An Introduction to the Lifeblood of Your Small Business
Financial Planning Personal
Development
Entrepreneurship Training
Strategic Planning
Business Perspective
MODULE OUTLINE THE BUDGET
THE
BALANCE SHEET
CASH FLOW
BREAK‐EVEN ANALYSIS
THE INCOME STATEMENT
MODULE OUTLINE THE BUDGET
THE
BALANCE SHEET
CASH FLOW
BREAK‐EVEN ANALYSIS
THE INCOME STATEMENT
THE BUDGET Overview Lays out initial
investment plan Sets priorities for financing revenue‐ producing activities Divides reasonable from unreasonable purchases Identifies all available support resources
THE BUDGET Finding an Initial Investment Personal Savings Business Partnerships Individual Investors Bank or Government Loans
THE BUDGET Identifying Priorities Highest Priorities
Purchases that are necessary to day‐to‐day operations
Primary Concerns
Purchases that add substantially to operating income
Secondary Concerns
Purchases that substantially reduce operating expenses
Tertiary Concerns
Purchases that serve to differentiate your business from competition
Any Remaining Funds
Purchases that promote clientele confidence in your product
THE BUDGET Setting Priorities HIGHEST PRIORITY
OBJECTIVE 1 +$$ OBJECTIVE 2
+$
OBJECTIVE 3
‐$
OBJECTIVE 4 ‐$$
THE BUDGET Making Reasonable Purchases
$$
$$
$$$
$$$
$$$$
$$$$
Which of these represent reasonable purchases?
THE BUDGET Assessing Available Resources Various Non‐Cash Holdings can become… Sources of alternative revenue streams Catalysts for achieving market differentiation Tools for streamlining the value‐added process Devices for cutting costs
STARTING A BUDGET
? ? ?
Preparatory Questions Do you know where you want to be financially in five years? In ten years? Do you know how much of your monthly income goes to business expenses? Do you know what portion of your expenditures go to luxuries versus necessities?
? ?
Do you know how much income you can expect to earn in a budgetary period? Do you know how much above expenses you can afford to save?
Respond or to each question.
STARTING A BUDGET Setting Financial Goals If You Answered…
YES Quantify the anticipated cost of meeting your goals and compute the monthly expense to your budget. Remove any nonessential costs that cannot be accommodated.
NO Identify 3‐5 major financial goals you would like to see realized in the next 5 years. Be conservative: assume that your monthly income will not have increased appreciably in that time.
STARTING A BUDGET Forecasting Income If You Answered…
YES Consider if the expected income already exceeds the anticipated monthly expense. If it does not, consider further limiting expenses or finding new sources of income.
NO Multiply expected sales by established prices. Be conservative: take into account seasonal spending changes and competition. Whatever happens, do not overshoot actual sales.
STARTING A BUDGET Keeping Track Of Expenditures If You Answered…
YES Calculate the percentage of your income that goes to business expenditures, and its change by month. Is growth in expenses outstripping growth in revenues?
NO Keep a ledger of all business activities, and sum up all expenses for that month. Subtract your expense total from that month’s revenues: is the difference positive?
STARTING A BUDGET Putting Away Savings If You Answered…
YES Set up a special savings or money‐market account and start having the bank auto‐draft a portion of your monthly balance into that account. Don’t touch it except in an emergency.
NO A good rule of thumb is to take the first 10% of all revenues and store it in a separate savings or interest‐bearing account. If 10% is too much, try for a set monthly dollar amount.
STARTING A BUDGET Categorizing Expenditures If You Answered…
YES Identify each expense as a percentage of operating income or total expenses. Are luxury purchases taking up too great a portion of your operating budget?
NO Using your expense ledger, identify which purchases contributed strongly to operating income, and which ones did not. Reconsider the fruitless purchases in the future.
STARTING A BUDGET Putting It All Together Personal Savings
Bank Loan
Friend Investor
Business Capital Priority Purchase Luxury Purchase
Priority Purchase
Secondary Purchase
Value‐Adding Activities
Extra Resource
MODULE OUTLINE THE BUDGET
THE
BALANCE SHEET
CASH FLOW
BREAK‐EVEN ANALYSIS
THE INCOME STATEMENT
THE BALANCE SHEET Overview DESCRIPTION
A snapshot of the condition of a company’s financial position.
TIMEFRAME
A single point in time, usually the start of one day at the end of a budgetary period.
