Group 4

Leonora Bien
Cristine Bea
Angelyn Bolilan
Louise Adrianne Cabria
Jonniel Naos
Axel Lee Barcelon
Jerico Bea

MANAGING SMALL BUSINESS FINANCE

Sources and applications of fund are two of the most important concerns of the small business owner.
Errors in decision-making regarding these two concerns could put in jeopardy the existence and survival
of the firm.

When business operations are in full swing, the firm cannot afford to lose the opportunity to make
profits because of the shortage of funds to sustain production efforts. Inversely, when funds or a part of
it remains unused, the profitability stature of the firm is diminished. In any case, there is a need to
properly manage the finances of the firm.

FINANCIAL PLANNING FOR SMALL BUSINESS

When any result is desired, certain activities must be undertaken to make it happen. To increase the
chances of reaping the financial rewards expected from the business, financial planning becomes a
requisite. Although the requirements for financial planning in small business are not as elaborate as
those for big business, a semblance of such activity must be undertaken.

IMPORTANCE OF FINANCIAL PLANNING

Financial planning provides the small business operator with a detailed approach to managing the
financial activities of the firm. Decisions can be made in advance, thus minimizing the risk of errors
brought by making choices in the middle of operations without the benefit of careful analysis.

WHAT IS FINANCIAL PLANNING?

Financial planning involves an analysis of possible future events and how these events might affect the
firm. It is an activity that involves analyzing the financial flows of the firm as a whole, forecasting the
financial consequences of various investments, financing, profit decisions, and weighing the effects of
various alternatives.

For the small firm, financial planning will mean knowing the profit objectives of the firm, identifying
the sources and uses of funds, and making decisions on varicus financing alternatives. The preparation
of budget will satisfy most of the requirements for financial planning in small business.
WHAT IS BUDGET?

A budget is an estimate of the income and expenditure for a future period of time, usually one year.

A budget must be made with the objective of satisfying the target market, employees and
management goals.

STEPS IN BUDGET PREPARATION

A budget is prepared by using the following steps:

1. Build the foundation for the budget.

a. Project the best estimate of the volume of products or services (or both) expected and the revenue
that will be received.

b. Divide the estimates into monthly figures.

c. Obtain an estimate of monthly cost of sales or rentals, by product or service.

2. Determine anticipated fixed costs.

3. Establish projected non-operating income and costs.

TYPES OF BUDGET APPLICABLE TO SMALL BUSINESS

There are various individual budgets used for specific purposes and some of them are useful to some
business. Listed below are the types of budget and the types of business they are most applicable to:

1. Cash budgets - applicable to all firms

2. Production budgets - for small manufacturing firms

3. Sales budget for small service firms

THE CASH BUDGET

A cash budget is a forecast of future cash receipts and cash disbursements over various intervals of
time. It is also alternately referred to as cash receipts and cash disbursements statement.

The cash budget contains the following main section:

1. Total cash available - contains the beginning cash and expected cash receipts

2. Cash disbursements - lists all cash outlays except for interest payments on short term loans

3. Cash excess or deficiency is shown by subtracting cash available from cash needs

4. Financing will show planned borrowings and repayments, including interests

5. Cash balance is a result of cash available plus borrowings less cash disbursements.

THE PRODUCTION BUDGET

The production budget is an estimate of the quality of goods to be manufactured during the budget
period. It describes how many units must be produced in order to meet sales needs and satisfy ending
inventory requirements.

The production budget is the primary basis for planning the following:

1. Raw material requirements

2. Labor needs.

3. Capital additions

4. Factory cash requirements

5. Factory costs

THE MERCHANDISE PURCHASES BUDGET

In retailing firm, the merchandise purchases budget is the equivalent of the manufacturing firm's
production budget. It identifies the quality of each item that must be purchased for resale, the unit cost
of the items and the total purchase cost.

The merchandise purchases budget usually includes the following:

1. Planning of sales

2. Stocks

3. Reductions

4. Markdowns

5. Employee discounts

6. Stocks shortages

7. Purchases

8. Gross margin

THE SALES BUDGET

 The sales budget applicable to service firms identifies each service and its quality that will be sold. The
services produced are identical to services sold.

FINANCIAL ANALYSIS

The financial health of the firm is the primary concern of the small business operator. The firm can
achieve its objective if it can continue to supply with the necessary funds in its current proposed
activities.

Financial analysis refers to the process of interpreting the past, present, and future financial conditions
of the firm.

In making a financial analysis, the following are basic requirements. (1) Financial statements, (2)
Break-even analysis and (3) Financial ratio analysis

1. FINANCIAL STATEMENTS

a. Balance sheet - gives a financial profile of a business at any given point, showing its assets, liabilities
and net worth

b. Income statement - shows the revenue and other income, expenses and net income covering a
period of time, usually one year.

