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Chapter 5 Financial Management: On-Line Lesson

After starting a new commercial recreation and tourism enterprise, the entrepreneur
must manage it efficiently and effectively. Effective management creates an effect,
where everything is done to achieve a goal. Efficient management implies that
everything is done with an economy of resources for optimal results. The commercial
recreation and tourism manger should strive for a realistic and workable combination of
efficiency and effectiveness.

Financial management represents a wide array of accounting and marketing

techniques. Knowledge of basic accounting includes the ability to prepare and
understand financial statements. Planning tools also include analyzing the current
business position. Without a solid comprehension of financial management no
business will survive for long. Financial management includes a review of financial
records, financial planning, maximizing profits, and other financial issues.

Topics:

Financial Objectives
Financial statements
Break-Even analysis
Cash flow management
Budgeting
Ratio analyses
How to increase profits
Auxiliary revenue sources

Terms:

balance sheet
cash flow statement
concession
debt ratio
fixed costs
income statement
liquidity
liquidity ratio
overhead
profit formula
profitability ratio
variable costs

Financial Objectives

The first step to successful financial management is to determine and articulate clear
objectives. Objectives must be measurable and achievable within a specific time. Two

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primary objectives are liquidity and profitability.

Liquidity: the ability of the enterprise to generate enough cash to pay the bills
(expenses).

Liquidity formula

Sales of Merchandise $5,000

Less: Returned Merchandise -$ 250
Net Sales $4,750
Less: Cost of Goods Sold -$2,000
Margin on Sales $2,750
Less: Operating Expenses -$1,500
Less: Debt Service -$1,000
Profit Before Income Taxes $ 250

Profitability: the commercial recreation and tourism enterprise must achieve long-term
profitability. The greater the risk the greater the expected profit.

A dollar saved is a dollar earned

Other Financial and Operational Objectives

market share - the percentage that the business hopes to gain for the overall market
of a product or service.
occupancy rate, use rate or load factor - the percentage of available rooms, court
times, or airline seats filled by paying passengers.
labor, food or fuel factors: the percentage of total costs attributed to
specific items such as labor, food, and fuel..

Financial Records

An important aspect of financial management is keeping accurate records. Without

accurate financial records, many management decisions would be made in a barrage of
incorrect information.

Records to Keep

The general reason for keeping financial records can be to categorized into three
areas: to meet legal requirements, to safeguard assets, and to help plan and control
operations. Records to be kept include the following:

Income
Expense
Tax
Payroll
Mortgage and Debt
Regular Financial Statements
Other Accounting records
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g

Personnel
Facility and Equipment
Legal
Other Administrative Records

The Accounting Process

The process of accounting involves organizing and summarizing a multitude of

business data into a form that is usable to a manager.

1) gather and record original transaction documents

2) assign to accounts and sub-accounts

3) prepare statements

4) management action

Financial Statements

Income Statement or Profit/Loss Statement: summarizes the financial activity of

the organization over a specific period of time (annually, quarterly, monthly).

Quoggy Jo Ski Center

Income Statement

8/31/16 Through 4/30/17

REVENUE

Lift Tickets $14,597.50

Lodge Rental $870.00

Other Income $313.48

Retail Sales $432.00

Ski Pass Sales $2,650.00

Ski Rental $3,405.00

Ski Swap Revenue $2,684.59

Snackbar $1,932.98

T-Shirt Sales $140.50

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TOTAL REVENUES $27,026.05

OPERATING EXPENSES

Insurance:

- Car Insurance $50.00

- Property Insurance $277.00

- Ski Liability $5,765.00

- Workers Comp $635.75

Total Insurance $6,727.75

Payroll:

Full-time $5,643.00
Part-time $1,495.00

Payroll Taxes:
- Fed SSN-Med $677.45

- Fed Unemployment $25.13

-State Unemployment $117.90

- State Withholding $7.00

Total Payroll Taxes $827.48

Petty Cash $315.96

Publicity:

- Newspaper Ads $302.06

- Parade $74.15
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Parade $74.15

- Brochures $125.45

Total Publicity $501.66

Repairs:

- Buildings & Grds $986.04

- Vehicles $480.35

Total Repairs $1,466.39

Ski Equipment:

- New Skis $863.51

- Ski Supplies $47.52

Total Ski Equip $911.04

Ski races $105.25

Snackbar Supplies $868.08

Supplies:

- Business $2.88.88

- Cleaning $25.00

Total Supplies $313.88

T-Shirts $323.40

Taxes:

- Business Tax $145.00

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- Property Tax $1,423.48

- Sales Tax $508.99

Total Taxes $2,077.47

Utilities:

- Electric (lodge) $868.47

- Electric (tow) $244.53

- Gasoline $318.60

- Heating Oil $646.75

- Snow Removal $255.00

- Telephone $280.59

- Trash removal $39.50

Total Utilities $2,653.44

Expenses - Other $47.07

TOTAL OPERATING
$25,952.78
EXPENSES

PRE-TAX INCOME $ 1,073.27

Less tax reserve $ 450.00

Net Income $ 623.27

Cash Flow Statement: shows the difference between revenues and expenses over a
monthly or quarterly period.

