Accounting and Finance for Your Small Business, 2nd Edition

Preface xiii

Section I Preparing to Operate the Business 1

Chapter 1 Budgeting for Operations 3

Definition or Purpose of an Operating Budget 3

Signs of Budget Ineffectiveness 4

Improvements to the Budgeting System 6

Responsibility Accounting 9

Budget Tracking and Maintenance 21

The System of Interlocking Budgets 25

Need for Budget Updating 35

Summary 36

Chapter 2 Investing in Long-Term Assets and Capital Budgeting 39

Definitions 40

Overview and Use of Capital Budgeting 41

Life Cycles 42

Capital Budgeting Sequence 43

Producing Numbers to Get Dollars, the Use of Forms, and the Capital Budgeting Model 48

Miscellaneous Considerations 65

Product Discontinuance 66

Bailout 68

Summary 69

Appendix: Examples and Comparison of Calculations 70

Chapter 3 Basic Control Systems 77

The Need for Control Systems 77

Types of Fraud 79

Key Controls 81

When to Eliminate Controls 97

Summary 99

Section II Operating the Business 101

Chapter 4 Cash Flow Concerns 103

Cash 103

What to Do with Excess Cash 105

Cash Flows 108

Introduction to Cash Flow Budgets 112

Indications of Cash Flow Problems 112

Managing Cash 113

Preparation of the Cash Budget 126

Disbursements 127

Net Cash Flow and Cash Balances 130

Exceptions to Expected Cash Flows 131

Summary 132

Appendix: Cash Flow Example 133

Chapter 5 Financing 143

New Businesses 143

Zero Working Capital and Zero Fixed Assets 144

Types of Financing 148

Private Placement of Stock 157

Swapping Stock for Expenses 158

Stock Warrants 159

Stock Subscriptions 159

How to Obtain a Bank Loan 160

Sources of Debt Financing 167

Types of Loan Arrangements 168

Restrictions on Loans 171

Conditions That a Borrower Should Seek 173

Summary 175

Section III Evaluating the Operations of the Business 177

Chapter 6 Performance Measurement Systems 179

Financial Ratios 180

Types of Financial Ratios 182

Using Performance Measurements for Predictions 193

Operating Ratios 196

Other Ratios 202

The Balanced Scorecard 204

Summary 207

Chapter 7 Financial Analysis 209

Risk Analysis 209

Capacity Utilization 215

Breakeven Analysis 222

Summary 229

Chapter 8 Taxes and Risk Management 231

Controlling Tax Liabilities 232

Risk Management 237

Insurance 245

Types of Insurance Companies 249

Claims Administration 250

Summary 252

Chapter 9 Reporting 255

Federal Government Requirements 255

State Government Requirements 262

Local Government Requirements 267

Creditors 268

Equity Holders 269

Management Reports 269

Summary 286

Index 289