Financial Management For A Small Business

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Financial Management for a Small BusinessParticipant GuideTable of ContentsWelcome . 3What Do You Know? Financial Management for a Small Business . 4Pre-Test . 5Benefits of Financial Management . 7Budgeting . 7Discussion Point #1: Budgeting. 7Bookkeeping . 8Cash Flow . 9Discussion Point #2: Cash Flow Projection . 10Profit and Loss (P&L) Statement . 12Discussion Point # 3: P&L Statement . 12Business Financing . 14Loans . 15Five Key Points to Remember. 18For Further Information . 19Post-Test. 20Evaluation Form . 22DISCLAIMERThese training materials are intended as general guidance only and may or may not apply to a particular situationbased on the circumstances. The materials do not create any legal rights or impose any legally binding requirementsor obligations on the Federal Deposit Insurance Corporation (FDIC) and U.S. Small Business Administration (SBA).The FDIC and SBA make no claims or guarantees regarding the accuracy or timeliness of this information andmaterial.The content of this training material is not designed or intended to provide authoritative financial, accounting,investment, legal or other professional advice which may be reasonably relied on by its readers. If expert assistancein any of these areas is required, the services of a qualified professional should be sought.Reference to any specific commercial product, process, or service by trade name, trademark, manufacture, orotherwise does not constitute an endorsement, a recommendation, or a preference by the FDIC and SBA or theUnited States government.Money Smart for a Small Business CurriculumPage 2 of 22Revision Date: 09-2011

Financial Management for a Small BusinessParticipant GuideWelcomeWelcome to the Financial Management for a Small Business training. By taking this training, you are taking an importantfirst step to building a better financial future for your business. This guide accompanies the Financial Management for aSmall Business PowerPoint Presentation.ObjectivesAfter completing this training, you will be able to: Explain the concept of financial management and why it is important to a small business Identify financial management practices, rules, and tools that are commonly available to a small business Explain how these financial management practices, rules, and tools work Explain financial management basics for a small business Explain the basics of start-up financing Explain the basics of financing for a growing businessExplain the basics of financing working capitalExplain the basics of financing fixed assetsMoney Smart for a Small Business CurriculumPage 3 of 22

Financial Management for a Small BusinessParticipant GuideWhat Do You Know?Financial Management for a Small BusinessInstructor: Date:This form will allow you and your instructors to see what you know about financial management, both before and afterthe training. Read each statement below. Please circle the number that shows how much you agree with each statement.DisagreeAgreeStrongly AgreeStrongly DisagreeDisagreeAgreeStrongly AgreeAfter TrainingStrongly DisagreeBefore Training1. I can explain the concept of financial management andwhy it is important to a small business.123412342. I can identify financial management practices, rules,and tools that are commonly available to a smallbusiness.123412343. I can explain how these financial managementpractices, rules, and tools work.123412344. I can explain financial management basics for a smallbusiness.123412345. I can explain the basics of start-up financing.123412346. I can explain the basics of financing for a growingbusiness.123412347. I can explain the basics of financing working capital.123412348. I can explain the basics of financing fixed assets.12341234Money Smart for a Small Business CurriculumPage 4 of 22

Financial Management for a Small BusinessParticipant GuidePre-TestTest your knowledge of financial management before you go through the training.1. Which of the following are reasons for good financial management? Select all that apply.a. Helps to show which products or services are profitableb. Provides information on the size of a loan a business can affordc. Helps in deciding what inventory a business should purchased. Provides a tool for planning to reach new markets2. New businesses should start financial management with a(n) ?a. Business credit cardb. Budgetc. Inventory purchased. Profit and loss statement3. Sound bookkeeping is the basis for all financial management.a. Trueb. False4. When business owners pay themselves, it is called .a. Owner’s drawb. Check cashingc. Profit and lossd. Ownership transfer5. What is the definition of cash flow?a. Sales minus cost of goods soldb. Moving cash in or out of a businessc. Balance of cash received less the amount of cash paid out over a period of timed. Both b. and c.e. All three: a., b., and c.6. Which of the following is a good use of a cash flow projection? Select all that apply.a. Setting sales and expense goalsb. Determining the breakeven point for a businessc. Tracking salesd. Planning equipment purchasese. Tracking liquidityMoney Smart for a Small Business CurriculumPage 5 of 22

Financial Management for a Small BusinessParticipant Guide7. What is the basic formula for a profit and loss statement?a. Sources of Cash– Operating Uses of Cash– Non-operating Uses of Cash Ending Cashb. Sales– Cost of Goods Sold Gross Profit– Overhead Net Profitc. Purchase Price– Cost of Goods Sold Profitd. Cash Flow from Operations Cash Flow from Financing Cash Flow from Investments Net Cash Flow8. For most small businesses, debt financing comes from owner or family savings and is frequently the onlysource of funds for start–up small businesses.a. Trueb. False9. Which of the following might be an element of a small business loan package? Select all that apply.a. Business planb. Business financial statementsc. Business tax returnsd. Credit reporte. Collateralf. Personal financial statementsg. Personal tax returnsh. Purchase agreementsMoney Smart for a Small Business CurriculumPage 6 of 22