PRIMARY FOCUS
Consider what moneys the company currently holds against what moneys the company owes.
ONE THING IT CAN DO
Determine if a company can pay back its short‐term debts with anticipated short‐term income.
ONE THING IT CAN’T DO
Determine how much time the company can survive on its current resources.
THE BALANCE SHEET
Leftover moneys reinvested in the company
Details Small capital purchases for everyday operations.
Assets
Other investors’ stake in your business
Liabilities & Equity
Cash
$1,000 Accounts Payable
$500
Accounts Receivable
$250 Total Liabilities
$500
Tools and Supplies
$750 Capital Stock
PP&E (Property, Plant, & Equipment)
$4,500 Retained Earnings Total Owners’ Equity
Total Assets
$6,500 Total Liabilities & Equity
$4,000 $2,000 $6,000 $6,500
A = L + E!
THE BALANCE SHEET Example Assets
Liabilities & Equity
Cash
$4,500 Accounts Payable
Accounts Receivable
$750
$500 Total Liabilities
Tools and Supplies
$1,500 Capital Stock
PP&E (Property, Plant, & Equipment)
$10,000
$13,500 Retained Earnings Total Owners’ Equity
Total Assets
Total Liabilities & Equity
A = L + E!
Fill in the highlighted missing entries.
THE BALANCE SHEET Accounts Payable and Receivable le b a v i ece R s t un
Acco
Acco
e l b a y a P s t n u
Anticipated moneys for Goods or Services rendered unto a partner business that have not yet been collected.
Anticipated moneys that have not yet been paid for Goods or Services rendered by a partner business unto you.
THE BALANCE SHEET
Current Receivables Current Debts
Healthy Current Ratio Cash + A/R
Interest + A/P
Ratio
$1,000 + $500/4
$150 + $750/14
1.667
$200 + $600/7
$250 + $500/10
1.067
$500 + $400/21
$250 + $500/10
1.200
$200 + $600/7
$500 + $500/3
0.800
# # – #
THE BALANCE SHEET When purchasing When purchasing operating supplies operating supplies on credit. on credit. When paying off credit balance.
Debit Equipment
$600
Accounts Payable
$600 Debit
Accounts Payable Cash
$600
Cash
$90
Accounts Receivable
$60
Sales Revenue When recouping payment for sales.
Accounts Receivable
Credit
$150 Debit
Cash
Credit
$600
Debit When selling goods or services on account.
Credit
Credit
$60 $60
MODULE OUTLINE THE BUDGET
THE
BALANCE SHEET
CASH FLOW
BREAK‐EVEN ANALYSIS
THE INCOME STATEMENT
CASH FLOW Overview Revenues, Income Your Business Expenditures, Bills
CASH FLOW Details Revenues, Income
Initial Investment
First Sales
Growth Sales
Your Business
Expenses, Bills
PP&E Purchases
Advertising
Business Reinvestment
Google Calendar is a useful tool!
CASH FLOW Forecasting You have laid out your anticipated major sales and expenditures for the week. You know you need to replace a $300 mixer to continue offering certain mixed drinks. Sunday
Busy Day: $700
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Holiday: $0
End of Month Bills: ($500)
Purchase Supplies: ($200)
Guest Visit: $300
New Promo: ($100)
Busy Day: $700
On what day should you make the $300 purchase?
CASH FLOW Improving Cash Flow
3 TIPS
Avoid Extraneous Purchases
Send Out Invoices Quickly
Maintain Inventory Turnover
CASH FLOW Inventory Turnover
Selling inventory generates cash. The quicker the turnaround, the higher the rate of cash flow.
Production
Stockpiling unused inventory does not generate cash; in fact storage expenses can deplete cash reserves.
CASH FLOW Common Issues PROBLEM No standing cash to replace operationally‐necessary capital investments.
SUGGESTION Leave a secondary savings account untouched for emergency needs.
Not having enough cash at end of month to pay for utility bills.
Budget anticipated monthly bills at the beginning of every pay cycle.
Business partners being slow to pay for product or services rendered.
Offer payment‐term discounts. Take 5% off the selling price for payments made within 2 weeks.
Delaying delivery time of goods or services, and subsequent payments.
Set a company policy to never exceed 1 week of delivery of goods or services.
