AnIntroductiontotheLifebloodofYourSmallBusiness

PersonalDevelopment

StrategicPlanning

BusinessPerspective

EntrepreneurshipTraining

FinancialPlanning

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THEBUDGET

CASHFLOWTHE

BALANCESHEET

THEINCOMESTATEMENT

BREAK‐EVENANALYSIS

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THEBUDGET

CASHFLOWTHE

BALANCESHEET

THEINCOMESTATEMENT

BREAK‐EVENANALYSIS

THEBUDGET

  Laysoutinitialinvestmentplan

  Setsprioritiesforfinancingrevenue‐producingactivities

 Dividesreasonablefromunreasonablepurchases

  Identifiesallavailablesupportresources

Overview

Personal Savings

Business Partnerships

Individual Investors

Bank or Government Loans

THEBUDGETFinding an Initial Investment

THEBUDGET

HighestPriorities Purchasesthatarenecessarytoday‐to‐dayoperations

PrimaryConcerns Purchasesthataddsubstantiallytooperatingincome

SecondaryConcerns Purchasesthatsubstantiallyreduceoperatingexpenses

TertiaryConcerns Purchasesthatservetodifferentiateyourbusinessfromcompetition

AnyRemainingFunds Purchasesthatpromoteclienteleconfidenceinyourproduct

Identifying Priorities

THEBUDGETSetting Priorities

HIGHEST

PRIORITY

OBJECTIVE 2

OBJECTIVE 4

OBJECTIVE 1

OBJECTIVE 3

+$$

+$

‐$

‐$$

THEBUDGET

Whichoftheserepresentreasonablepurchases?

$$$$

$$$$$$

$$

$$$

$$$

Making Reasonable Purchases

THEBUDGET

VariousNon‐CashHoldingscanbecome… Sourcesofalternativerevenuestreams

 Catalystsforachievingmarketdifferentiation

 Toolsforstreamliningthevalue‐addedprocess

 Devicesforcuttingcosts

Assessing Available Resources

STARTINGABUDGETPreparatory Questions

Doyouknowwhereyouwanttobefinanciallyinfiveyears?Intenyears?

Doyouknowhowmuchincomeyoucanexpecttoearninabudgetaryperiod?

Doyouknowhowmuchofyourmonthlyincomegoestobusinessexpenses?

Doyouknowhowmuchaboveexpensesyoucanaffordtosave?

Doyouknowwhatportionofyourexpendituresgotoluxuriesversusnecessities?

? ?? ??

Respondortoeachquestion.

STARTINGABUDGETSetting Financial Goals

YES NO

IfYouAnswered…

Quantifytheanticipatedcostofmeetingyourgoalsandcomputethemonthlyexpensetoyourbudget.Removeanynonessential

coststhatcannotbeaccommodated.

Identify3‐5majorfinancialgoalsyouwouldliketoseerealizedinthenext5years.Beconservative:assumethatyourmonthlyincomewillnothaveincreasedappreciablyinthattime.

STARTINGABUDGETForecasting Income

YES NO

IfYouAnswered…

Consideriftheexpectedincomealreadyexceedsthe

anticipatedmonthlyexpense.Ifitdoesnot,considerfurtherlimitingexpensesorfindingnew

sourcesofincome.

Multiplyexpectedsalesbyestablishedprices.Beconservative:takeinto

accountseasonalspendingchangesandcompetition.Whateverhappens,donotovershootactualsales.

STARTINGABUDGETKeeping Track Of Expenditures

YES NO

IfYouAnswered…

Calculatethepercentageofyourincomethatgoestobusinessexpenditures,anditschangebymonth.Isgrowthinexpenses

outstrippinggrowthinrevenues?

Keepaledgerofallbusinessactivities,andsumupallexpensesfor

thatmonth.Subtractyourexpensetotalfromthatmonth’srevenues:isthe

differencepositive?

STARTINGABUDGETPutting Away Savings

YES NO

IfYouAnswered…

Setupaspecialsavingsormoney‐marketaccount

andstarthavingthebankauto‐draftaportionof

yourmonthlybalanceintothataccount.Don’ttouchitexceptinanemergency.

Agoodruleofthumbistotakethefirst10%ofall

revenuesandstoreitinaseparatesavingsor

interest‐bearingaccount.If10%istoomuch,tryforasetmonthlydollaramount.

STARTINGABUDGETCategorizing Expenditures

YES NO

IfYouAnswered…

Identifyeachexpenseasapercentageofoperatingincomeortotalexpenses.Areluxurypurchasestakinguptoogreata

portionofyouroperatingbudget?

Usingyourexpenseledger,identifywhichpurchasescontributedstronglytooperatingincome,andwhichonesdidnot.

Reconsiderthefruitlesspurchasesinthefuture.