Quoggy Jo Ski Centre: 6-Month Cash Flow Statement

January February March April May June Total

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Net Revenues 2,000 2,300 1,800 300 300 250 6,900

Expenses 2,300 1,500 1,200 435 275 205 5,985
Monthly Cash Flow (300) 800 600 (135) 25 45
Cumulative Cash Flow (300) 500 1,100 965 990 1,035
Cash at Beginning of Month 2,000 1,700 2,500 3,100 2,965 2,990
Cash Position at End of Month 1,700 2,500 3,100 2,965 2,990 3,035

Balance Sheet: shows the financial condition of an organization at a point in time

(month, quarter, or year).

Balance Sheet

Assets Liabilities and Net Worth

Cash 2,300.00 Accounts payable 845.00

Merchandise Inventory 3,200.00 Taxes Payable 325.00

Accounts Receivable 165.00 Total Current Liabilities 1,170.00

Total Current Assets 5,665.00

Ski Shop Fixtures 800.00 Bank Loan 2,000.00

Office Equipment 2,500.00 Total Long Term Liabilities 2,000.00

Total Fixed Assets 3,300.00 Total Liabilities 3,170.00

Total Assets 8,965.00 Total Net Worth 5,795

Total Liabilities and Net Worth 8,965.00

current assets - cash and those assets that can be turned into cash.
accounts receivable - amounts not yet collected from customers and are currently
due.
fixed assets - assets not intended for sale that are used to create, display, or
transport the product/service. Including land, buildings, machinery and equipment.
depreciation - an accounting method used to expense the decline in useful value
of a fixed asset due to normal wear, tear, and obsolescence.
accounts payable - the amount the business owes to its suppliers, and to service
providers from whom they have bought goods/services on credit and to employees
for salaries.
current liabilities - debts for regular business operations that will come due in the
near future.

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long-term liabilities - debts that are due after one year from the date from the
financial report, usually mortgages, bonds and other major loans.
net worth (owner's equity) - the portion of the business that is owned free and
clear of all debts.

Budget Statement: allows the commercial recreation and tourism manager to review
the financial activity of the enterprise with respect to the planned program of income
and expenditure. It shows how much of a budgeted amount has been spent or received
as a given point in the fiscal term.

Quoggy Jo Ski Center

December 31, 2017
Budget Actual Committed % Balance
Revenue
Lift Tickets 16,000 14,500 0 90.6 1,500
Snack Bar 2,500 1,932 0 77.2 568
Ski Rental Shop 4,000 3,405 0 85.1 595
Lodge Rental 1,500 870 0 58 630
Total Revenue 24,000 20,707 0 86.2 3,293
Expenses
Personnel 12,000 7,965 1,525 79 2,510
Maintenance 5,000 1,466 960 48.5 2,574
Program/Ski
1,500 988 90 71.8 422
Supplies
Transportation 2,250 1,061 600 73.8 589
Promotion 2,000 1,112 400 75.6 488
Total Expenses 22,750 12,582 3,575 55.3 6,583

Financial Planning

The main purpose of financial records is to provide the commercial recreation and
tourism manager with information to use in planning and decision making.

Break Even Analysis

Break Even Analysis: is a management control device that helps determine how much
must be sold at a given price in order to exactly cover costs. Profit is realized with the
sale of each unit after the break-even point.

Fixed costs: expenses that must be paid in full, regardless of how many customers
purchase the product or service. Fixed costs typically include management salaries,
payroll, property taxes, equipment leases, utilities, maintenance, insurance,
rent/mortgage, legal/accounting fees, and advertising, vehicles, and major equipment.

Variable costs: expense that increase or decrease depending upon how many
customers use the product or service. Typically, a ratio can be established between the
number of customers and the item of expense.

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Break Even Analysis - Contribution Method

BE Point= total fixed costs / revenue per unit - variable costs per unit

Example:

$ 4,400___ = $4,400 = 88 sales/week

$60 - $10 $50

Ratio Analysis

Ratio analysis is one of the best ways to measure the relative efficiency and of the
business.