Different profit measures found in income statement:

• Gross profit (sales minus cost of goods sold)

• Operating profit (gross profit minus operating expenses)

• Profit before tax (operating expenses plus other income, such as interest earned from investing idle
cash, minus interest expense on borrowed funds)

• Net profit (profit before tax minus tax liability)

c. Statement of changes in financial positions - designed to explain the financial changes that occur in
a company from one accounting period to the next.

2. BREAK-EVEN ANALYSIS - a very useful tool in managing the finances of the firm Calculating the break-
even point may be determined by using the following formulas

a. Calculating the break-even point in units

BEFU = F/P-V

b. Calculating the break-even point in pesos

 BEPP = f/1-V/P

Where P = price per unit

F= Fixed costs

V= variable costs

3. FINANCIAL RATIO ANALYSIS

Financial ratios are useful tools used to determine the financial health of the firm. They are used to
spot trends (good or bad), get a better way of handling cash, and forecast the effect of operations on
profitability. Information provided in the balance sheet and income statement can be used to create
certain ratios that provide useful insight into the business. Through the use of financial ratios, SBOs can
gauge the financial strengths and weaknesses of their business operations and which can be used as a
basis for determining which course of action to take to correct a problem. Financial ratios also indicate a
firm's competitive strength in relation to similar businesses in that industry.

Financial ratios may be classified as follows:

a. Liquidity ratios

b. Activity ratios

c. Profitability ratios

d. Leverage ratios

Liquidity Ratios - reveals the firm's ability to pay debts as they become due. The most commonly used
liquidity ratios are:

• Current Ratio = Current assets/current liabilities

• Quick ratio = current assets/current liabilities

SOURCES OF FINANCING

One method for small businesses to obtain money is through "equity financing" or "debt financing."
Equity financing means that you sell stock in your company to a buyer, who then has an ownership
interest in your company. Debt financing is a business loan - you owe the person or entity that holds the
debt (usually in the form of a promissory note) the amount borrowed and interest.

Here are the most common sources of equity and debt financing for small businesses.

1. You - Contributing your own money to your business is the easiest way to finance it. You can tap into
your savings, use a home- equity line of credit, or sell or borrow against a personal asset, such as stocks,
bonds, mutual funds or real estate.
2. Family and Friends - Your parents, relatives and friends may have access to more cash than you do.
They may be willing to lend you money or take an ownership interest in your company.

3. Small Business Administration - The Small Business Administration (SBA) offers a number of loan
programs to small businesses. Through these programs, the SBA provides loans to small businesses that
are not able to obtain financing on reasonable terms through normal lending channels. You can apply
for these loans through your local participating lender, usually a bank.

4. Banks - Banks make a majority of loans to small businesses. But for start-up businesses, banks can be
the hardest place to find money because, to ensure prospects for repayment, bank-lending standards
usually favor a history of profits that start-ups do not have. If you have a good business plan and
personal assets that you can offer as collateral (or a guarantor or cosigner satisfactory to the lender),
you may be able to qualify for a bank loan.

5. Credit Cards - If you have a credit card, you have a built-in line of credit. Credit cards are one of the
most costly ways to finance your company. Nevertheless, start-up businesses routinely use credit cards
as a businesses routinely use credit cards as a source of funds if they are unable to obtain financing
elsewhere.

6. Leasing Companies - Through leasing companies, businesses can finance computers, office
equipment, phone systems, vehicles and other equipment. By leasing equipment, you can lower your
initial costs because you won't have a large outlay of cash for the equipment. You can also more easily
upgrade your equipment upon lease expiration.

7. Customers - If you have existing customers, they may be willing to pay you in advance for your
products. Then you can use their money to purchase products or inventory.

8. Trade Credit - Vendors and suppliers are often willing to sell to you on credit. This is a great source of
financing for both start- up companies and growing businesses.

9. Small Business Investment Companies - Small Business Investment Companies (SBICs) are licensed
and regulated by the Small Business Administration. SBICs are privately owned and managed investment
firms that provide venture capital and start-up financing to small businesses.

10. Venture Capital Firms - Venture capitalists provide funds to companies that they believe have
exceptional growth potential. Very few small businesses are able to obtain financing through venture
capital firms.

11. Investment Banking Firms - Investment bankers "take companies public." That means that the
investment banker offers stock (an ownership interest) in your company to the public. This option is
generally only available to small businesses that have very strong growth history and potential.

12. Private Placement - A private placement is an offer of stock or debt to wealthy individuals or
venture capitalists without going public.