Entrepreneurship

Topic: How Do I Operate An Enterprise? (Managing Money)

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? V. Evaluation

? Additional Readings

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IIL CONTENT NOTES An efficient record keeping system is required for any business, All business transactions should be fully recorded on paper. Many small businesses fail because of inadequate record keeping. The business may have an excellent product, a high sales volume, and a good profit margin. However, without proper records, the business is inviting disaster. Too often, small business owners have the attitude that keeping records is not necessary in a small business. Moreover, the person who owns a small business is confronted with problems and decisions every day. Sound decisions require a manager who is informed in all aspects of the business. A proper record keeping system can provide the financial information necessary to solve management problems more easily and to make sound business decisions. Key Questions Concerning Record Keeping 1. Why do keep records? A. The law requires that some form of written records be kept by all businesses. B. Adequate records can answer the following questions: How much profit is the business making? How much is the business worth? How much do credit customers owe the business? How much does the business owe its creditors? How much tax should the business pay? 2. How can a record keeping system be established? A. Before establishing an adequate record keeping system, the assistance of an accountant should be obtained. If the owner cannot afford an accountant, he or she cannot afford to be in business. B. An accountant can establish a suitable recording system tailored to the needs of a particular business. 3. What will others want to know about the finances of a business? Various people will want to know about the financial conditions of a business. Bankers may be interested because you have applied for a financial loan. Tax collectors are interested in your business condition, as are partners, relatives and others who may have lent you money. Suppliers will also want to know things about the finances of your firm, because when they ship you merchandise for which you have not yet paid, it is as though they are extending a form of credit. Specific questions they might ask include: a) How much do you own, how much do you owe, and how much are you worth? b) What was your income last year? c) How much of your sales are for cash and how much are for credit? d) What has been your collection record? e) What is your total "overhead" and what percentage of gross sales does it represent? f) What expenses do you have? g) What is the present value of buildings, equipment, vehicles, fixtures, and other accessories? 2h) What items of inventory are the best and worst sellers? i) What are the most profitable and least profitable departments? j) Are you taking full advantage of cash discounts, trade discounts, and advertising and merchandising allowances? 4. What kinds of records should a small business keep? A. Payroll. The owner must know the amount paid to himself or herself and to employees. This information alone requires a mini-accounting system to keep things accurate an in order. Salaries Payroll https.//www.google.com/search?sxsrf=ALeKkOQuaDYh, IUli8VWOdsZBXBGFsWRTQ:1595333875509 &source -univ&tom-isch&q=picture+of+records+of+payroll&sa-X&ved=2ahUKEwip B. Cash Balance. The owner must know how much cash is available at any given time to determine if bills can be paid. Money comes into and goes out of the firm every day, but without records entrepreneurs would not know what they can afford. Simple Cash Book (Debit) (Credit) Current Date TRANSACTION Money Money Balance in (+) out (-) 23 Balance as of January 23 3,500.00 23 Receives cash loan 20,500.00 20,500.00 24,000.00 24 Paid R.J. Smith cash for building and land 8,000.00 8,000.00 16,000.00 24 Purchased equipment 2,875 00 2,875.00 13,125,00 24 Purchased fixtures 895.00 895.00 12,230.00 25 Purchased supplies 175.00 175.00 12,055.00 25 Purchased merchandise 4,275.00 4,275.00 7,780.00 28 Sold merchandise 125.00 125,00 7,905.00 28 Purchased merchandise (50.00 150.00 7,755,00 28 Withdrew cash for personal use 175.60 175.00 7,580.00 31 Sold merchandise 3,101.00 3,101.00 10,681 00 31 Paid power bill 1,500.00 1,500.00 9,181.00 2 Paid part time help 86.00 86.00 9,095.00 Sold merchandise 125 00 125.00 9,220,00 W W N Sold merchandise 116:00 116.00 9,336 Paid for repairs $5.00 65.00 9,271 00 4 Purchased merchandise 203.00 203.00 9,068.00 313.00 13.00 9,055.00 4 Paid freight charges 9,055.00 Ending Balance C. Accounts Receivable. Under certain conditions, the owner extends credit to some customers. The money is called accounts receivable. They are important records. Without them, how would the owner know when to bill and for how much? When to discontinue credit? When to make aggressive efforts to collect overdue bills? When to charge interest, if any? ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER - 125 000 Ega - Accounts Receivable Date Invoice No Posting Reference Debit Credit Total Dec 19 12-05 Sales Journal 50 000 50 000 Tau - Accounts Receivable Date Invoice No Posting Reference Debit Credit Total Dec 1 12-01 Sales Journal 30 000 30 000 Dec 20 12-13 Sales Journal 30 000 60 000 Rasa - Accounts Receivable Date Invoice No Posting Reference Debit Credit Total Dec 15 12-04 Sales Journal 15 000 5 000 Source: Foundations of Accountancy D. Accounts Payable. The amount of money owed by a business to others (such as suppliers) is called accounts payable. These bills need to be paid on time for two reasons: (1) sometimes by paying a bill on time you will receive a cash discount, and 2) you must maintain a good reputation in relation to those with whom you do business. Without accurate records, you may make mistakes. E. Inventory Records. Even in a small retail business, an owner must have control of inventory. What products are selling? What products are not moving? Is there a good supply on hand? Entrepreneurs can keep some of this information in their head, but not enough to do the kind of job necessary to make a profit. F. Government Requirements. The owner must file financial statements for tax purposes. Taxes are calculated on the profit a business earns. Even a small retail business must file certain reports.G. Financial Statement. At least once a year, the owner should have a comprehensive financial statement on the business prepared - this is like an individual having an annual medical check-up. How well did the business do in terms of total sales? What were its expenses? What are its profits before and after taxes? What can the owner do to improve things next year? When borrowing money, entrepreneurs must present such a statement to a banker, if they want to sell their business, they must show financial statements to prospective buyers. Joy Corporation Income Statement Year Ended December 31, 20x9 Sales Cost of Goods Sold 435 650 Gross Profit 530 000 905 650 Operating Expenses 430 200 Income Before Tax 475 450 Joy Corporation Balance Sheet December 31, 20x9 ASSETS LIABILITIES Cash 21 250 Accounts Payable 79 835 Accounts Receivable 102 000 Interest Payable 25 655 Inventory 93 750 Total Liabilities 105 490 Property, Plant and Equipment 45 300 EQUITY Common Stock 156 810 Total Assets 262 300 Total Liabilities & Equity 262 300 The company forecasts that sales will Increase to 1 500 000 in the following year. Cast of goods sold is also expected to increase by 10% next year. 20x0 ending inventory is expected to be 18 750 higher than the beginning inventory level for 20x0. Also, the corporation targets income before tax, 20x0 to be 500 000. Source: Foundations of Accountancy 5. Who should be responsible for keeping the financial records? A. Keeping the records, yourself. If the business is small and you have some experience, you may be able to keep the records for your business yourself. Remember: when you are doing this job, you are preventing yourself from doing some other tasks for your business, perhaps a task only you, the owner, can perform. Plan on delegating the record keeping functions to someone else as soon as possible. But you should still always understand the system and be able to "step in" at any moment if the record keeper leaves or is sick. B. Assigning an assistant. If you employ others, one of the first jus you may give to one of your employees is that of keeping all or some of the record's. All employees have some record keeping responsibility since they make out sales slips, operate the cash register, and in many ways perform record keeping tasks which you trust will be accurate. It is your responsibility to train and instruct this individual and periodically evaluate the methods used. 5C. Hiring a full-time bookkeeper. When you are large enough to do this, you are in a good position to secure a competent person who will frequently know more about records than you do. This is a difficult area for some businessmen to delegate. They feel that they must keep their own "hands" on the books, but this frequently confuses the record keeper and sometimes weakens his or her position. State your wishes and requirements, and let the bookkeeper do the job! D. Contracting the service out. There are many firms which sell various record keeping services. These range from an annual audit with the preparation of a profit and loss statement and balance sheet, to weekly payrolls, daily sales analysis, and inventory control and analysis. E. Accounting department. Eventually, if size warrants, you may have your own accounting department headed by a comptroller or an officer within the firm, usually the treasurer. The department would maintain a full set of books, including accounts receivable, accounts payable, and general ledger accounts. Mechanical or computerized record keeping equipment may be feasible, depending on the volume of information needed. Financial Forecast An entrepreneur who has established a good record keeping system adapted to the size of his/her business will always know how the business has performed in the past up to the present date. However, an entrepreneur needs to make sure that he will be able to pay all obligations that will come up in the future, e.g., salaries, materials, interests, repayments of credits from suppliers or loans from a bank, etc. Figures from record