Quick ratio: cash plus accounts receivable compared to current liabilities. Quick =
(current assets - inventories)/current liabilities
Current ratio: used to estimate the ability of a business to meet its short term
financial obligations. Current assets should be twice current liabilities (ratio of
1.o or higher). Current = current assets/current liabilities
Debt-to-net worth ratio: used to compare the total financial obligations of the
business to the investment of its owners. Debt -t-net-worth = current and long
term liabilities/net worth
Activity ratios: Average collection period : shows the average time to receive
payment for products/services delivered. Average collection period = (accounts
receivable/sales) x 365 day
Profitability ratios: Return on equity = net profits after taxes/equity
Profitability ratios: Return on sales = net income/net sales
Debt/coverage/leverage ratios: Equity ratio = Equity/Total Assets

Cash Flow Management

Most commercial recreation and tourism businesses have periods during their peak
season when they generate more revenue than needed to meet expenses. Conversely,
during off-seasons, expenses usually demand more cash than revenues generate. The
primary objective of cash flow management is to smooth out these uneven
combinations of revenue and expenses. Two Primary Strategies for Improving Cash
Flow

1) Emphasize transactions that increase or accelerate cash inflow.

2) Pursue transactions that economize or delay cash payments.

Require cash payments

require prompt payment

deposit revenues the day they are received

only pay bills on due dates

minimize inventory buildup

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Budgeting - A budget is a plan of action with price tags attached. It projects

everything that is expected to occur in the coming year, with the associated revenues
and costs.

Budgeting Problems:

over-budgeting - too complex budget

budgeting based only on precedent - budgets should reflect current market
conditions, not historical data
overestimating revenue by overestimating demand - be cautious in estimating
revenues
underestimating expenses - be realistic in estimating expenses and have a
reserve fund to cover shortfalls
regarding budgets as a straitjacket - budgets are tools and not written in stone.
be flexible when necessary

How to Increase Profits

Opportunities to increase profits may be realized at each stage of the formula used to
produce the income statement:

Sales

- Cost of Goods

Margin on Sales

- Operating Expenses

Profits

Strategies to Increase Profits

Price Increases: if cost of goods is stable and sales volume does not decline.
Increased sales volume: if margin on sales can be held constant or reduce margin,
increase volume.
Improved purchasing: accurate purchasing of the types/amount of products
consumers want. Economy of scale.
Volume purchasing: buying in bulk may save money.
Consignment: Get products on consignment and pay for only items sold.
Inventory control: enough but not too much stock
Reduce labor costs: use part time help; contract for specialists; hire generalists
Reduce overhead costs: lease facilities; share capital assets and overhead with
other businesses; sell-off non-productive assets; reduce other overhead; utilities,
telephone, maintenance, advertising
Financial controls: avoid losing money through employee errors or dishonesty.

Auxiliary Revenue Sources

A secondary line or products/services that may significantly add to your profitability.

Core product extensions

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Recreation programs

Equipment rental

Repair services

Food and beverage concessions

Retail product sales (pro-shop)

Video games

Leased space to outside business

Five Types of Consumer Credit

1. open (charge) account - purchases are billed on a regular cycle

2. revolving account - customers are allowed a fixed amount of credit and pay a
minimum each month.

3. budget account - used for somewhat costly items

4. installment account - used for high-end items and requires a down payment and
monthly payments

5. bank debit card - purchases are charged to a existing savings or checking account

Types of Budgets

The two primary types of budget are operating & maintenance (O&M) and capital.

Operating & Maintenance (O & M): a type of budget used to help the manager operate the day-to-day
business. All budgets other than Capital budgets are operating budgets. It contains detailed information
of all administrative costs (personnel salaries, payroll taxes and benefits, office rentals, maintenance,
equipment, insurance etc.) required to operate the business, usually for one year. Budgets are based on
a fiscal or a calendar year. A fiscal year is normally July 1 to June 30. A calendar year is January 1 to
December 31.

Sample: Line Item Budget

Capital: is utilized for long-range, high-cost, and long-term budget items such as new buildings, vehicles,
major facility renovations etc. It is a separate document that includes proposed expenditures for carrying
out major purchases and construction projects of a substantial and long-term nature. These would include
the purchase of heavy equipment, vehicles, land purchases and/or the purchase or construction of new
facilities (golf courses, intergenerational centers etc). They might include major retrofit/renovation
projects but not routine maintenance expenses. NOTE: Start-up expenses and NOT included in a capital
budget.

Sample: Capital Budget

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Capital Budget 2018 2019 2020 2021

Trampoline $14,300
Bounce House $18,000
Generator1 $6,000

[return to Chapter Five]

Copyright 2012 Northern Arizona University, ALL RIGHTS RESERVED

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