Implement accounting procedures to track money flow

and to determine financial status.

Marketing Management Indicator 2.03

• Making sure there is enough cash to operate is one of business’s most important financial activities

• Movement of cash is important• Determines the amount can work with at any given time• If running low

• May not be able to cover expenses

• May not be able to pay the employees

• May fail• Businesses that are profitable may experience cash-flow problems

• Sources of cash that flow into a business• Some sources are more reliable and steady than others

The Importance of Adequate Cash Flow to Business

Success

• Start-up money• Funds to cover expenses until revenue starts to come

in• Sale of products

• Main source of cash for established businesses• Loans

• Businesses borrow cash to expand• Possibly needed when sales are slow

• Interest• Invest extra cash to earn interest

• Sale of assets• Anything of value a business owns that can be sold

Sources of Cash

• Operating expenses• Payroll and benefits

• Health insurance

• Paid vacation and sick time

• Retirement fund contributions

• Rent or mortgage payment• Utility Costs

• Electric

• Gas

• Water

• Supplies• Shipping and delivery

expenses• Advertising

• Insurance• Cost of goods

• Raw materials• Assets

• Furniture, land, vehicles• Loan payments• Taxes

• Property• Income• Sales• Payroll

• Miscellaneous• Legal fees• Maintenance and repairs• Uncollectable accounts• Unexpected emergencies

Sources of Cash That Flow Out of a Business

• When• Warns when business will be

low on cash• Identifies high and low points• Identifies months when

certain sources of income will be collected

• Where• What source• Debit cards, cash, credit

cards• How much

• Tells how much cash is flowing into the business

• Can plan ahead for expected shortages

How do Cash Flow Statements Tell When, Where, and How Much?

• New businesses• Often a problem because do not have data from previous years

• Rely on figures gained from marketing research

• Established businesses• Review profit and loss statement to determine cash coming into and going out of business

• Also use industry trends and predictions

• Rely on previous financial information to be safe

How New and Established Businesses Estimate their

Cash Flow Figures

• Beginning cash balance• amount of money business has available at the beginning

of each month, can include cash remaining from previous month

• Includes loans, personal savings, investors• Same as listed amount from previous month’s ending

balance• Cash receipts

• Sale of goods and services• Loans• Sale of assets• Interest income• ONLY CASH

• Total cash receipts• ALL sources of income listed under cash receipts• Examples include selling products, interest on

investments, taking out loans

Components of a Cash Flow Statement

• Total cash available• Amount of cash available to spend each month• Add total cash receipts to beginning cash balance

• Cash payments• Flow out of the business each month• Three parts

• Cost of goods sold• Variable expenses (shipping, taxes)• Fixed expenses (payroll, rent)

• Total cash paid out• All of business’s cash payments

• Includes cost of goods sold, variable expenses, and fixed expenses)

• Ending cash balance• Amount of cash a business has left at the end of the

month• Subtract total cash paid from total cash available

• Is the beginning cash balance for the next month

Components of a Cash Flow Statement

How is cash flow calculated?

• Write down Beginning Cash Balance• List them items under Cash Receipts

• Sale of goods and services• Loans• Asset sales• Interest income

• Add all items under Cash Receipts to get Total Cash Receipts• Add Beginning Cash Balance to Total Cash Receipts to get Total Cash Available• List all Cash Payments in one of three areas

• Cost of goods to be sold (raw material, and resale inventory)• Fixed expenses (stay the same)• Variable expenses (change according to sales volume)

• Add all items under Cash Payments to get Total Cash Paid Out• Subtract Total Cash Paid Out FROM Total Cash Available to get Ending Cash

Balance

Balance Sheet

Example Company Balance Sheet

December 31, 2010

ASSETS

LIABILITIES Current Assets

Current Liabilities

Cash $ 2,100

Notes Payable $ 5,000

Petty Cash 100

Accounts Payable 35,900

Temporary Investments 10,000

Wages Payable 8,500

Accounts Receivable - net 40,500

Interest Payable 2,900

Inventory 31,000

Taxes Payable 6,100

Supplies 3,800

Warranty Liability 1,100

Prepaid Insurance 1,500

Unearned Revenues 1,500

Total Current Assets 89,000

Total Current Liabilities 61,000

- Investments 36,000

Long-term Liabilities

Notes Payable 20,000 Property, Plant & Equipment

Bonds Payable 400,000

Land 5,500

Total Long-term Liabilities 420,000

Land Improvements 6,500

Buildings 180,000

Equipment 201,000

Total Liabilities 481,000

Less: Accum Depreciation (56,000)

