Transcript PowerPoint Presentations Chapter 12

Small Business Management:
A Planning Approach
Joel Corman
Suffolk University, Emeritus
Robert Lussier
Springfield College
Lori Pennel
Bunker Hill Community College
Copyright Atomic Dog Publishing, 2005
PART 4
Controlling and Evaluating Performance
CHAPTER 12
The Financial Function
Copyright Atomic Dog Publishing, 2005
12-1 The Interrelationship between
the Financial Function and the
Other Business Plan Components
• All resources need finance
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Production requires material, equipment, and personnel.
Marketing needs to advertise and promote new and old
products.
• The finance function finds and taps sources for the
funds required by all the functions.
Copyright Atomic Dog Publishing, 2005
12-2 Determining Financial Need
• Entrepreneurial/small business activities start with
an idea and the thought that purchasing this idea
will provide both pleasure and profit.
• Small business provides a lifestyle as well as
independence and monetary returns.
• Pro forma’s are guidelines against which you can
measure how assumptions relate to reality.
• Capital requirements indicates how much money
you need to go into business.
• Cash flow pro forma statement translates your
business plan into future or projected dollars of
income and expenses.
Copyright Atomic Dog Publishing, 2005
12-2 Determining Financial
Need (contd.)
• Pro forma income statements and balance sheets can also
be determined.
• Two methods to determine the pro forma cash flow
statement:
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Using your present knowledge of the business operation and
it’s operating history to determine all the expense categories
and their interrelationships
Use of standard industry ratios
• Standard industry ratios are developed from data reported to
trade associations or governmental units.
• SIC/NAICS codes are used to classify businesses.
Copyright Atomic Dog Publishing, 2005
12-2 Determining Financial
Need (contd.)
• Cash deficit occurs when cash expenditures are
greater than cash income.
• Operational results occur when the operation of the
business results in income being greater than
expenditures on a cash basis.
Copyright Atomic Dog Publishing, 2005
12-2a Break-Even Analysis
• Break-even occurs when the volume of sales is
sufficient to cover all fixed and variable costs.
• Break-even point (BEP) is the point at which
revenue equals costs.
• At break-even point sales revenues equals the
costs necessary to generate them.
• As long as forecasted sales are greater than the
break-even point, you must stay in business, if
they drop below it, you may decide against starting
or continuing it.
Copyright Atomic Dog Publishing, 2005
12-2b Determining the Break-Even
Point
•
BEP shows the relationship between cost and volume.
•
The components of break-even analysis are:
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Revenue
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Fixed costs
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Determined by multiplying unit sales by unit price
Expenses that do not vary with the level of production or sales
Variable costs
-
Costs that vary directly with the level of production or sales.
Copyright Atomic Dog Publishing, 2005
12-2b Determining the Break-Even
Point (contd.)
Graphic depiction of break-even point
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12-2c Break-Even Analysis
a Management Tool
as
• Contribution margins (CM) are the amount of
money generated by sales volume after fixed costs
are covered.
• Enables us to predict a break-even point at various
described profit levels.
• It is possible to calculate break-even point by
individual products in a multi-product company too.
Copyright Atomic Dog Publishing, 2005
12-3 Types of Capital Financing
• Three major types of capital financing:
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Short-term capital
Early-stage capital
Long-term capital
Copyright Atomic Dog Publishing, 2005
12-3a Short-Term Capital
• Short-term capital is funds that are borrowed for
less than one year.
• Used when companies have expended their initial
capital
• Occurs when one has neglected the task of
preparing a projected cash flow budget statement
• Trade credit obtained from creditors is
commonly used.
Copyright Atomic Dog Publishing, 2005
12-3b Early-Stage Capital
• Early-stage capital (intermediate capital) is funds
to be paid back within a period of five years.
• Need arises as need for working capital increases.
• Business must be at break-even point.
• Used for small expansion activities
Copyright Atomic Dog Publishing, 2005
12-3c Long-Term Capital
• Covers long-term projects lasting longer than five
years
• Used for fixed assets and real estate purchases,
expensive machinery, and franchise financing
• Used for major expansions or the acquisition of
expensive equipment
Copyright Atomic Dog Publishing, 2005
12-3d Capital Requirements
• A good assessment of capital needs and
resources is an essential step for the small
business owner.
• The three basic questions before initiating a
search for capital:
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How much capital will I need?
What type of capital is required?
Where can I get the funds?
Copyright Atomic Dog Publishing, 2005
12-4 Traditional Sources of Venture
Capital
• The traditional paths of financing:
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Seed financing
Relatives and friends
Partnerships
Commercial banks
Sale of capital stock
Venture capital companies
Government-sponsored agencies
State and regional development companies
Trade credit
Equipment loans and leases
Copyright Atomic Dog Publishing, 2005
12-4a Seed Financing
• The initial investment amount that an owner has
invested in the business
• This initial capital could also include some debt.
