Lesson 9Daytoday Financial Mgt'

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Lesson 9-Day-to-day Financial Mgt.
Introduction When you enter into a contract
agreement to pay for a large purchase like a car
or home, do you consider your potential
for income to cover the debt over the time of the
loan? Keep this thought in mind as you proceed
through this unit.
Interviewer " Your holiness, how many people
work in the Vatican? Pope John XXII "About
half." 
Objectives Determine the projected revenue of a
business venture based on calculation of the
target markets potential volume. Develop a
strategy for the ongoing collection of income
from cash and credit customers.
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Lecture Point One
The financial management of your firm begins
prior to the doors opening. Business start-up
costs significantly impact the go or no-go
decision facing the potential entrepreneur. If
this stage of your financial planning is
trivialized or overlooked, you could be looking
at closure of the business as early as six or
seven months into your business year. This
means, then, that a start-up cost analysis should
be done to clarify the minimum cash required for
a successful launch. Keep in mind that a
business, much likea baby, is not likely to be
able to care for itself in the early stages of
development. You will need to giveto the
business for awhile before it is able to fend
for itself and start paying you back. Hence,
your start-up costs not only include business
expenses, they will likely include your living
expenses until the business is able to support
your lifestyle. I have constructed a guide for
the calculation of start-up costs. Click here
for the business Start-up Costs Worksheet.
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Since many small business starts require some
sort of outside funding, it is important to
consider sources for this funding. Keep in mind
that traditional sources of funding,
banks, usually are not particularly interested in
start-ups. They prefer to see the owner apply
for funds to expand the enterprise after at least
two to three years of successful operation. So,
lets examine a variety of non-traditional
sources for that much-needed beginning
capital. One of the reasons banks are reluctant
to lend to new owners is that they dont know
your personal capabilities as a business person,
or even as a level-headed individual. For this
reason you may want to locate family or friends
to fill this need (even to the point of
getting several of them to fund part of the
effort. Click here to see a list of possible
alternate funding sources for start-up businesses.
The reading selection for this lesson is found in
chapters 22 and 23 of your textbook. This
selection will focus on the management of your
business accounts, describe alternatives for
dealing with customer credit, and resolution of
accounts receivable. Please go to Study Quiz 09
to record these concepts.
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Lecture Point Two

•       A topic that most small business owners
  don't want to address is the issues surrounding
  charging for their products/services and worst of
  all--collecting debts!!  The fact is, you're in
  business to make money and you can't do that by
  giving away the store.  The vast majority of
  consumer-oriented small businesses will use cash,
  checks and credit cards as their payment forms. 
  However, there are many of you who will be
  dealing with other businesses and might encounter
  open-book credit.  Here are some guidelines that
  can be used when extending credit.
• There are three major factors when evaluating a
  credit applicant
• 1. ability to pay
• 2. willingness to pay
• 3. potential profitability of the account
• Verify the information provided on the
  application by
• checking place of employment to verify they have
  an income source, and the time on the job is
  reported accurately
• verify bank references for existence of account
  and a broad idea of average account balance
• the local credit bureau can also provide
  information to members (membership fees are
  usually based on business size and a nominal fee
  for each inquiry)
• check for stability in employment and residence