Value‐AddingActivities

STARTINGABUDGETPutting It All Together

PersonalSavings BankLoan FriendInvestor

BusinessCapital

PriorityPurchase PriorityPurchase

SecondaryPurchaseLuxuryPurchase ExtraResource

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THEBUDGET

CASHFLOWTHE

BALANCESHEET

THEINCOMESTATEMENT

BREAK‐EVENANALYSIS

THEBALANCESHEETOverview

DESCRIPTION Asnapshotoftheconditionofacompany’sfinancialposition.

TIMEFRAMEAsinglepointintime,usuallythestartofonedayattheendofabudgetaryperiod.

PRIMARYFOCUS

Considerwhatmoneysthecompanycurrentlyholdsagainstwhatmoneysthecompanyowes.

ONETHINGITCANDO

Determineifacompanycanpaybackitsshort‐termdebtswithanticipatedshort‐termincome.

ONETHINGITCAN’TDO

Determinehowmuchtimethecompanycansurviveonitscurrentresources.

THEBALANCESHEET

Assets Liabilities&Equity

Cash $1,000 AccountsPayable $500

AccountsReceivable $250 TotalLiabilities $500

ToolsandSupplies $750 CapitalStock $4,000

PP&E(Property,Plant,&Equipment) $4,500 RetainedEarnings $2,000

TotalOwners’Equity $6,000

TotalAssets $6,500 TotalLiabilities&Equity $6,500

A = L + E!

Smallcapitalpurchasesforeverydayoperations.

Otherinvestors’stakeinyourbusiness

LeftovermoneysreinvestedinthecompanyDetails

THEBALANCESHEET

Fillinthehighlightedmissingentries.

Assets Liabilities&Equity

Cash $4,500 AccountsPayable $750

AccountsReceivable $500 TotalLiabilities

ToolsandSupplies $1,500 CapitalStock $10,000

PP&E(Property,Plant,&Equipment) $13,500 RetainedEarnings

TotalOwners’Equity

TotalAssets TotalLiabilities&Equity

Example

A = L + E!

THEBALANCESHEET

AccountsRece

ivable

Accounts Payable and Receivable

AccountsPaya

ble

AnticipatedmoneysforGoodsorServicesrendereduntoapartnerbusinessthathave

notyetbeencollected.

AnticipatedmoneysthathavenotyetbeenpaidforGoodsorServicesrenderedbya

partnerbusinessuntoyou.

1.067�

1.200�

0.800�

THEBALANCESHEETHealthy Current Ratio

Cash + A/R Interest + A/P Ratio

$1,000 + $500/4� $150 + $750/14� 1.667�

$200 + $600/7� $250 + $500/10�

$500 + $400/21� $250 + $500/10�

$200 + $600/7� $500 + $500/3�

#

#

#–

Current Receivables�Current Debts�

THEBALANCESHEETDebit Credit

Equipment $600

AccountsPayable $600

Debit Credit

Cash $90

AccountsReceivable $60

SalesRevenue $150

Debit Credit

Cash $60

AccountsReceivable $60

Debit Credit

AccountsPayable $600

Cash $600

Whenpurchasingoperatingsupplies

oncredit.

Whenpurchasingoperatingsupplies

oncredit.

Whenpayingoffcreditbalance.

Whensellinggoodsorservices

onaccount.

Whenrecoupingpaymentforsales.

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THEBUDGET

CASHFLOWTHE

BALANCESHEET

THEINCOMESTATEMENT

BREAK‐EVENANALYSIS

CASHFLOWOverview

Revenues,Income

Expenditures,Bills

YourBusiness

CASHFLOW

Revenues,Income

Expenses,Bills

Details

InitialInvestment

FirstSalesGrowthSales

PP&EPurchases Advertising

BusinessReinvestment

YourBusiness

CASHFLOWForecasting

GoogleCalendarisausefultool!

Onwhatdayshouldyoumakethe$300purchase?

Sunday Monday Tuesday Wednesday Thursday Friday Saturday

BusyDay:$700

Holiday:$0

EndofMonthBills:($500)

PurchaseSupplies:($200)

GuestVisit:$300

NewPromo:($100)

BusyDay:$700

Youhavelaidoutyouranticipatedmajorsalesandexpendituresfortheweek.Youknowyouneedtoreplacea$300mixertocontinueofferingcertain

mixeddrinks.

CASHFLOWImproving Cash Flow

3 TIPS

AvoidExtraneousPurchases

SendOutInvoicesQuickly

MaintainInventoryTurnover

CASHFLOWInventory Turnover

Production

Sellinginventorygeneratescash.Thequickertheturnaround,thehighertherateofcashflow.

Stockpilingunusedinventorydoesnotgeneratecash;infactstorageexpensescandepletecashreserves.

CASHFLOW

PROBLEM SUGGESTION

Nostandingcashtoreplaceoperationally‐necessarycapitalinvestments.

Leaveasecondarysavingsaccountuntouchedfor

emergencyneeds.

Nothavingenoughcashatendofmonthtopayforutilitybills.

Budgetanticipatedmonthlybillsatthebeginningof

everypaycycle.

Businesspartnersbeingslowtopayforproductorservicesrendered.

