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As a manager, you need a method for measuring your companys success; finance is one tool at your disposal. Finance can be defined as the process of maximizing profits without jeopardizing the firm's ability to pay its bills (Larson et al. 1994, p. 151). Financial management helps managers make decisions to increase profits for the company without causing the company to fail. Managers must have a basic idea of all the finances his or her company has in order to perform his or her job well. If there are questions or uncertainty, consult the financial expert in your firm. Figure 1 presents finances compared to the parts of a tree.
FruitC:\Users\Scotty\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.IE5\7KWKIGFA\MC900441870.wmf
Figure 1. Finances compared as a tree (Smith 2004).
Financial activities (Roots): Financial contribution from the owner with equity shares in return. For example, creditors loan money in return for interest and principle payments.
Investing activities (Branches and trunk): Capital is used to invest in assets such as building, equipment, machinery and vehicles.
Operating activities (Fruit): Produce goods and service that are sold to customers.
Financing a small business
To finance your company you can either find venture capitalists, Small Business Administration loans or grants from the government. The Small Business Administration offers many different low interest loans for small businesses. You should visit your local bank to see what loans are offered by them. Federal governmental grants are provided from tax dollars for use in starting only non-profit firms. State and local governments and non-profit organization may provide grants to small businesses. These grants may require you to match funds in order to be a recipient (SBA 2012).
Basic Financial Definitions:
To better understand financial management, let's take a look at some important financial definitions:
Assets: items, property, and rights owned by a company that can be used to generate economic benefits. Assets = Liabilities + Equity
Liabilities: a company's debt and payables. The total amount of liabilities is the amount the company has borrowed and must repay.
Stockholders' Equity: consists of contributed capital and retained earnings. To examine the net worth of the company, the fundamental equation is: Assets- Liabilities= Equity.
Financial statements are important tools contributing to the success of a company. Financial statements require accurate and timely information to be effective. They should be reliable, consistent and accurate to ensure they are simple to understand. The main financial statements a firm uses to manage its success are a balance sheet, income statement, return on earnings and cash flow.
Balance Sheet: presents the firm's assets, liabilities, and owners' equity. A balance sheet provides an estimation of your company's worth at one point in time. They are typically done on the last day of each month (Smith 2004).
Current maturities of long-term debt
Property, production equipment
An example of a balance sheet (Yahoo! Finance 2012):
All numbers in thousands
Dec 30, 2011
Dec 30, 2010
Dec 30, 2009
Cash And Cash Equivalents
Short Term Investments
Other Current Assets
Total Current Assets
Long Term Investments
Property Plant and Equipment
Deferred Long Term Asset Charges
Short/Current Long Term Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Deferred Long Term Liability Charges
Misc Stocks Options Warrants
Redeemable Preferred Stock
Other Stockholder Equity
Total Stockholder Equity
Net Tangible Assets
Income statement: Accounts for all activities associated with operating the business (revenues, expenses). The income statement provides a measure of profit and performance to show management efficiency over a period of time. These are typically done monthly, but need to be generated quarterly. Net income is the most important number disclosed in the income statement. The net income your firm makes from the sale of products or services to customers may be used in three ways: 1) reinvested in the production assets, 2) returned to the creditor as a form of repayment for debt, and/or 3) returned to the owners of the company in the form of dividends beautiful (Smith 2004). Below your will find what is required in an income statement and how to calculate income.
=Net income before taxes
=Net Income after taxes
/Number of shares
=Income per share
Revenues: Total dollar value of goods and services sold during a given time period.
Cost of Goods Sold (COGS): the business' costs to purchase goods that are later resold or any manufacturing expense.
COGS= starting inventory + purchasing - ending inventory
Operating expenses: costs incurred from regular business operations.
i.e. marketing, wages, administrative, taxes, insurance, rent, utilities.
Revenues - Expenses = Income
Gross Profit or margin
The difference between sales and COGS.
The money available to cover operating expenses.
The amount of income left over after subtracting operating expenses.
Net Income after taxes:
The amount left to the business after income has been paid.
Table 1. Example of an income statement (Yahoo! Finance 2012)
Weyerhaeuser Income Statement
All numbers in thousands
Mar 30, 2012
Dec 30, 2011
Sep 29, 2011
Jun 29, 2011
Cost of Revenue
Selling General and Administrative
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Income Before Tax
Income Tax Expense
Net Income From Continuing Ops
Effect Of Accounting Changes
Statement of Retained Earnings: compares expenses to revenue over a certain time frame and shows a profit or loss for the company.
Cash Flow Statement: shows the changes in the business's working capital from the start of the year. This statement lists sources of funds and the use of them. Below you will find the items included in a cash flow statement.
+ Cash collection
âˆ’ Cash paid
= Net cash increase (decrease) from operating
âˆ’ Purchases of securities or property
+ Sales of securities or property
= Net cash increase (decrease) from investing
+ raised capital from issuing equity or entering
âˆ’ Dividends or debt payments
= Net cash increase (decrease) from financing
(1) + (2) + (3) = Increase (decrease) in cash balance + Beginning cash balance
Financial ratios provide a firm with a quick assessment tool for measuring performance of a company. Ratios are a comparison of two values and should be compared with other financial ratios to interpret their relative meaning. You can compare the ratios with other wood products industrial averages to determine the relative success of the business.
Return on Assets:
Measures the efficiency of a firm; the ability to generate a profit using the assets available.
Shows the effectiveness of generating sales revenues using assets available.
Return on Sales
Shows the percentage of each sales dollar that is profit.
Shows the debt level of a company.
Return on Equity
Presents stockholders with the return on their investment.
Bookkeeping and other finance sources:
If your company does not have an inside source for your accounting needs, an outside source may be beneficial. An outside accounting source will allow you to focus on other business tasks, such as expanding your business. Depending on your company needs in financial services, these sources can provide payroll, accounts payable and receivable, financial statements, cash flow management, and even tax preparation.
Finance management allows companies to see the reality in their business and look at things objectively. As a manager, you may not have a full understanding of financial analysis; however, a basic knowledge of finances will help you effectively manage your business. Consult a financial manager or accountant if financial management is unclear or questions arise.
Larson, P., M. J. Tentnowski, and S.M. Hensley. 1994. The Virginia entrepreneur's guide. How to start and manage a business in Virginia. University Press. Missoula, MT. 323p.
Smith, R.L. 2004. Measuring success. Presentation. Virginia Tech. Blacksburg, VA.
Small Business Administration (SBA) 2012. Explore loans, grants, and funding. Available at: http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/loans-grants-funding. Accessed August 6, 2012.
Yahoo! Finance 2012. Financial reports. Available at: http://finance.yahoo.com/. Accessed June 27, 2012.