Show Me the Money Resources I Link

1. Show Me the MoneyResources I Link Jeff Stambaugh Dillard College of Business/Rm 257A jeff.stambaugh@mwsu.edu http://faculty.mwsu.edu/business/jeff.stambaugh Built by Stambaugh/2008

2. Case Study: Should You Buy It?“Wings ‘R Us” (pg 408) Variable costs Food 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 Built by Stambaugh/2008

3. Case Study: Should You Buy It?“Wings ‘R Us” (cont) 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? Built by Stambaugh/2008

4. Which Business Will Pose Greatest / Least Cash Management Issues? • 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 Built by Stambaugh/2008

5. The Money Cycle Cash Spent to Generate Product Cash Received from Product Sales Fixed Costs Built by Stambaugh/2008

6. Maximizing Inflows • 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 Built by Stambaugh/2008

7. Credit Cards • Pro: • Almost expected by customers • They bear risk for money loaned • Short cash cycle • Con: • Fees (2.5%) • Charge backs Built by Stambaugh/2008

8. Minimizing Outflows • 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 Built by Stambaugh/2008

9. What I Need is a System • Accountants to the rescue … kind of Built by Stambaugh/2008

10. What’s Right About Accounting for Entrepreneurial Businesses? • Needed to make sound financial decisions (Managerial Accounting) • Needed to get funds from investors / banks (Financial Accounting) • Needed to do your taxes (Tax Accounting) Built by Stambaugh/2008

11. What’s Wrong About Accounting for Entrepreneurial Businesses? • 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 Built by Stambaugh/2008

12. Key Terms • 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 Built by Stambaugh/2008

13. Big 3 Statements • Income statement • Balance sheet • Cash flow statement Built by Stambaugh/2008

14. Income Statement Income Statement for year ending 12/31/20XX Sales revenue 356,428 Less cost of goods sold 105,200 Gross margin 251,228 Less operating expenses  Marketing 30,000   SG&A 30,000   Depreciation 10,000  Total operating expenses 70,000 Operating income 181,228 Less interest expense 6,000 Income before taxes 175,228 Income tax expense 40,000 Net income 135,228 Built by Stambaugh/2008

15. Income Statement Issues • Detail of “where money is going” • Operating income is key for many decisions • Does NOT track cash • What and when is revenue Built by Stambaugh/2008

16. Balance Sheet Liabilities and Owner's Equity Current 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  Assets Current Assets Cash $ 52,400.00 Accounts receivable $ 11,300.00   Inventory $ 15,600.00 Total 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 Built by Stambaugh/2008

17. Balance Sheet Issues • 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 Built by Stambaugh/2008

18. Cash Flow Statement Built by Stambaugh/2008

19. Cash Flow Statement Issues • Critical to startups (month-by-month not uncommon) Built by Stambaugh/2008

20. Pro Forma Budgeting • Budget: Plan for future • Mechanism for control: Variance analysis Built by Stambaugh/2008

21. Class Takeaways • 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 Built by Stambaugh/2008