Unit 29 Managing and Running a Small Business

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 Executive Summary
This report aims to demonstrate the importance of keeping different financial statements and
considering the key legal implications. This report focuses on interpreting a forecasted cash
flow statement and the description of break-even analysing and its importance. Also, the
discussion on key financial statements and key legislation and regulations that a small and
social business must consider is presented here.

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Table of Contents
Executive Summary...................................................................................................................1

Introduction................................................................................................................................3

Monthly Cashflow Forecast.......................................................................................................4

Breakeven Analysis....................................................................................................................7

Key Financial Statement Interpretation.....................................................................................8

Income Statement...................................................................................................................8

Balance Sheet.........................................................................................................................8

Cashflow Statement................................................................................................................9

Key Legislations and Regulations for Small Businesses.........................................................10

Naming the Business............................................................................................................10

Choosing the Legal Status....................................................................................................10

Paying Tax and National Insurance......................................................................................10

Acquiring Industry-Specific Licensing................................................................................11

Legislations that may affect the business.............................................................................11

Legal Documents..................................................................................................................12

Conclusion................................................................................................................................13

References................................................................................................................................14

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 Introduction
A business surely requires proper planning and ideation to be successful and earn the
potential. However, structured financial planning and consideration are important to
understand whether the business will be profitable, survive in the long run or not, and
determine the probably required investments. Therefore, it's a must for every business type,
including the small and social enterprises, to keep and maintain standard financial records
and statements. Also, along with the financial measurements, a business must focus on the
key legislation and regulation. In this report, the key financial statements and legislations are
discussed.

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 Monthly Cashflow Forecast
A cash flow forecast assists a company in tracking the probable cash movement from and in the business in the near future. This forecast works
as a guideline and precaution for the business owner to understand how much cash is remaining and how much is going from the business. Based
on that, the idea of the condition of sales and profit and other performances are received (Klammer, 2017). Also, when the forecast is done
monthly, it offers a more precise understanding of the practical and anticipated outcomes. Below a regular cash flow forecast of a small business
is shown.

Monthly Anticipates Sales:

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
50000 68000 75000 120000 90000 85000 110000 135000 130000 125000 110000 100000

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
Cash £20000 £15000 £7500 £18000 £12000 £9500 £21000 £20500 £16000 £15000 £22000 £15000
Balance at
the
beginning
Cash Sales 35000 29000 29000 32000 30500 28000 36000 38500 27000 21000 20000 27000
(50%)
Credit Sales - 35000 29000 29000 32000 30500 28000 36000 38500 27000 21000 20000
Cash In 55000 79000 65500 79000 74500 68000 85000 95000 81500 63000 63000 62000

Cash Out
Variable
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 Cost
Raw 12500 17000 18750 30000 22500 21250 27500 33750 32500 31250 27500 25000
Materials
(25%)
Shipping 5000 6800 7500 12000 9000 8500 11000 13500 13000 12500 11000 10000
Materials
(10%)
Salary 5000 6800 7500 12000 9000 8500 11000 13500 13000 12500 11000 10000
&Wages
(10%)
Promotions 2500 3400 3750 6000 4500 4250 5500 6750 6750 6250 5500 5000
(5%)
Total 25000 34000 37500 60000 45000 42500 55000 67500 65250 62500 55000 50000
Variable
Cost
Fixed Cost
Rent 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000
Insurance 2100 2100 2100 2100 2100 2100 2100 2100 2100 2100 2100 2100
Maintenance 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Total Fixed 8100 8100 8100 8100 8100 8100 8100 8100 8100 8100 8100 8100
Cost
Total Cash 33100 42100 45600 68100 53700 51200 63100 75600 73350 40600 63100 58100
Out
Cast at the 21900 36900 19900 10900 20800 16800 21900 19400 8150 22400 (1300) 3900

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end

From the above cash flow statement, it can be seen that the small business did well throughout the year, with a positive balance at the end of the
month. However, in the 11th month, it has a negative balance which means the expenses crossed the cash balance. But as it is a forecasted cash
flow statement, it will be easier for the business to be careful so that in the actual calculation, the balance doesn't go negative (Tomchuk, 2013).

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 Breakeven Analysis
A break-even analysis offers clear anticipation to a business regarding how much profit must
be earned for avowing loss and profit (Mayes and Shank, 2015). The result of a break-even
analysis indicates a point that is achieved, and the business will be in a neutral position. Here,
below that point, a business will make losses and make a profit above the point. The
identification of break-even point helps to set a clear goal for the business and measure the
risks. It also identifies whether the capacity and resources of the organisation are enough to
reach the neutral point and earn a profit (Chapman, Ferris and Zachary, 2017).

