“MBA in a day”
Presented by NEWVISION
Financial Management
Presented by:
Ryan D. Smith, CPA
Martin, Holland & Petersen, PLLC
509.575.1040
Overview
1.
Form of Business Entity
2.
Financial Overview: Books, Records, and Controls
3.
Developing and Using Cash Flow Projections
4.
Financing Your Business
Form of Entity
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Sole Proprietor
Partnership
Limited Partnership
Corporation
S-Corp
LLC
Sole Proprietorship
Advantages
 Easy to form
 Owner has complete control
 Owner receives all income
 No double taxation
Disadvantages
 Unlimited personal liability for all acts and debts
of the business
 Fewer tax benefits
 Termination on death of owner
 Ineligible for equity financing
 Limited ability to raise capital
General Partnership
Advantages
 Fairly simple to set up
 Combination of resources and talents
 Personal tax benefits
Disadvantages
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More recordkeeping requirements
Unlimited liability (including for each other’s debts)
Dissolution upon death of a partner
Partnership profits taxed as income to partners
Possible friction between partners
Limited Partnership
Advantages
 General partners have additional capital
 Limited partners have limited liability
 No double taxation
Disadvantages
 Initial organizational cost high
 Limited partners have no control
 Partnership profits taxed as income to partners
 Subject to state and federal securities laws
 Finite existence
Corporation
Advantages
 Limited liability of shareholders
 Perpetual existence
 Flexibility of financing through outside investors
 Transfer of ownership by sale or gift of stock
 Tax benefits available to corporate employees
Disadvantages
 Initial organizational cost high
 Annual reporting requirement
 Double taxation on dividends
S Corporation
Advantages
 Same as for Corporation
 Taxed at the individual shareholder level
Disadvantages
 Except for the tax consequences, same as for
Corporation
 With some exceptions, only individuals can be
shareholders
 Limited number of shareholders
 Limited to one class of stock
 Must use calendar year
Limited Liability Company
Advantages
 Limited liability without limits on management
participation
 Flexible ownership and capital structure
 No double taxation
 Allocation of tax benefits among members
Disadvantages
 Poor tax treatment of fringe benefits
 Transferability must be governed by buy/sell provisions
Income Taxes
Sole Proprietorship
 The owner pays tax
 Schedule C
Partnership
 The partners pay tax
 Form 1065
Corporation
 The Corporation pays tax
 Form 1120
LLC
 Taxed as a Partnership
Why Keep Records?
Financial Management
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To provide financial information about your business
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To produce financial statements
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To provide tax preparation information
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To provide borrowing information
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To pay and/or collect bills when due
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To control cash flow
Internal Controls
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To watch costs and budgets
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To prevent theft
Legal Issues
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To document events in case of lawsuits
Management Decisions
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To provide planning information
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To monitor business progress
Computerized Accounting Systems
Be sure you find out about :
 Hardware requirements
 Ability to modify
 Support services
 Scaleability / Ability to expand
 User friendliness
 Training / Help desk
 Reports and documents
 Personnel requirements
 Local use (other businesses using this software)
What To Look For In Accounting Software
Ease of Use
 How steep is the learning curve?
 How long will it take you to become proficient?
 How much will training time add to the cost?
Scaleability
 What other modules are available?
 Does it integrate seamlessly with other business applications?
 Is it compatible with your accountant’s system?
 Will it accommodate growth?
 Will you have to make multiple upgrades as you grow?
Flexibility
 Can the programs be customized to meet your unique needs?
Security
 Is it secure?
 Does it prevent unauthorized access to your data?
Technical Assistance
 Does the program have an adequate help utility, help desk, or community user
forum?
 Does the manufacturer offer training?
 Is the manufacturer likely to stay in business?
Accrual vs. Cash Accounting
Accrual Method
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Record revenue and expenses when work is done, even
though cash may not have been collected
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Usually preferred by accountants and the IRS
Cash Method
 Record revenue and expenses when cash is received,
even though work may not be complete
 Usually preferred by business owners
Sample Balance Sheet
Owner’s Equity
Assets
Belong to
Creditors
Assets Belong
to Owners
Statement of Owner’s Equity
Sample Income Statement
Annual Statement of Cash Flows
Types of Ratios
Liquidity Ratios
Can your business meet its short-term obligations?
Examples: Quick Ratio, Current Ratio
Asset Management Ratios
How efficiently does your company handle assets?
Examples: Inventory Turnover Ratio, Receivables, Turnover Ratio
Profitability Ratios
What is your return on sales and capital?
Examples: Gross Profit Margin Ratio, Net Profit Margin Ratio, Return on
Investment Ratio
Capital Structure Ratios
How much does your business owe, and own?
Examples: Debt to Equity Ratio, Debt to Assets Ratio
Ratio Analysis
LIQUIDITY RATIOS
Liquidity refers to a business’s short-term ability to pay current and
unexpected debts.
Current Ratio
Current assets  Current liabilities
(2:1 is preferred)
Quick Ratio
(Cash + Marketable securities + Receivables)  Current liabilities
(1:1 is preferred)
CAPITAL STRUCTURE RATIOS
Debt to Equity Ratio
Total debt  Total equity
Debt to Total Assets
Total debt  Total assets
Operating Ratios
Ratios that reflect activities crucial to making a
profit in your business.
Gross Profit Percentage
Gross Profit  Net Sales
Inventory Turnover
Cost of Goods Sold  Average Inventory
Receivables Turnover
Net Credit Sales  Average Net Receivables
Profitability Ratios
Ratios that compare earning to the resources
available in the business.
Think of these ratios as answering the question, “How well did I do,
given what I had to work with?”
Return on Sales
Net Income  Net Sales
Returns on Assets
Net Income  Total Assets
Earnings Per Share
Net Income  Average # of Common Shares Outstanding
Horizontal Analysis
2007
2008
2009
2010
$120,000 $126,000 $180,000 $186,000
100%
105%
150%
155%
Vertical Analysis
What Makes a Good Accounting System?
 It works for you!
 The right information at the right
cost
 Keep it simple
 The business owner is involved
 Good internal controls
Internal Controls
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The control environment
Authorization
Segregation of duties
Physical controls
Tickler system
Audit trail
Monitoring and review
Internal Controls for Cash
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Authorization
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Receiving Bank Account Statements
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Reconciling Bank Accounts
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Segregation of Duties
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Physical Controls

