Show Me the Money Resources I Link Link Built by Stambaugh/2008 Jeff Stambaugh Dillard College of...
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Transcript of Show Me the Money Resources I Link Link Built by Stambaugh/2008 Jeff Stambaugh Dillard College of...
Show Me the MoneyResources I Link
Built by Stambaugh/2008
Jeff StambaughDillard College of Business/Rm 257A
[email protected]://faculty.mwsu.edu/business/jeff.stambaugh
Case Study: Should You Buy It?“Wings ‘R Us” (pg 408)
Built by Stambaugh/2008
Variable costsFood 15,000
Beverage 4,500
Supplies (napkins, cleaning materials) 2,000
Labor 21,600
Total Variable Costs 43,100
Fixed Costs (rent, insurance, etc) 21,900
Do you replace existing fryer (bought used for $4K) with a new fryer that costs $25K (+ $5,500 for ship/install – total $30,550)?
• Saves $1,000 per month in utilities and insurance• More capacity than existing fryer
Case Study: Should You Buy It?“Wings ‘R Us” (cont)
Built by Stambaugh/2008
Your account says depreciation under MACR would be:
Yr 1: 6,100 Yr 2: 9,760 Yr 3: 5,856K Yr 4 & 5: 3,513
So, do you buy?
What if accountant says depreciation should be $4,357 in years 1-6 and $4,358 in year 7. How does that change your decision?
What are the “costs” associated with the purchase?
Which Business Will Pose Greatest / Least Cash Management Issues?
Built by Stambaugh/2008
■ Furniture retail store■ Custom home builder■ Music concert promoter■ Restaurant■ Income tax preparation firm■ Massage therapy firm■ Used (very used) car dealership■ Custom Machine Shop■ Waterpark
The Money Cycle
Built by Stambaugh/2008
Cash Spent to Generate
Product
Cash Received from Product
Sales
Fixed Costs
Maximizing Inflows
Built by Stambaugh/2008
■ Take deposits / require progress payments■ Reward prompt payments■ Ask to be paid■ Take on non-core business (seasonal especially)■ Factoring receivables (2-7% per month)■ Borrow more cash
Credit Cards
Built by Stambaugh/2008
■ Pro:■ Almost expected by customers■ They bear risk for money loaned■ Short cash cycle
■ Con:■ Fees (2.5%)■ Charge backs
Minimizing Outflows
Built by Stambaugh/2008
Inventory Control (drawdown) Curtailing non-essential expenses Trade discounts (>1% for 30 days) Know billing cycles Employ non-cash incentives Consignment goods Barter (offer your services in lieu of payment) Renegotiate terms
What I Need is a System
Built by Stambaugh/2008
Accountants to the rescue … kind of
What’s Right About Accounting for Entrepreneurial Businesses?
Built by Stambaugh/2008
■ Needed to make sound financial decisions (Managerial Accounting)
■ Needed to get funds from investors / banks (Financial Accounting)
■ Needed to do your taxes (Tax Accounting)
What’s Wrong About Accounting for Entrepreneurial Businesses?
Built by Stambaugh/2008
■ Very specific lingo and application to keep it standardized
■ Some information may not paint useful picture■ Can be manipulated by unscrupulous folks■ Can be time consuming / expensive
Key Terms
Built by Stambaugh/2008
■ Cost: value given up to obtain something you want■ Expense: decrease in owners equity caused by
consuming your product or service■ Revenue: Money generated from sale of goods /
services, or any other use of assets associated with the main operations of firm
■ Assets = Liabilities + Owners Equity
Big 3 Statements
Built by Stambaugh/2008
■ Income statement■ Balance sheet■ Cash flow statement
Income Statement
Built by Stambaugh/2008
Income Statement for year ending 12/31/20XX
Sales revenue 356,428Less cost of goods sold 105,200Gross margin 251,228Less operating expenses
Marketing 30,000 SG&A 30,000 Depreciation 10,000 Total operating expenses 70,000Operating income 181,228Less interest expense 6,000Income before taxes 175,228Income tax expense 40,000Net income 135,228
Income Statement Issues
Built by Stambaugh/2008
■ Detail of “where money is going”■ Operating income is key for many decisions■ Does NOT track cash
■ What and when is revenue
Balance Sheet
Built by Stambaugh/2008
AssetsCurrent Assets Cash $ 52,400.00 Accounts receivable $ 11,300.00 Inventory $ 15,600.00Total current assets $ 79,300.00 Fixed assets PPE $ 80,000.00 Accum depreciation $ (10,000.00)Net fixed assets $ 70,000.00
Total assets $149,300.00
Liabilities and Owner's EquityCurrent liabilities Accounts payable $5,300.00 Note payable to bank $2,700.00 Dep. from customers $6,000.00 Total current liabilities $14,000.00 Long term mortgage $50,000.00 Total liabilities $64,000.00
Owner's Equity Retained earnings $85,300.00 Total Owners' Equity $85,300.00
Total liability and equities $149,300.00
Balance Sheet Issues
Built by Stambaugh/2008
Snapshot of business Some useful ratios: quick, D/E Assets probably do not reflect true market value Many firm assets (and maybe liabilities) not captured
Cash Flow Statement
Built by Stambaugh/2008
2007 2006Cash Flow from OpsNet Income $ 130,000.00 $ 74,000.00 Additions (Cash Sources)Depreciation $ 13,000.00 $ 11,000.00 Decreases in Accounts Receivable $ 5,000.00 $ (2,000.00)Decrease in Inventory $ 2,000.00 $ 2,500.00
Subtractions (Uses of Cash)Decreases in Accounts Payable $ (5,000.00) $ 4,150.00
Net Cash from ops $ 145,000.00 $ 89,650.00 Cash Flow from InvestingPurchase of Equipment $ (200,000.00) $ 5,000.00 Net Cash from Investing $ (200,000.00) $ 5,000.00
Cash flow from FinancingProceeds from L/T Debt $ 100,000.00
Principal/Interest Paid $ (15,000.00) $ (55,499.00)Net Cash from Financing $ 85,000.00 $ (55,499.00)
Increase In Cash Flow $ 30,000.00 $ 39,151.00 Begin Cash $ 54,391.00 $ 15,240.00 End Cash $ 84,391.00 $ 54,391.00
Cash Flow Statement Issues
Built by Stambaugh/2008
Critical to startups (month-by-month not uncommon)
Pro Forma Budgeting
Built by Stambaugh/2008
Budget: Plan for future Mechanism for control: Variance analysis
Class Takeaways
Built by Stambaugh/2008
■ Financial skills are very important to success as an entrepreneur (and this class!)
■ Understanding “where’s the money going” a matter of survival for a venture