Based on the cash flow forecast calculation, a few important results were found, which will
help get a break-even analysis point. The formula of break-even analysis of sales is,

Breakeven Analysis in sales = Fixed Cost/Conversion Margin

Let's assume the conversion margin is 40%.

Now, the breakeven analysis in sales = (8100 x 12) / 0.40

= 97200/0.40 = 38880.

It means that if a particular business gets a break-even analysis point is sales of £38880, then
it must reach this point to avoid any loss. However, any amount that reaches above £38880,
then the organisation will be considered to earn profit of that excess amount, and the opposite
will mean making a loss.

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 Key Financial Statement Interpretation
A financial statement means keeping the formal record of the financial activities of an
organisation. Financial statements are kept after a certain period, which could be monthly,
quarterly, half-yearly or yearly. It's important to maintain the financial records as the
statements offer the scenario of overall performance, growth, financial position and many
important factors (Fraser and Ormiston, 2016). They provide important insights into the
investors, creditors, debtors, profit and loss, assets, liquidity etc., and all these things help to
future decisions with utmost caution and maximum feasibility. Because a business should
never run its operation without keeping any records and just depending on ransom
anticipation. Actual data is always important which also facilitates the path of getting future
investments. There are, three key financial statements that every owner/manager of the
business must keep as they offer the most crucial data and insights of the ongoing business
activities.

Income Statement
This the primary and initial statement kept by a business organisation. Under this statement,
all the expenses and revenue are recorded for each period (monthly, quarterly, half-yearly,
yearly). Then the sales and review are compared against the net expenses, and the profit or
loss is determined (Beattie, Fearnley and Hines, 2011). It also offers insights into interests
paid, accrued income and costs etc., to keep track of these things and balancing them with the
initial balance. It also helps the manager to identify the operating costs and whether the net
expenses are getting increased than expected and at what amount, so that necessary measures
could be taken to control that. Also, the loss and profit reveal whether the business has done a
successful performance for the given period or not.

Balance Sheet
This is another important financial statement that provides an overview of the total assets,
liability and owner's equity of the organisation on a given date instead of a given period. As a
result, through this statement, the condition of a business at a certain point in time is
measured. Here, the company records all the sources of assets and liability, depreciation,
liquidity etc. These things help to identify different financial ratios against assets, liability,
equity, sales, costs etc., to understand the overall financial condition of the business
(Abdulshakour, 2020).

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Also, under the balance sheet, another statement is included, called the statement of
stockholder's equity. Here, the records of newly issued stocks, purchase of treasury, retained
earnings, dividends etc., are listed. The result of the stockholder's equity is added in the
balance sheet. That is why not everyone keeps a separate statement of stockholder's equity;
they do with the balance sheet at the same time. However, whether doing it separately or not,
recording the stockholder's equity statement is a must.

Cashflow Statement
The cash flow statement is already depicted in the previous section, and it is too one of od the
major financial records of an organisation. Through a cash flow statement, the overall cash
inflow and outflow related activities are recorded, and after a certain period, the amount of
liquidity balance is measured (Halim, 2020). Because a business requires to keep a certain
amount of cash to handle its operating costs. So, if the cash flow is negative, it indicates poor
management of the business, as it's always preferred to have a positive cash balance.

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 Key Legislations and Regulations for Small Businesses
While starting and managing a small business or any social enterprises, a lot of
considerations need to be made. However, one most important aspect is the legal laws and
regulation, which is a must or else severe consequences will arise (Holland and Webb, 2013).
That's why it's important to consider the key legislations and regulation and how to fulfil all
those requirements.

Naming the Business

It's important that every business must have a unique name to address the organisation. It
ensures the brand identity and offers convenience for further business expansion. However,
the business name should be unique and never used by anyone else before, and it can be
checked in the government of UK's official websites that whether a company has already
registered a name or not (Tache, 2019).

Choosing the Legal Status

The legal status of the business means registering the company under the UK's company
house. This legal status impacts the accounts records, enforced tax, national insurance, the
financial position of the business etc. The legal status also brings benefits for the employee to
get a pension when they retire.

Paying Tax and National Insurance

All the businesses in the UK must get registered under HM Revenue and Customers (HMRC)
the moment its start to trade products and services to pay the income tax. It can be done either
online or offline by opening an account and after a few days, the owner gets contacted with a
10-digit Unique Taxpayer Reference (UTR) to access the account (di Norcia, 2013). A
regular entry of necessary business activities should be included in that account, especially
the financial ones.