Controls for Cash Registers
Segregation of Duties for Cash
Segregation of Duties for Cash Sales
 Handles central cash register
 Closes register at the end of the day and reconciles cash
in the drawer to total sales
 Prepares deposit slip
 Makes deposit daily and compare deposit slip to cash
report prepared by Person 2
Person 1
Person 2
Person 1
Person 3
Segregation of Duties for Checks Received in the Mail
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Opens mail and makes a list of checks received
Prepares deposit slip
Updates A/R records
Compares the information from Person 4, 5, and 6
Person
Person
Person
Person
4
5
6
7
Segregation of Duties for Cash Disbursements
 Prepares checks
Person 8
 Signs checks & reviews supporting documents
 Mails checks
Person 9
Person 9 or 10
Segregation of Duties for Bank Reconciliation
 Prepares bank reconciliation
 Reviews bank reconciliation
Person 11
Person 12
Record Retention Guidelines
Type of Record
Retention Period
Bank Statements
Business licenses
Cash register tapes
Cash registers
Canceled checks
Financial statements
General ledger
Inventory records
Invoices (A/P)
Invoices (A/R)
Phone / utility bills
Property, plant & equip. records
Purchase orders
Receiving reports
Tax Returns
Time cards or tickets
Travel expense records
Property deeds / titles
Other: _____________________
___________________________
___________________________
7 years
Until expired
3 years
Permanent
3 years
Permanent
Keep permanently
7 years
3 years
3 years
3-6 years
Permanent
3 years
3 years
Keep permanently
3 years
7 years
Keep while you own
_____________________
_____________________
_____________________
Why Should You Budget?
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Helps you understand your business
Translates strategies into action
Enables adaptation to changing conditions
Improves business culture by teaching flexibility and
compromise
Fuels creativity and innovation
Provides benchmarks
Uncovers bottlenecks
Coordinates teams and departments
Explains and documents failures, adjustments, and
successes
What Makes a Good Budgeting System?

Employee involvement

Consistent use

Documenting your assumptions
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Ease of use
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Integration with your business needs
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Flexibility
Sales Forecast Example
Henry’s Appliance Shop
Cost of Product Units Sold Budget
Henry’s Appliance Shop
Performance Report Example
Henry’s Appliance Shop
Fixed Expenses
Variable Expenses
The Break-Even Point
Break-Even Analysis
How many units do you need to sell before you start making a profit?
Break-Even Units Volume:
Fixed Costs
Price - Variable Costs
Example:
Selling Price is $10.00 per unit
Variable costs are $5.50 per unit
Contribution margin is $4.50 per unit
Fixed costs are $1,350.00 per month
Break-Even Point in Units: $1,350.00  $4.50 = 300 units per month
When you sell unit #301, you will start making a profit for that month.
Break-Even in Dollars of Sales: 300 units x $10 = $3,000
Pricing and Planning for Profit

Can you sell 300 units per month at the $10.00 per unit price?
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If it takes 300 units per month to break even, how many more can you sell
to make a profit?