Prop, Plant & Equip - net 337,000

- Intangible Assets

STOCKHOLDERS' EQUITY

Goodwill 105,000

Common Stock 110,000

Trade Names 200,000

Retained Earnings 229,000

Total Intangible Assets 305,000

Less: Treasury Stock (50,000)

Total Stockholders' Equity 289,000

Other Assets 3,000

- Total Assets $770,000

Total Liab. & Stockholders' Equity $770,000

The notes to the sample balance sheet have been omitted.

• Assets – resources of monetary value

• Current Assets

• Cash

• Cash equivalents

• Accounts receivable

• Inventory

• Intangible Assets (life insurance, copyrights, franchises, patents)

• Liabilities – debts owed by the company

• Current liabilities

• Accounts payable

• Taxes

• Dividends

• Equity – value of a business to its owners after all the commitments have

been met

Components of a Balance Sheet

• Cash

• Money market funds

• Short term investments

• Accounts receivable

• Notes receivable

• Inventory

Examples of a Business’s Current Assets

• Buildings

• Office Equipment

• Property/Land

• Machinery

• Vehicles

Examples of Fixed Assets

• Accounts payable

• Taxes

• Dividends

• Short-term loans

• Interest payable

• Consumer deposits

• Tax reserves

Examples of Current Liabilities

• Debts that will take longer than one year to pay off

• Mortgage

• Leases

• Deferred taxes

Examples of Long-term Liabilities

• Original money invested in business

• Stock sales (sell portion of company for money)

• Retained earnings (profits put back into the business)

Sources of Stockholder Equity

A Balance Sheet is a Snapshot of a Business’s

Financial Condition

• Gives a fairly clear picture of the business at the moment

• Gives the business’s financial condition at a specific moment in time

• Allows a business owner to quickly get a handle on the financial strength and capabilities of the business

• Allows a creditor to see what a company owns as well as what it owes to other parties as of the date it was run.

A balance sheet • tells assets, liabilities, and capital• is prepared to tell investors how much money

the company has, how much it owes, and what is left for the stockholders.

• it can identify and analyze trends.

An income statement • Tells total revenue, expenses, and profit/loss• is prepared to tell you how much money a

corporation made or lost and is a record of the company’s profitability.

• Easily understand their current financial state

• Keeps business up to speed on the current state of relevant finances

• Get a quick handle on the financial strength and capabilities of the business

• Identify and analyze trends

Ways a Business Can Use Its Balance Sheet

• Summarizes where the business’s money came from and where it went

• Summary of a business’s income and expenses over a period of time

• Also known as • earnings statement• operating statement• profit-and-loss statement

Purpose of an Income Statement

• Revenue• Sales of business’s goods

and services• Interest earned• Return on investments• Sale of business’s assets

• Cost of goods sold• Raw materials• Packaging• Shipping• Labor• Supplies• Return/unsold/stolen items

• Gross profit• Subtract cost of goods sold

from revenue• Total profit BEFORE all

remaining expenses have been deducted

• Operating expenses (variable/fixed)

• Employee wages/salaries• Insurance• Utilities• Mortgage/rent• Advertising• Interest on outstanding

loans• Net income

• Known as the bottom line• Final profit of the business

Categories of Components of Income Statements

• Shows a business’s total financial picture

• Represents a total for specific period of time

Income Statement is Cumulative

Who Analyzes the Information found in Income

Statements

• Top executives and managers

• Creditors

• Investors

• Accumulated depreciation is all of the depreciation ever 'accumulated' against the assets currently in service. It is shown on the balance sheet as a 'contra' (negative) asset, directly below the assets it relates to.

Depreciation expense is the current period's depreciation of the assets currently in service. It is shown on the income (P&L) statement as an expense.

What is the Difference Between Depreciation

Expense and Accumulated Depreciation?