There is also Value Added Tax (VAT) which is imposed in goods and services. A business
needs to register itself for Vat when it exceeds the current limit of £85000 Vat taxable
turnover. The standards VAT rate is 20%.

Insurance

While operating a business, some insurance must have to protect the business against
probable risks, such as motor insurance, professional indemnity, employer's liability
insurance, etc. Other additional insurances are buildings and contents, cyber cover,

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employment protection, keyman insurance, money in transit, product liability, public liability
etc.

Acquiring Industry-Specific Licensing

A small business may also need to acquire an industry-specific licence for trading legally.
Businesses that are involved in hotels, food outlets, street trader, hairdresser etc., will need it
(Barker, Cobb and Karcher, 2009). To get this license, the owner has to contact the local
authority to provide further information and guidelines to complete the process. It should be
remembered that failure to get an industry-specific license may result in the accusation of
criminal offence.

Legislations that may affect the business.

Several rules and regulations affect the regular activities of a business, and organisations
must obey them to avoid legal consequences (Meiners, Ringleb and Edwards, 2018). Some of
those legislations are,

Health & Safety at Work Act 1974

The organisation should be structured in a way so that the workplace contains necessary
health and safety protection.

Equal Pay Act 1970

Each and every employee should be equally paid according to UK law.

Employment Protection Act 1978

Employees are bound to receive an employment contract from the employer, and both of
them must follow it.

Consumer Protection Act 2009

Consumers have the right to say, be heard, safety, and other things that are mandatory for a
business to follow to save the consumers from unethical business practices.

Sale and Supply of Goods Act 1994

All the goods supplied and offered by the business must have the industry standard.

General Data Protection Regulation Act 2018

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Business organisations cannot use, manipulate the data and information of the customers
without their consent.

Legal Documents
Several important legal documents must be maintained and kept the business organisation,
such as agreements, contracts, forms, letters, notices, policies, etc.

Employment Laws

 Employment Contracts
 HR procedures, disciplinaries.

Business Laws

 HMRC Papers
 Data Protection Documents
 Contacts for Goods and Services
 Details of Financial Contracts
 Intellectual Property

Tax

 Invoices
 Bank Statements
 Past Tas Returns
 Expenses Records

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 Conclusion
The business organisation should be managed with the necessary and regular recording of
financial activities through financial statements. Also, there should be some development of
forecasted cash flow. The owner and the manager predict certain aspects and determine what
is needed to be done to avoid the consequences and improve the performance. Also, a
standard financial statement is vital to be maintained on a given period or a given date to
understand the financial positioning of the organisation. These are important to follow some
legal regulation too, along with other considerations of starting and operating a small and
social enterprise.

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 References
‌Abdulshakour, S. (2020). Impact of financial statements for financial decision-making. Open
Science Journal, 5(2).

‌Barker, R.M., Cobb, A.T. and Karcher, J. (2009). The legal implications of electronic
document retention: Changing the rules. Business Horizons, 52(2), pp.177–186.

‌Beattie, V., Fearnley, S. and Hines, T. (2011). Reaching key financial reporting decisions :
how and directors and auditors interact. Chichester: Wiley.

‌Chapman, L.W., Ferris, K. and Zachary, C. (2017). Utilising break-even analysis in a

competitive laser market. Lasers in Surgery and Medicine, 50(1), pp.10–11.

‌di Norcia, V. (2013). Rules of Law. Journal of Civil & Legal Sciences, 02(02).

‌Fraser, L.M. and Ormiston, A. (2016). Understanding financial statements. Boston: Pearson.

‌Halim, K.I. (2020). An Empirical Analysis on the Integrity of Financial Statements. Journal
of Advanced Research in Dynamical and Control Systems, 12(5), pp.544–549.

‌Holland, J.A. and Webb, J.S. (2013). Learning legal rules. Oxford: Oxford University Press.

Klammer, T.P. (2017). Statement of cash flows : preparation, presentation, and use. Durham,
Nc: Aicpa.

‌Mayes, T.R. and Shank, T.M. (2015). Financial analysis with Microsoft Excel. Boston, Ma,
Usa: Cengage Learning.

‌Meiners, R.E., Ringleb, A.H. and Edwards, F.L. (2018). Legal environment of business.
Boston, Ma, Usa: Cengage Learning.

‌Tache, G.E. (2019). The Main Objectives of the Interpretation of Legal Rules. International
Journal of Academic Research in Business and Social Sciences, 9(3).

‌Tomchuk, V. (2013). Organisation of cashflow controlat agricultural enterprises. The Russian

Academic journal, 26(4).

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