keeping will be a good help in making this forecast, particularly when the business has seasonal variations. A proven instrument for a financial forecast is the cash flow plan. As its name indicates, this plan is based on the cash that flows into the business and the cash that flows out of the business. For a cash flow plan, money that is paid into the bank accounts of the business is also considered as cash. Cash that flows into a business is in most cases cash from sales of products, goods, or services. There are also other inflows of cash that could come from bank credits or overdrafts, or selling of old equipment, or a tax return, and so on. Cash that flows out of the business is mainly payment of salaries, operational costs, and capital costs. The entrepreneur will know from the sales plan how much turnover he/she can expect and what will be the costs to produce or buy the goods. 6A monthly cash flow plan is an instrument that allows the entrepreneur to estimate how much cash is expected to enter the business and how much must be paid out every month It helps a businessperson to avoid her/his business running out of cash. How to make a cash flow plan? A typical cash flow plan looks like the table shown below. An entrepreneur who wants to establish a cash flow plan will do this step by step. 1. He/she will check the money available in the cash box and in the firm's bank account and mark the amount in the row "Cash at beginning of month" in the first column "Month 1". For a business starter this amount of money represents the working capital. 2. The estimated turnover from the sales plan is then recorded in the next row "Cash in from sales". If part of the sales is planned to be on credit, his part is not recorded for this month. It will be recorded later as input of the month during which the customer has paid the remaining part. 3. Expected cash in from other operations, such as a loan from a bank or interests paid for business money in the bank, is recorded in the row "Cash in from other operations. 4. The sum of these three rows is the total amount of cash in and is recorded in the row "Total cash in" 5. The sum of all staff costs for the month, including all social insurance costs and other benefits for the staff as well as the owner's salary, is recorded in the row "Cash out for staff costs. 6. The operation costs vary according to the sales plan, particularly for material costs or for goods. If it is foreseen that any of the acquisitions planned is to be bought on credit, the cash out will be recorded when the credit has to be paid. 7. Any other cash that must be paid out for the business, such as interest on loans. taxes and licenses, is recorded in the row "Cash out for other costs". This also includes payments for investments planned for the month. 8. The sum of the three previous rows is added up and recorded in the row "Total cash out". 9. The last step in the calculation of the cash flow plan for the first month is the subtraction of the total cash out from the total cash in, which will give the amount of cash expected at the end of the month. This figure is recorded in the last row. The cash flow for the other months is calculated in the same way. The amount of cash recorded at the end of each month will be recorded as cash available at the beginning of the next month. Cash Flow Plan Month 2 10 11 12 Cash at beginning of month Cash in from sales Cash in from other operations Total Cash in Cash out for staff costs Cash out for operational costs Cash out for other costs Total cash out Cash at end of monthNormally, a cash flow plan covers a period of 12 months in line with the financial year However, the forecast must be made on data that is realistic. The duration depends on the nature of the business, and therefore a monthly cash flow plan can be worked out for a shorter period if necessary. The monthly cash flow plan should be updated each month with data from the record keeping in order to immediately identify deviations from the cash flow plan. If the cash flow plan shows that the business is likely to run out of cash during any of the subsequent month, the entrepreneur can try taking the following measures: Increasing cash inflow through: Decreasing cash outflow through: Increasing sales Reducing operational costs Giving less customer credit Identifying a cheaper supplier Using a bank overdraft Negotiating supplier credit Selling an investment item Negotiating an extension of the Asking a friend for money loan period Making a planned investment later Business starters are often requested to make a cash flow forecast for 12 months or, when they want credit from a bank, for a period that corresponds to the duration of the bank loan. Source: Know About Business (KAB) IV. ACTIVITIES Activity 1 Date: Direction: Give what is asked in every item. Write your answers on your Entrepreneurship answer sheet. HPS: 15 Points 1. Why is record keeping system a requirement for a business? 