Financial Management 101. Angie Mohr

is the amount of sales it has made in the period, regardless of whether or not the money has been collected. For example, if your business sold $50,000 worth of product or services, but you weren’t going to collect the money until 90 days after the period end, you would still show the $50,000 as revenue (and you would have $50,000 in Accounts receivable on the balance sheet).

      The next section of the income statement shows the business’s total expenses for that period, again, regardless of whether or not they have been paid.

      The number at the bottom of the income statement is the net profit for the period, calculated by subtracting the total expenses from the revenue.

      The Cash Flow Statement

      The cash flow statement is the most misunderstood statement in your financial statement package. Its purpose is to show a summary of the sources and uses of a business’s cash during a particular period. It answers the critical question, “Where did my cash go?” See Sample 3 for an example of a cash flow statement.

       Sample 3: Cash Flow Statement

      The cash flow statement can take many formats but the most common one breaks the statement into three sections:

      • Cash from operating activities. This could include the collection of receivables, payment of payables, and purchase of inventory.

      • Cash from investing activities. This could include the purchase or disposal of equipment.

      • Cash from financing activities. This could include borrowing new money from lenders, repaying debt to lenders, new capital investments from the owners, and cash distributions to owners.

      The sums of all three sections of the cash flow statement plus the net income minus non-cash expences are combined to show the net increase or decrease in cash for the period. For example, if you started your year with $5,000 in the business’s bank account and now there was $2,700, the cash flow statement would summarize all the inflows and outflows that make up the net decrease in cash of $2,300.

      Chapter Summary

      • The three major financial statements for a business are the balance sheet, income statement, and cash flow statement.

      • he balance sheet represents a snapshot in time of what a business owns and owes, usually recorded at historical cost.

      • The income statement represents a business’s operating activity for the period leading up to the related balance sheet.

      • The cash flow statement answers the question, “Where did the money go?” It shows cash inflows and outflows from all activities for the period leading up to the related balance sheet.

      2

      Basic Budgeting

      In this chapter, you will learn —

      • The importance of budgeting

      • How to prepare and update a monthly budget report

      • What to do with the information

      The purpose of this book is to take the basic information that you have about your business’s financial position and create a structured plan to maintain, track, and improve your financial performance.

      Under half of all businesses that have fewer than five employees maintain a working budget, the most basic of management reports. These businesses give many reasons, including, “I can’t predict my sales” and “It takes too much time.” However, businesses that have been around for a long time understand the importance of tracking and planning. Without a solid understanding of your impending performance, it is nearly impossible for you to make intelligent financial decisions for your business.

      Case Study

      “See? I told you that budgeting was useless.” Joe banged his half-empty coffee cup down on the desk. “Over the last three months we’re nowhere close to where our budget says we should be.”

      “Vivian, our accountant, explained that it was an ongoing process,” said Becky. “This is the first time we’ve ever sat down and looked at our operating performance. She said we’ll get better

      at budgeting the more we understand our numbers.”

      “Well, it all seems ridiculous to me.” He paced the floor of the office. “We said we were going to do $21,000 in revenue last month, and we only did $18,000 — which is pretty much the same as last year.”

      “When we prepared the budget,” Becky explained, “we said that we were going to do a large mail-out to attract new customers. That’s why we budgeted an increase in sales.”

      “Well, I just got too busy to do that,” Joe said quietly.

      “And here is the impact on our numbers,” replied Becky. “That’s the point of budgeting. To understand what the numbers are telling us.”

      The Monthly Budget Report

      The monthly budget report is the most basic of all financial planning tools. It shows what the projected revenues and expenses are for your business for the next one to five years, on a month-by-month basis. The monthly budget report only shows revenues and expenses, not cash receipts and disbursements.

      The cash flow report is discussed in more detail in Chapter 5.

      The monthly budget report is a useful tool for predicting when sales will be high and when they will be low so that you can plan for those events. For example, if your sales are always at a low point in March, it may make sense to target your advertising during that period.

      Where Do the Numbers Come From?

      Go to www.numbers101.com for a free downloadable template.

      The starting point for your budget plan is to know what happened in the past. Of course, if you are a start-up business, you won’t have any financial history to examine. We will discuss startups later in the chapter.

      If you work on a computerized accounting program like MYOB or Simply Accounting, you most likely have historical information at your fingertips. Run your monthly income statement for the previous 12 months. This will give you an overview of your business’s financial performance for the past year. You should be able to note the seasonality of your sales and be able to explain the dips and peaks. If you can’t explain them, take some time to analyze the sales.

      Find out who you sold to during those periods. This knowledge is the foundation of your planning, as knowing why and when customers buy from you helps you to plan the future.

      Case Study

      “You actually did very well last month in comparison to the budget on the expense side.” Vivian reviewed the figures with both Becky and Joe looking over her shoulder. “Your office supplies are down and so are your meals and entertainment expenses.”

      Becky smiled at Joe. “When we first started to look at our numbers, I realized that we were buying our office supplies from the most expensive store in the city. I also saw that many of the clients we were taking out for dinner and buying hockey tickets for weren’t our good clients. We’ve become more selective in how to use that budget.”

      Vivian said, “Well, you’re reigning in your expenses and it sure shows in your operating performance last month. Now, let’s project how much increased business you can expect from doing that mail-out and