For Small Businesses
BUS 203 Bus Financial Mgt
What Every Small Business Owner Needs to Know
about Financial Management
• In this course we will review:
A little knowledge
goes along way!
The Importance of Cash Flow
The Main Culprits of Poor Cash
Flow (the big three).
The Accounting-Financial Process
Cycle in a business.
Basic Financial Statements: What
they are and how to use them.
Interpreting the Financial Health of
our businesses through “key
indicators” or financial ratios.
The Importance of Financial and (Cash)
Cash is a four letter word…CASH is also
a “curse” to many small businesses.
Inadequate capital…and inadequate cash
flow management is often the number
one reason for small business failure.
Most mismanagement issues are related
to financial and / or accounting issues.
SIMPLY PUT : The inability to manage your finances
and cash flow can mean you’re throwing
money……perhaps your business, away!
Managing “Cash” and not just Profits
Good Financial Managers are
well-versed in managing the “traditional
financial side” of the business. This
means they can analyze the basic
financial statements and figure out the
profitability of their business.
Great Financial Managers are
AWARE of their businesses cash needs.
They not only know when they are
profitable, but know whether they will
have the cash they need to grow and
How can I manage my Cash ?
1. The first step is to understand your
own “cash flow cycle”
(The longer the cycle the more likely your
business will suffer a cash crunch)
2. Calculate your cash conversion cycle
at least quarterly…and understand
where the cash is on a daily basis.
3. The next step is to try to shorten the
length of the cash flow cycle by
shortening the Accounts Receivable Cash Flow = the time
and turning over the inventory faster. lag between paying
Cash Flow Cycle
Why Cash & Profits are not Created Equal:
Profits are just a Piece of the Puzzle
Profit is the difference between a
company’s total revenue and it’s total
Cash is the money that is readily
available to use in a business.
Cash Flow measures liquidity…the ability
to pay bills.
Profitability does not guarantee liquidity!
When business owners need to meet
their obligations, they are required to do so
The Big-Three Cash
• The “BIG Three” of Cash Management include
Accounts Receivables, Accounts Payable and
•These “3 Monsters” are the primary causes of
cash flow problems and poor fiscal management.
•By monitoring these three areas, a business
owner can effectively manage their finances and
•The object is to “get the cash in the door as fast as
you can, cut your costs and leakage, and pay people as
late as possible.”
Monitoring Your Accounts Receivable
• According to the National Association of
Credit Managers, “ A sale is not a sale until
you collect the money.”
• “Receivables are the second most
important item on the balance sheet.”
• This means the first rule is to establish a
Credit & Collection policy and MONITOR it.
• Many small businesses use “cycle billing”where a company will bill a portion of its
credit customers at different times of the
month to even out cash receipts.
Other techniques for accelerating
Speed-up orders through fax or email.
Send invoices when goods are shipped.
Make your invoices CLEAR, with the terms.
Deposit customer checks and card receipts on
a daily basis!
Identify the top 20% of your customers and
create a separate A/R file for each of them.
Follow your Credit Policy.
Ask for a larger portion of a down-payment.
Consider using a billing system (on-line billing).
Restrict a customer’s credit until past bills are
paid to date.
The Timing of Accounts Payable
• Accounts Payables A/P are what
you owe your creditors.
• It is important to stretch out
payables as long as possible
without damaging your credit.
• Strive to get the best credit
terms 30,60, 90 day rather than
• Regulate you’re A/P to your
Methods to Monitor Your Payables for
Optimum Cash Flow
Set scheduling goals (many businesses will pay
their bills 45 days after invoice, and strive to
collect 30 days after sell).
Keep paper work organized. Set up workable
Prioritize your bills. This helps you realize what
is needed and not just wanted.
Know your creditors…many will not allow you to
stretch to 45 days. Develop trade terms with
your creditors that work for your business.
Be consistent with your creditors.
Monitor and always look for “warning signs” of
adequate cash on hand.
The Third Cash Issue
• One of the biggest capital “investments” for
• Many companies have a lot of money “tied”
up in the wrong inventory.
• If companies want to grow, they have to
“turn” their inventory quickly.
• Lenders look closely at how well businesses
manage their inventory assets.
Tips for Managing Inventory
• Track your inventory: separate into
specific categories so you know
what is moving, and what is
stagnate, and what is lost!
• Understand the cost of “carrying”
inventory, especially if it is
• Don’t carry too much, and don’t
carry too little.
• Shed your “slow-moving” inventory.
• Monitor the turn-around time of
The Accounting Cycle
and how that relates to
The Accounting-Financial Cycle
Pieces of paper, receipts
3) General Ledger - Chart of
4) Trial Balance
5) Balance Sheet
6) Income Statement
7) Cash Flow Statement
Accounting- Financial Cycle
Post the transactions
on the General Ledger
“Chart of Accounts”
General Ledger & Chart of Accounts
The General Ledger is a summary book that records all transactions
and balances and is organized into 5 distinct categories. For
computerized accounting it is essential that these are set-up
accurately in your Chart of Accounts
1 – Assets - a record of all item the business owns
2 – Liabilities - a record of all debts the business owes
3 – Capital - a record of all ownership or equity
4 – Revenue or Sales - a record of all income earned for a specific
5 – Expenses - a record of all expenditures incurred during a given
• Good records will allow you to
develop Financial Statements.
• Financial Statements are used to
provide information for preparing
taxes and needed for borrowing.
• Savvy business owners use their
financial statements to evaluate the
condition of their businesses and
determine strengths & weaknesses.
• Bankers utilize these statements to
determine if you are a good risk.
Glossary of Income Statement Terms
Net Sales - the total dollar volume of all cash or
credit sales less returns, discounts and rebates.
COGS - Cost of Goods Sold - the total cost of
products sold (retail) plus the cost of delivery. For
manufacturing it is everything that it costs to
make and deliver it.
Gross Profit - Profit before expenses and
federal taxes have been deducted.
Expenses - The cost of doing businesses. Often
called “overhead”. It includes wages, telephone,
supplies, insurance, marketing, interest.
Net Profit - The amount left over (if any) after
expenses. Often called NP before taxes.
The Most Important Financial
• The Three Most Important
– Balance Sheet
– Income Statement - also called Profit
& Loss Statement or P&L
– Statement of Cash Flows
The Balance Sheet
• Shows the condition of a business at a fixed date
(the end of an accounting period).
• It is a “snap shot” of your company’s financial
condition at any given moment.
• Lists the businesses’ assets…everything your
business owns that has a monetary value.
• Lists the businesses’ liabilities…everything you
owe, your debts & obligations.
• Lists your “Net Worth” or Owner’s Equity…the
cumulative profits and losses of a company.
Why does a Balance Sheet have to
• Assets = Liabilities + Net Worth
• This is the Accounting
• This is true even if liabilities
exceeds assets. In this case,
you have a “negative net
Assets - Liabilities = Net Worth
Assets = Liabilities + Net Worth
Anatomy of a Balance Sheet: Separating
Current from Fixed and Long Term
Total Fixed Assets
Long Term Liabilities
Total Long Term Debt
The Income Statement
• Shows the total actions of a business over a
period of time; be it monthly, quarterly or annually.
• Also called the Profit & Loss or P&L Statement.
• Unlike the Balance Sheet - the P&L is a ‘moving
picture’ of the company’s profitability over time.
• The statement begins when a sale is made. So
the first entry is sales!