2. Give two (2) examples of records a small business keep? Activity 2 Date: Title: SIMPLE CASH BOOK Directions: Prepare a simple cash book, Write your answer in your Entrepreneurship answer sheet. HPS: 30 PointsSimple Cash Book Activity 3 Date: Title: CASH FLOW PLAN Directions: Prepare a Cash Flow Plan. Write your answer in your Entrepreneurship answer sheet. HPS: 20 PointsV. EVALUATION: Date: Directions: Read and understand each item carefully and choose the correct answer. Write only the letter of your answer on your Entrepreneurship answer sheet. HPS: 15 Points 1. Who established a record keeping system? A. Teachers C. Suppliers B. Creditors D. Accountants 2. Which type of record should a business keep when the owner must have control of the inventory? A. Payroll C. Inventory B. Cash balance D. Accounts Receivable 3. Which is NOT a benefit of Bookkeeping A. detailed recording C. faster Financial Analysis B. it is easier to plan D. less relation with banks and investors 4. Which of the following are kinds of record a small business keep? EXCEPT A. Payroll C. Cash Balance B. Class record D. Accounts Receivable 5. Which of the following are NOT users of Financial Statements? A. Owners C. Government Agencies B. Students D. Prospective Investors 6. What kind of record that determines the amount of money on hand? A. Payroll C. Cash Balance B. Inventory D. Accounts Receivable 7. What are the questions where adequate record keeping can answer? EXCEPT A. How much is the business worth? B. How much tax should the business pay? C. How much profit is the business making? D. How disaster contributes a business income? 8. Who is responsible in keeping financial records when the business is small, but you have some experience in doing business records? A. Assigning an assistant B. Accounting department C. Hiring a full-time bookkeeper D. Keeping the records, yourself 9. Why do we keep records? EXCEPT A. Answers how much profit is the business making. B. Efficient record keeping is required in any business. C. Provide financial information and make sound business decisions. D. Inadequate record keeping invites disaster. 10. What is an instrument that allows the entrepreneur to estimate how much cash is expected to enter the business and how much must be paid out every month? A. Monthly cash book C. Monthly Payroll B. Monthly cash flow plan D. Monthly Financial Statement 1 1. Which of the following increases cash inflow? A. Increasing sales C. Selling an investment item B. Negotiating supplier credit D. Asking a friend for money 1012. Who should be responsible for keeping the financial record when a department is headed by a comptroller; and maintain a full set of books? A. Assigning an assistant B. Accounting Department C. Contracting the service out 13. Which of the following decreases cash outflow? A. Using a bank overdraft D. Hiring a full-time bookkeeper. B. Negotiating supplier credit C. Reducing operational costs D. Making a planned investment later 14. Which of the following is not an advantage in record keeping? A. Manage your cash flow. B. A roadmap, guideline of what your goals are. forecast. C. Figures from record keeping will be a good help in making financial D. Provide financial information necessary to solve management problems. Plan ? 15. Which of the following statement does NOT describe best for a Cash Flow A. The forecast made in the cash flow plan uses data that is unrealistic from the record keeping year. B. A cash flow plan covers a period of 12 months in line with the financial C. A cash flow plan should be updated each month with data from the record keeping VI. ADDITIONAL READINGS Directions Read and answer the following questions below in your Entrepreneurship answer sheet. To construct a cash flow projection, you need to estimate what it is going to cost to keep your business going month-by-month for the next year. Think of it as all your monthly income statements side by side (your income statements are the statements that list your sales income, sales costs, and overhead expenses, thereby giving you a monthly profit or loss figure). By adding together all of the "bottom lines", the monthly profits and/or losses, you will be able to see your cumulative cash flow. Look at how the bottom-line changes in the example which follows. FRANK'S CONSTRUCTION COMPANY CASH FLOW PROJECTION FOR THE TWELVE MONTHS FROM APRIL 1 TO MARCH 31 APR MAY JUNE JULY AUG SEP OCT NOV DEC JAN FEB MAR Source of cash: sales 2500 3000 $500 1000 1000 5000 6000 1 2006 6000 Use of cash Cost of 175 1350 1575 275 275 450 450 900 goods sold 900 1800 900 900 Operating 1443 1555 1668 893 893 1055 455 expenses 2380 2380 3530 218 2330 Total 2618 2905 3243 1168 1 168 1505 1905 3280 3280 5330 3080 3:230 Total uses (increase of (118) 95 257 658) (668) 50S 905 decrease) 2720 2720 6670 2920 2770 Cumulative cash flow (118) (23) 234 (434) (1 102) (1607) (2512) 208 2928 9598 12518 15288 Directions: Read and answer the following questions below in your Entrepreneurship answer sheet. 1. How to construct a cash flow projection? 11ACTIVITY 1 (15 POINTS) EVALUATION (15 POINTS) 1. 6. 11. N 2. 12. 8. 13. 4. 9 . 14. 5 10. 15. Activity 2 Date: Title: SIMPLE CASH BOOK Directions: Prepare a simple cash book. Write your answer in your Entrepreneurship answer sheet. HPS: 30 points Simple Cash Book 13Activity 3 Date: Title: CASH FLOW PLAN Directions: Prepare a Cash Flow Plan. Write your answer in your Entrepreneurship answer sheet. HPS: 20 points 14