Offerpayment‐termdiscounts.Take5%offthesellingpriceforpaymentsmadewithin2weeks.

Delayingdeliverytimeofgoodsorservices,andsubsequentpayments.

Setacompanypolicytoneverexceed1weekof

deliveryofgoodsorservices.

Common Issues

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THEBUDGET

CASHFLOWTHE

BALANCESHEET

THEINCOMESTATEMENT

BREAK‐EVENANALYSIS

THEINCOMESTATEMENTOverview

DESCRIPTION Anoverviewoftheearningsorlossesofacompany.

TIMEFRAME Onebudgetaryperiod,e.g.1month,1year,1fiscalyear…

PRIMARYFOCUS

Considerhowrevenuesarebeingdivviedupbetweenexpendituresandnetprofit.

ONETHINGITCANDO

Determineifyourcompanyisearningenoughtosustainlong‐termoperations.

ONETHINGITCAN’TDO

Determineifyourcompanyhasenoughcashonhandtofinanceanemergencycapitalpurchase.

THEINCOMESTATEMENT

RevenueFromSales $1,000

OperatingRevenues $1,000

CostofGoodsSold $250

AdministrativeExpenses $100

‐OperatingExpenses $350

OperatingIncome(EBIT) $650

InterestExpense $75

TaxExpense $125

‐Non‐OperatingExpenses $200

NetIncome $450

AllRevenuesfromsalesofMerchandise

orServices

ExpensesassociatedwithrunningDay‐to‐

DayOperations

EarningsBeforeInterestandTaxes

AlsocalledNetProfit,theamountthatcanbe

ReinvestedintheBusiness

Details

THEINCOMESTATEMENTaSSESSING COSTS OF GOODS SOLD (COGS)

WhichoftheserepresentCOGS?

MATERIALSEXPENSE LABOUREXPENSE SALESREVENUE

$50 $25 $100

THEINCOMESTATEMENTFixed Costs vs. Variable Costs

ProductionCosts

ProductionCosts

AsProductionincreases,FIXEDCOSTSremainthesame.

AsProductionincreases,VARIABLECOSTS

increaseproportionately.

MAINTENANCE

UTILITIES

RENT

SUPPLIES

WAGES

EQUIPMENT

THEINCOMESTATEMENTForecasting

MonthlyFixedCosts:

$500

MonthlyIncomeNeededforLiving:

$5,000

Cashfrom1Sale:

$20COGSfrom1Sale:

$9

Profitfrom1Sale:

$11

SalesNeededtoReachIncomeGoal:

500

THEINCOMESTATEMENT

EBIT=OperatingRevenues–OperatingExpenses

IFEBITIS…

BELOW$0

EQUALTO$0

ABOVE$0

RaisePricesorCutCosts

EITHER/BOTH

MaintainorIncrease

Production

Calculating and Using EBIT

MODULEOUTLINE

THEBUDGET

CASHFLOWTHE

BALANCESHEET

THEINCOMESTATEMENT

BREAK‐EVENANALYSIS

BREAK‐EVENANALYSISVocabulary Review

Break‐EvenPoint

Thedateatwhichincomingrevenuefortheperiodequals

outgoingexpenditures,zeroingoutoperationalprofits.

Price&Profit

Themarketvalueofthegoodorserviceforsale,andthemarginabovethecostofmanufacturingthatisretainedinthe

company.

BREAK‐EVENANALYSIS

$0

$150

$300

$450

$600

$750

June

TotalCostsTotalRevenues

Overcoming Production Costs

Break‐EvenPoint

NetProfit

FixedCosts

VariableCosts

BREAK‐EVENANALYSIS

Whatstageareeachofthese3businessesin?

Overcoming Production Costs

SalesRevenue $1,000

AllRevenues $1,000

COGS $500

Admin $200

OpEx $700

EBIT $300

Interest $100

Taxes $300

Non‐OpEx $400

NetIncome ($100)

SalesRevenue $2,000

AllRevenues $2,000

COGS $1,000

Admin $150

OpEx $1,150

EBIT $850

Interest $150

Taxes $350

Non‐OpEx $500

NetIncome $350

SalesRevenue $1,250

AllRevenues $1,250

COGS $550

Admin $200

OpEx $750

EBIT $500

Interest $250

Taxes $250

Non‐OpEx $500

NetIncome $0

BREAK‐EVENANALYSIS

($300)

($150)

$0

$150

$300

$450

$600

$750

January February March April May June July August

CostsRevenuesCumulativeNetProfit

Equity

Overcoming Startup Costs

InitialInvestmentReturned

TurnaroundPoint

BREAK‐EVENANALYSIS

MaterialCosts

ProductionCosts

ProfitMargin The Buyer’s Willingness to Pay

Cost of Goods Sold What You

Pay Suppliers

Value Added by You

Net Gain

WhichoftheserepresentsthePrice?

BREAK‐EVENANALYSIS

ProfitMargin

ProfitMargin

$

$$$× =× =

× $ =

Strategies for Shrewd Pricing