How much profit do you want to make?
Example: You want to make $900 per month profit. How many more
units per month do you have to sell?
1.
2.
3.
It took 300 units to break even
$4.50 per unit after the first 300 will contribute to profit
$900  $4.50 = 200 units more to make $900 per month profit
Can you sell 500 units per month?
The Cash Flow Cycle
Managing Inventory
Inventory Turnover =
Cost of Goods Sold  Average Inventory
Example:
Cost of Goods Sold = $390,000
Average Inventory = $30,000
$390,000  $30,000 = 13
Inventory turns 13 times per year
Average Days in Inventory =
365 days  Inventory Turnover
Example:
365 days  13 = 28
On average, goods remain in inventory for 28 days
Managing Accounts Receivable
Receivables Turnover =
Net Credit Sales  Average A/R
Example:
Net Credit Sales = $715,000
Average A/R = $65,000
$715,000  $65,000 = 11
Receivables turn 11 times per year
Average Collection Period =
365 days  Receivables Turnover
Example:
365 days  11 = 33
On average, it takes 33 days to collect receivables
Accounts Receivable Aging Report
Bullfrog, Inc.
October Accounts Receivable Aging Report
Age ofAccount
0 - 30 Days
Account Name
Amount
Barnaby
$
200.00
 How do you speed
Johnson
$
150.00
up collections?
Total0 - 30 Days
30 - 60 Days
Hamilton's B & B
$
1,250.00
Connor
$
100.00
Kline
$
200.00
Jones
$
450.00
Total30 - 60 Days
60 - 90 Days
Over 90 Days
Totals
Jones
$
$
350.00
 What would you
do with the Over
90 days category?
$
2,000.00
 How does your
350.00
Total60 - 90 Days
Jones
$
$
350.00
300.00
collection policy
affect your Cash
TotalOver 90 Days
$
300.00
TOTAL RECEIVABLES
$
3,000.00
Flow Projection?
Why Do You Need Financing?
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Research and development
Growth or start-up expenses
Purchase a business
Seasonal working capital
Permanent working capital
Equipment acquisition
Real estate acquisition
Other: ______________________
Fitting the Loan to the Need
Short-term Debt
Used to meet short-term needs, such as seasonal
inventory or short-term liquidity problems. Repayment:
One year.
Intermediate Debt
Used for permanent working capital equipment
acquisition. Repayment: Three to seven years.
Long-term Debt
Used for real-estate purchases or the initial purchase of a
business. Repayment: Seven years or more.
Debt or Equity Financing Considerations
Change in ownership
Obligation to repay
Tax considerations
Capital structure
Time required
Cost of obtaining the funds
Personal factors / preferences
Lender and investor reactions
The Cs of Credit
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Credit history
Character
Capacity
Collateral
Conditions
Capital
Leasing vs. Purchasing
Advantages
 Usually no down payment
 Often over a longer time period than a loan
 Protects against equipment obsolescence
 May allow “off balance sheet” financing
 Increases possible sources of financing
Disadvantages
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May cost more if tax advantages lost
May not own assets at end of the lease
Is still a long-term legal obligation
Terms and conditions may limit flexibility of use
Other Sources of Financing
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Self
Friends and family
Peer to peer / crowd financing
Suppliers
Customer deposits
Credit cards
Insurance companies
Factoring companies
Loan guarantor
Loan broker
Franchising
Grants
Other: ________________________
Tips for Working with Your Banker
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Deal with a local bank when possible
Make an appointment
Select a banker you trust
Select a banker you trust
Select a banker familiar with your type of business
Dress appropriately
Ask for advice
Develop a long-term relationship
Know your needs
Present a complete proposal
Explain uses and benefits of the loan
Be flexible
Be patient
Tell the truth
Recommend your banker to others
The Basics of Negotiation
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There would be no negotiation unless both sides
expected a benefit
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The goal of negotiation is to create a new
situation that’s better than the old one
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Unfair deals last only while one party feels
weaker than the other
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Win-win negotiation delivers the best, most
enduring deals
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Like any other skill, negotiation can be learned
and practiced
Traits of Effective Negotiators
Good negotiators:
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Understand their counterpart’s interests and
perspectives
Understand the difference between positions and
interests
Understand the difference between real power and
perceived power
Know their settlement range
Know their BATNA (Best Alternative To a Negotiated
Agreement)
Know when to walk away from negotiations
Negotiation Strategies
Soft Negotiators
 Avoid conflict at any cost
 Usually don’t stand up for their best interests
Hard Negotiators
 Aggressive and competitive
 May use threats of bluffs
 Not trusting or trustworthy
Win-Win Negotiators
 Work towards the best outcome for all
 Flexible, but can be firm when it’s appropriate
 Attack problems, not people
Stages of Negotiation
Setting an Agenda
 Why are you negotiating? What are the issues, and what are
the goals?
Voicing Demands and Offers
 What are your interests and positions?
 What do you want, and what are you willing to give in return?
Working to Minimize Differences
 Where do interests overlap?
 Where is the common ground?
Closing the Deal
 “Win-win” means both sides are better off than when they
started.
Three Ways to Increase Profitability
1.
2.
3.
Increase your sales volume (without increasing
your fixed costs)
Reduce your fixed costs (without causing a
decrease in your sales volume)
Increase your contribution margin by:
• Increasing the sales price (without decreasing
volume)
• Decreasing variable costs
• Changing product mix to those with higher
contribution margins (without decreasing volume)
Growth and Maximizing Profit
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Profit growth is the most important metric.
Policies should allocate assets to maximize profit.
Company and product branding is critical to profits.
Customer knowledge and management is the most important focus
in a growth company.
Time spent on things that don’t maximize profit will slow your
growth.
Cost controls are important, but companies cannot save their way to
growth.
Growth strategies begin and end with the company’s leader.
All employees and stakeholders must pull together to be successful.
Care about and manage people, not data.
To be successful, make others successful!