Financial Management for a Small BusinessParticipant GuideBenefits of Financial ManagementQuality financial management offers many benefits to you as a business owner. Financial management includesbookkeeping, projections, financial statements, and financing, which forms the foundation for reaching your goals throughsound business decisions.Financial management is one of your main avenues to success as a business owner. Financial management is the way youknow if you are making a profit. Financial management helps you decide what you can afford in terms of store or officelocation, inventory purchases, employees, and equipment. You need sound financial information to set your prices andselect your vendors. Financial management gives you the tools to plan for overall business growth, for diversification ofyour product lines, or for reaching new markets. Financial management helps you decide which products, services, andmarkets are profitable. Effective financial management gives you tools to chart your course into the future, adjust yourdirection when needed, and help you find your way through challenging times.If your business growth requires financing (loans), financial management provides the information to know how muchyou can afford for your business. Financial management gives you not only the documentation needed for a loanapplication, but also helps you discuss your business circumstances with a lender in terms that improve your ability toqualify for the loan.BudgetingCreating a budget is the first place to start with your financial management practice. A budget is a list of all your (monthlyor yearly) expenses, organized by categories. A budget is a tool that helps you: Track all your business expenses Plan for the futureEconomize when you need toPlan for expansion Make a profitOnce you create a budget, use it to compare what you’ve budgeted with your actual expenditures.Discussion Point #1: BudgetingUse the sample business budget for this discussion. Review each category.What budget categories do you use?Money Smart for a Small Business CurriculumPage 7 of 22

Financial Management for a Small BusinessCategoryParticipant GuideMonthly BudgetActual MonthlyExpendituresRentUtilitiesTelephone and InternetInsuranceEmployees or ContractorsOffice SuppliesInventory PurchasesPermits and LicensesDues, memberships, subscriptionsIncome TaxesOwner’s DrawTravelInterestBank Service ChargesPostageLegal and AccountingOtherTOTALBookkeepingBookkeeping is the organized process of tracking all income and expense transactions. Bookkeeping is a criticalcomponent of financial management, which leads to better business decisions regarding financing, taxes, owner’s draw,and retirement.Here are eleven basic bookkeeping steps:1. Obtain business accounting software. Proper software selection is critical for success.2. Open a separate business checking account. Do not mix business and personal checking accounts.3. Reconcile your checking account. Each month, reconcile your account using business accounting software or acloud computing reconciliation process.4. Track sales. Create an airtight system for tracking sales using tools such as a register tape, invoices, and a salesbook. Always use this sales tracking system.Money Smart for a Small Business CurriculumPage 8 of 22

Financial Management for a Small BusinessParticipant Guide5. Deposit all sales. Using the duplicating deposit slips, deposit all sales in your business checking account.Alternately, “remote deposit capture” (RDC) may be available for depositing checks—this technology allows youto deposit a check into your account from your office by sending the bank an electronic image of the check. Totalsales should equal total deposits. Do not spend cash sales. Link all forms of sales documentation (such asinvoices, cash register tapes, and sales books) with a specific deposit.6. Write business checks for all business expenses (or use a business check card). Don’t use a petty cash systemuntil you are experienced at bookkeeping.7. Obtain a separate business credit card. If you plan to use a credit card for business expenses, considerobtaining a card in your company’s name. Doing so will help you keep track of business expenses.8. Pay business expenses first. Most businesses start out as a sole proprietorship. In sole proprietorships, you, theowner, do not get a salary; rather you take an owner’s draw. A common question is how much draw to take?Here’s a rule of thumb: Sales pays for business expenses first, personal expenses second (step 10, below).9. Run a profit and loss (P&L) statement. A checking account balance is not a good indication of how much profitthe business has made or what amount is available for owner’s draw. A P&L statement can provide a betterpicture of the financial health of the organization.10. Pay yourself with owner’s draw. Owners should pay themselves by writing a check or making an electronictransfer from the business account to a personal account. If you are a sole proprietor, assign those draw checks toan equity account called “Draws.”Cash FlowCash flow can be defined two ways: Balance of cash received less the amount of cash paid out over a period of time Moving cash in or out of a businessCash Flow ProjectionA cash flow projection is a financial statement that tries to show how cash is expected to flow in and out of a businessover a future period of time. A cash flow projection is used to see if projected cash receipts (in flows) will be sufficient tocover projected cash disbursements (out flows). A business can be profitable and still run out of cash. As an investmentbanker might say, “Cash flow projections provide the visibility needed to avoid liquidity problems.” In other words, acash flow projection is a tool to help you manage your cash so you can pay your bills on a timely basis and keep the doorsof your business open.A cash flow projection is a great tool for setting sales goals and for planning for expenses to support those sales. A relateduse for a projection is to determine your breakeven point during a start-up or expansion phase. If you need to plan for alarge expenditure, such as an equipment purchase or move to a new location, a cash flow projection is the perfect tool.Similarly, if you have a seasonal business with large inventory purchases, a projection can help you have the cash on handto make a large inventory investment when you need it.A P&L statement can mask cash shortages if you use accrual accounting. A cash flow projection helps you see the cashstatus of your business now and plan into the future. A cash flow projection is a good way to prepare and plan for yourfinancing needs and is often a required part of a business loan application.Money Smart for a Small Business CurriculumPage 9 of 22

