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Canadian Entrepreneurship & Small Business Management: Balderson and Mombourquette

M&B Tooling Ltd. is assessing two available options for the purchase of new equipment with a negotiated cash price of $100,000. The manufacturer is willing to accept a down payment of 20% of the purchase price and an instalment note for the balance. The note would require quarterly fixed principal payments (plus interest) starting October 1, 2020, for a period of two years. M&B has a proposal from its bank for an instalment loan for two years that requires a fixed blended monthly payment (includ

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97 views23 pages

Canadian Entrepreneurship & Small Business Management: Balderson and Mombourquette

M&B Tooling Ltd. is assessing two available options for the purchase of new equipment with a negotiated cash price of $100,000. The manufacturer is willing to accept a down payment of 20% of the purchase price and an instalment note for the balance. The note would require quarterly fixed principal payments (plus interest) starting October 1, 2020, for a period of two years. M&B has a proposal from its bank for an instalment loan for two years that requires a fixed blended monthly payment (includ

Uploaded by

Rishab Joshi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Balderson and Mombourquette,

Canadian Entrepreneurship & Small Business Management,


10th Edition

Presentation prepared by:

Peter Mombourquette of
Mount Saint Vincent
University
CHAPTER 9
FINANCIAL MANAGEMENT

Copyright © 2017 McGraw-Hill Education Ltd. 2


Learning Objectives
LO1 Review the fundamentals of small business
accounting.
LO2 Discuss the various types of accounting systems a
small business can use.
LO3 Describe the considerations in purchasing a computer
for the small business.
LO4 Illustrate how to evaluate the financial operations of
the small business.
LO5 Explain the important aspects of credit management
for the small business.

Copyright © 2017 McGraw-Hill Education Ltd. 3


The Need for Financial Records – Uses
of Accounting Information
◦ Entrepreneurs
◦ To plan and control
◦ To motivate employees
◦ Investors
◦ To evaluate performance

Copyright © 2017 McGraw-Hill Education Ltd.


4
The Need for Financial Records – Uses
of Accounting Information
◦ Lenders
◦ To evaluate creditworthiness
◦ Government
◦ To verify taxes owed
◦ To approve new stock issues

Copyright © 2017 McGraw-Hill Education Ltd.


5
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

Copyright © 2017 McGraw-Hill Education Ltd.


6
Accounting Systems for Small Business

Outsourcing Financial Activities


Manual Systems

Copyright © 2017 McGraw-Hill Education Ltd.


7
Accounting Systems for Small Business
Small Business Computer Systems
Disadvantages
◦ Cost
◦ Obsolescence
◦ Employee Resistance
◦ Capabilities
◦ Setup Time
◦ Failure to Compensate for Poor Bookkeeping

Copyright © 2017 McGraw-Hill Education Ltd.


8
Management of Financial Information
for Planning
Short Term Financial Planning
◦ Clarification of Objectives
◦ Coordination
◦ Evaluation and Control

Copyright © 2017 McGraw-Hill Education Ltd.


9
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

Copyright © 2017 McGraw-Hill Education Ltd.


10
Management of Financial Information
for Planning
Long Term Financial Planning (cont.)
◦ The Expansion Decision
◦ Effect of fixed cost adjustments
◦ Effect of variable cost adjustments

Copyright © 2017 McGraw-Hill Education Ltd.


11
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

Copyright © 2017 McGraw-Hill Education Ltd.


12
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

Copyright © 2017 McGraw-Hill Education Ltd.


13
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

Copyright © 2017 McGraw-Hill Education Ltd.


14
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

Copyright © 2017 McGraw-Hill Education Ltd.


15
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

Copyright © 2017 McGraw-Hill Education Ltd.


16
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

Copyright © 2017 McGraw-Hill Education Ltd.


17
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

Copyright © 2017 McGraw-Hill Education Ltd.


18
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

Copyright © 2017 McGraw-Hill Education Ltd.


19
Credit and the Small Business
Use of Bank Credit Cards
Debit Cards

Copyright © 2017 McGraw-Hill Education Ltd.


20
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.

Copyright © 2017 McGraw-Hill Education Ltd.


21
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?

Copyright © 2017 McGraw-Hill Education Ltd.


22
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?
10. Why is ratio analysis important?

Copyright © 2017 McGraw-Hill Education Ltd.


23

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