• The owner should have at least two-thirds of this
amount.
• Many firms fail because of the lack of ownership
equity.
• Seek the “right” investor who is aware of:
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The funding required
Aware of risks involved
Ability to provide additional funds that may be needed
The nature of the business and offer guidance
Copyright Atomic Dog Publishing, 2005
12-4b Relatives and Friends
• Most frequently sought by most entrepreneurs
• Troubles frequently arise from this type of loan:
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Interference in business decisions cannot be avoided as
they may seek an active role in the business.
Demand of early repayment of the loan leads to
misunderstanding and confusion.
• Rules must be laid out before the whole process
takes place.
• Should be repaid in the shortest possible time
Copyright Atomic Dog Publishing, 2005
12-4c Partnerships
• Business ventures are started with one or more
partners in order to meet capital requirements.
• A limited partner has interests with the investment
only and not with the daily activities of the
business.
• However, limited partners should have some voice
in the decisions that affect the business’s viability.
Copyright Atomic Dog Publishing, 2005
12-4d Commercial Banks
• Banks that receive funds for depositors and lend
funds to businesses
• Do offer a limited source when initial capital is
needed against personal guarantees
• Offer only short-term loans to small businesses
rather than long-term loans
• Qualified applicants could seek many special types
of financing.
• Establishing a good relationship with banks is to
the benefit of the entrepreneur.
Copyright Atomic Dog Publishing, 2005
12-4e Sale of Capital Stock
• The sale of stock as a device for raising capital is
not limited to large businesses.
• Capital stock is stock, or ownership shares, issued
in exchange for funds needed to operate the
business.
• Private sale stock helps avoid compliance with the
laws of the Security Exchange Commission.
• As owners, equity holders may also share in the
earnings of the company.
• Private placements are direct sales of stock
positions to private investors without SEC
registration and with minimal restrictions.
Copyright Atomic Dog Publishing, 2005
12-4f Venture Capital Companies
• Venture capital refers to funds that are invested in
new or higher risk enterprises, usually in return for
an equity position.
• Good source for rapid growth businesses
• They seek higher rate of return as they subject
themselves to higher risk.
• Appear to be an excellent source of readily
available capital
Copyright Atomic Dog Publishing, 2005
12-4f Venture Capital
Companies
(contd.)
• Advantages:
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Heightened credibility with customers and bankers
Expert managerial assistance
Continuing source of financing
Smaller burden of risk
• Disadvantages:
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Loss of substantial equity
Investor makes most of the decisions
Risk of takeover
Copyright Atomic Dog Publishing, 2005
12-4g Government-Sponsored
Agencies
• The government has developed sources that
sponsor the small business owner.
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Small Business Administration
- An agency of the government founded to help small
businesses, offer the most assistance with financial help
and professional advice.
- SBA Loan Guarantee program
- Small Business Institute (SBI)
- Service Corps of Retired Executives (SCORE), an
organization of people who donate their time to assisting
business (affiliated with the SBA) in making business plans
and facilitate obtaining of loans.
Copyright Atomic Dog Publishing, 2005
12-4g Government-Sponsored
Agencies (contd.)
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Minority Enterprise Small Business Investment Company
(MESBIC)
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Special financing for minorities
A private concern that combines financing sources of the
company itself, banks, and the SBA.
Provide managerial assistance and perform market studies
Invest in banks, high-tech firms, service companies,
franchisees, and other diverse ventures
Small Business Investment Company SBIC
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Evolved out of the Small Business Equity Act of 1958
Principal funding comes from insurance companies,
pension funds, bank trust departments, and wealthy
individuals.
In 1979, 40% of start-ups were financed.
Needs a reasonable amount of owners equity and a
thoroughly developed business plan.
Copyright Atomic Dog Publishing, 2005
12-4h State and Regional
Development Companies
• Privately owned companies sponsored by the state
• Private companies develop suppliers and
customers through this medium.
• Backed by large manufacturing companies, and
utility and transportation companies
Copyright Atomic Dog Publishing, 2005
12-4i Trade Credit
• Trade credit is credit extended by a supplier.
• Inventory is one of the largest investments.
• Excellent source of capital comes from vendors
with whom the business has dealings.
• Involves unsecured, open-book account
• Terms of credit are usually 30 days with a discount
if paid early.
• “2/10, net 30” would mean 2% discount if paid
before 10 days, the remainder due within 30 days.
Copyright Atomic Dog Publishing, 2005
12-4j Equipment Loans and Leases
• Vendors routinely offer attractive installment plans
against which equipment can be bought.
• 25–35% down payment is usually required with an
intermediate loan period of 3–5 years.
• The advantages of leasing are:
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Flexibility with equipment needs and payment schedules
Smaller capital requirements
Equipment maintenance service offered by the leasing
company
A way to beat the obsolescence problem
• The disadvantage would be the absence of
depreciation and a higher total cost of purchase.
Copyright Atomic Dog Publishing, 2005