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• Commercial accounts may be difficult to assess,
  unless you can get a copy of financial reports.
  Instead, rely on bank references, supplier
  references, and the applicants reputation in the
  industry.  Take note of authorized individuals so
  that fraudulent purchases can be detected. Also,
  there should be some sort of purchase order
  process to clarify authorization.  Frequently,
  applicants will provide only the good
  references. Use your judgment to determine other
  possible suppliers and inquire about possible
  experiences.  Commercial credit services are
  available to secure information on businesses
  throughout the country. The cost of this service
  will vary with the detail and depth of the
  inquiry.
• Collections Problem Detection
• Credit collection problems should be acted upon
  as quickly as possible.  An important indicator
  of the effectiveness of your credit and
  collections policy is your Average Collection
  Period.
• The average collection period is calculated as
  follows 
• Accounts Receivable divided by Average Daily
  Credit Sales
• For example
• Business has 6,000 in daily credit sales
• It also has 9,000 in outstanding accounts
  relievable
• Calculation
•   Average Daily Credit Sales 6,000 divided by
  30 days 200
•   Average Collection Period 9,000 divided by
  200 45 days
• This calculation indicates that, on average,
  customers are taking 45 days to pay their
  accounts.
• Compare your findings to
• your expected payment terms (Are customers
  supposed to be paying in 30 days?)
• past history (Is the collection period improving
  or declining?)
• industry averages (How do you compare with others
  in your specific industry?)

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• Aging of Receivables
• Identify specific accounts that fall into aged
  groups. For example, accounts can be identified
  in 0-30 days, 31-60 days, 61-90 days.  Accounts
  that are very old are obviously the most risk for
  collection. These are the accounts that should
  be identified and immediate corrective action
  taken.
• Collection Procedures
• To assist in the timely collection of accounts
  receivable
• minimize the span of time between purchase and
  collection (make sure your billing is done
  quickly, too)
• prepare invoices quickly and accurately
  (inaccuracies cause questions and delays)
• clearly state payment terms at time of sale
• collection can be accelerated by offering cash
  discounts
• make sure you have included appropriate
  references to purchase order numbers, etc.
• keep customers advised of the status of their
  account balances. (statements should show balance
  and current activity)
• consider a charge for delinquency
• follow-up immediately (first with a xeroxed
  reminder, then a personal call)
• Remember that customers that dont pay arent
  good customers.  Also, customers that owe you
  money are usually too embarrassed to do business
  with you until the account is cleared.  So, you
  really want to get the accounts resolved--soon.
• Target Market Revenue Projection

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Start-up Costs Worksheet Living
Expenses From last paycheck to opening
day _____ For three months after opening
day _____ (Note Money for living and
business expenses for at least theree months
should be set aside in a bank savings account
and not used for any other purpose. This is your
start-up cushion.) Deposits, Licenses,
Prepayments Deposit for rent _____ Telephon
e and utility deposits _____ Insurance
premiums _____ Leasehold
Improvements Remodeling and
redecorating _____ Fixtures, equipment,
displays _____ Installation
labor _____ Signsoutside and
inside _____ Inventory For service
business Delivery equipment and
supplies _____ For merchandise business
About 65 of start-up costs might be needed
for opening stock. _____ Operating Expenses
for first 3 months (obtained from cash flow
projection for regular monthly expenses) _____
Reserve to carry customers accounts _____ (o
nly if you intend to have open-book accounts for
customers) Cash for Petty cash account,
etc. _____ Total Start-up Cash
Needs _____
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Financing Business Start-ups Most start-up
businesses cannot secure "traditional" bank
financing. Banks will want two or three years'
track-record with this business before
considering a loan. You can accomplish this
track-record by operating your business part-time
for two years, then requesting an expansion
loan, or you could try one or more of the
following prospects Credit cards (check Money
Magazine for lowest bank card rates. Friends and
Relatives (they know your character banks
dont) Life insurance reserves and savings
accounts SBA Micro-loan Program Chicanos Por La
CausaPhoenix 501 W. Apache Street Phoenix, AZ
85003 [phone] up to 15,000 (without
proof of bank denial) 100 up-front fee
minimal business plan preparation http//www.cp
lc.org youth loan program (18-25 years old)
5,000 loan fund Self-employment Loan Fund
technical assistance 300 to 5,000
progressive increments as actions
prove-out [phone] Refinance your boat,
camper, or car. Take a second mortgage on your
house (a third, fourth) Research your assets
(coin collections, baseball cards) Get a loan on
your stock or CD. Look at non-bank sources
savings and loans, credit unions, Ins. companies