manufacturing). They are well financed and constantly looking for opportunities to expand into new markets.
Liquidity Ratios
Financial rations used to measure a firms ability to meet its short term obligations to creditors as they come due. Liquidity means how quickly an asset can be turned into the amount of cash it is actually currently worth the more quickly it can become cash, the more liquid is to be.
Ratio analysis
Financial ratios
Financial ratios
Financial ratios Industry average analysis Trend analysis
Profitability Ratios
Financial ratios are used to measure the ability of a company to turn sales into profits and to earn profits on assets and owner equity committed. Profitability ratios allow some insight into the overall effectiveness of the management team. Three important profitability ratios: net profit margin return on assets return on equity
Leverage ratios
Financial ratios that measure the extent to which a firm uses debt as a source of financing and its ability to service that debt. The risk of using someones else's money to generate profit. The more debt a firm uses the more financial leverage it has. Two important leverage ratios are the debt ratio and the times interest earned ratio.
Asset Utilization Ratios
Financial ratios that measure the speed with which various asset accounts are converted into sales or cash.
Partnership income
Form 1065 and each partner reports her individual share of that income on schedule SE and Schedule E.
What purpose do GAAP and FASB serve for a small business owner?
GAAP (creates) purpose is to create certain guidelines or standards that turn data into management information. FASB (monitors) this group monitors the appropriateness of these principles.
Balance sheet
Income statement shows the financial condition of your business over time, the balance sheet provides an instant snap shot of your business at any given moment. It has two parts one shows the liabilities, and two an owners equity of the business. The 2 side must balance.
Profitability Ratios
Profitability ratios Net profit Margin Return on equity
Explain the 11 rations use to analyze financial statement.
Ratio analysis enables you to compare the financial condition of your business to its performance in previous time periods or to the performance of similarly sized businesses performance withing your industry. Four important type of financial rations discussed in this chapter are liquidity (current and quick or acid test, ratios) asset utilization (inventory turnover, average collection period, fixed asset turnover and total asset turnover) Leverage (debt, and time interest earned) and Profitability ratios (net profit margin, return on assets, and return on equity)
Explain the most important points to consider when starting a new business.
The entrepreneur needs to begin by questioning the feasibility of her idea. Then to bridge the gap between dream and reality, careful planning is needed. Entrepreneurs need to carefully consider the costs of starting a new business and they must analyze the market and competitive landscape to ensure that their competitive advantage really exists. Providing customers with outstanding service during and after the sale of a product is of utmost importance in business start-ups. Customer service is the basis for establishing a long term relationship with customers. Start-up also has legal requirements. Entrepreneurs must file the business name with the state of origin and obtain local business licenses and any industry-specific permits required. They must also apply for a tax identification number to collect and process sales taxes, if necessary.
How is liquidity measured?
The financial data used to determine liquidity are the firms current assets and current liabilities found on the balance sheet. Two important liquidity ratios: the current ratio and the quick (or acid-test) ratio.
Cash-to-cash cycle
The period of time from when money is spent on raw materials until it is collected from the sale of a finished good. Sometimes known as the operating cycle. Cash - Purchase of raw materials and inventory - Manufacturing and holding - Sales credit cash - Accounts receivable - collections This chart shows the time it takes from raw material to the finished process before collecting any money.
Cash flow
The sum of net income plus any non cash expenses such as depreciation and amortization or the difference between the actual amount of cash a company brings in and the actual amount of cash a company disburses in a given time period. The best is to have cash when you need it.
Accounting (Start Chapter 8)
The system within a business for converting raw data from source documents (like invoices, sales receipts, bills, invoices, sales receipts, bill and checks) into information that will help a manager make business decisions.