MODULE OUTLINE THE BUDGET
THE
BALANCE SHEET
CASH FLOW
BREAK‐EVEN ANALYSIS
THE INCOME STATEMENT
THE INCOME STATEMENT Overview DESCRIPTION
An overview of the earnings or losses of a company.
TIMEFRAME
One budgetary period, e.g. 1 month, 1 year, 1 fiscal year…
PRIMARY FOCUS
Consider how revenues are being divvied up between expenditures and net profit.
ONE THING IT CAN DO
Determine if your company is earning enough to sustain long‐term operations.
ONE THING IT CAN’T DO
Determine if your company has enough cash on hand to finance an emergency capital purchase.
THE INCOME STATEMENT Details Revenue From Sales Operating Revenues
All Revenues from sales of Merchandise or Services
$1,000 $1,000
Cost of Goods Sold
$250
Administrative Expenses
$100
‐ Operating Expenses
$350
Operating Income (EBIT)
$650
Interest Expense
$75
Tax Expense
$125
‐ Non‐Operating Expenses
$200
Net Income
$450
Expenses associated with running Day‐to‐ Day Operations
Earnings Before Interest and Taxes
Also called Net Profit, the amount that can be Reinvested in the Business
THE INCOME STATEMENT aSSESSING COSTS OF GOODS SOLD (COGS) MATERIALS EXPENSE
LABOUR EXPENSE
$50
$25
SALES REVENUE
$100
Which of these represent COGS?
THE INCOME STATEMENT Fixed Costs vs. Variable Costs As Production increases, FIXED COSTS remain the same.
As Production increases, VARIABLE COSTS increase proportionately.
Production
Production
Costs
Costs
SUPPLIES
UTILITIES
RENT
MAINTENANCE
EQUIPMENT
WAGES
THE INCOME STATEMENT Forecasting Monthly Income Needed for Living:
$5,000 Monthly Fixed Costs: Cash from 1 Sale:
$500
$20
Profit from 1 Sale:
COGS from 1 Sale:
$11
$9 Sales Needed to Reach Income Goal:
500
THE INCOME STATEMENT Calculating and Using EBIT EBIT = Operating Revenues – Operating Expenses BELOW $0
IF EBIT IS…
Raise Prices or Cut Costs
EQUAL TO $0 EITHER/BOTH
ABOVE $0
Maintain or Increase Production
MODULE OUTLINE THE BUDGET
THE
BALANCE SHEET
CASH FLOW
BREAK‐EVEN ANALYSIS
THE INCOME STATEMENT
BREAK‐EVEN ANALYSIS Vocabulary Review
Break‐Even Point
Price & Profit
The date at which incoming revenue for the period equals outgoing expenditures, zeroing out operational profits.
The market value of the good or service for sale, and the margin above the cost of manufacturing that is retained in the company.
BREAK‐EVEN ANALYSIS Overcoming Production Costs $750 $600
Total Costs
Net Profit
Total Revenues
$450
Variable Costs
$300 Break‐Even Point $150 $0
Fixed Costs
June
BREAK‐EVEN ANALYSIS Overcoming Production Costs Sales Revenue $2,000
Sales Revenue $1,000
Sales Revenue $1,250
All Revenues $2,000
All Revenues $1,000
All Revenues $1,250
COGS
$500
COGS
$550
Admin
$200
Admin
$200
OpEx
$700
OpEx
$750
COGS $1,000 Admin
$150
OpEx $1,150 EBIT
$850
EBIT
$300
EBIT
$500
Interest
$150
Interest
$100
Interest
$250
Taxes
$350
Taxes
$300
Taxes
$250
Non‐OpEx
$500
Non‐OpEx
$400
Non‐OpEx
$500
Net Income
$350
Net Income ($100)
Net Income
What stage are each of these 3 businesses in?
$0
BREAK‐EVEN ANALYSIS Overcoming Startup Costs $750 $600 $450 $300
Costs Revenues Cumulative Net Profit Turnaround Point
$150 Equity
$0 ($150)
Initial Investment Returned
($300) January February March
April
May
June
July
August
BREAK‐EVEN ANALYSIS Net Gain
Profit Margin
Value Added by You
Production Costs
What You Pay Suppliers
The Buyer’s Willingness to Pay
Cost of Goods Sold Material Costs
Which of these represents the Price?
BREAK‐EVEN ANALYSIS
Strategies for Shrewd Pricing
$$$
$
$
= = =
Profit Margin
Profit Margin