Financial Management for a Small BusinessParticipant GuideCash Flow Projection SpreadsheetLet’s look at a sample cash flow projection. The first set of rows, titled Sources of Cash, document all sources ofincoming cash, including cash from customer sales, interest earned, loan funds, and current checking and savings accountbalances. The second section, Operating Uses of Cash, contains all those expenditures associated with the day-to-daybuying and selling process. Most of these expenses show up on the P&L statement. The third section, Non-OperatingUses of Cash, show expenses that normally show up on your Balance Sheet: equipment purchases, the principle portion ofloan payments, inventory, taxes, and owner’s draw. Subtract your Uses of Cash from your Total Cash Available, and youhave Ending Cash for the month. Ending Cash for one month becomes Opening Cash for the next month.Discussion Point #2: Cash Flow ProjectionTake a few minutes and review the spreadsheet on the next page.After reviewing the spreadsheet, which month had a positive cash flow?Here are some strategies for creating a positive cash flow: Increase the number of items soldIncrease the price of itemsReduce expenses Change the timing of expensesSave money to have sufficient Opening Cash to get through the “start-up” periodObtain sources of cash other than sales, such as a line of credit Reduce or change the timing of your owner’s drawResearch vendor options for buying inventory at lower price or obtaining credit from vendors Establish policies to get paid sooner from customersMoney Smart for a Small Business CurriculumPage 10 of 22

Financial Management for a Small BusinessParticipant GuideSample Cash Flow ProjectionOpeningSources of CashBalancesBeginning CashCash SalesCollections on A/RInterest incomeLoan ReceivedEquity ContributionTotal Cash AvailableOperating Uses of CashContract laborWagesPayroll TaxesRentPhoneOffice ional FeesTotal Op CashNet CashNon Operating Uses of CashDebt ServiceCapital PurchasesSelf Employment TaxesOwner's DrawInventory PurchasesEnding CashMonth 1(8,785)4,800(3,985)Month 2(5,512)5,700Month 3(1,287)6,6001885,313Month 4(9,302)8,400(902)Month 5(3,927)18,000Month 610,1989,000Month 77,5739,000Month 813,3989,000Month 920,1936,600Month 1018,9885,400Month 1121,5185,100Month 85005,985(8,785)(5,512)Small Business Financial Education age 11 of 22

Financial Management for a Small BusinessParticipant GuideProfit and Loss (P&L) StatementThe P&L statement is the best tool for knowing if your business is profitable. A P&L statement measures revenue (alsocalled sales or income) and expenses over a month, quarter or year. With it you know if you have made a profit (and howmuch) or if you have incurred a loss.The most important financial management report is the P&L statement. A P&L statement will reflect your businessdecisions on the basic buying and selling process. A P&L will tell you how well you are managing your business andprovide information on how to grow your business.Basic Formula for P&L Statement Sales– Cost of Goods Sold Gross Profit– Overhead Net ProfitSales (also called Income or Revenue): Total amount from selling your product or service during a certain timeperiod.Cost of Goods Sold: Total expenditure for inventory items which customers buy. Cost of Goods Sold consists ofthe cost of purchasing the items, freight, manufacturing costs, modification costs, and packaging. For services,this is the cost of providing the services, including labor, material used, and transportation. Gross Profit: Sales less Cost of Goods Sold. Overhead: Expenses associated with your ongoing business operation, such as rent or utilities. Net Profit: Gross Profit less Overhead. Net Profit is what remains to pay for expansion, equipment, loanrepayment, income taxes and owner’s draw.Compiling a P&L Stat

Financial Management for a Small Business Participant Guide Money Smart for a Small Business Curriculum Page 3 of 22 Welcome Welcome to the Financial Management for a Small Business training. By taking this training, you are taking an important

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