Entrepreneurship and small business management chapter 14

Entrepreneurship and Small Business Management Chapter 14 Cash Flow and Taxes... Cash Flow Is Critical Cash flow refers to money coming in and going out of your business..  Cash flow

Entrepreneurship and Small

Business Management

Chapter 14

Cash Flow and Taxes

 Read a cash flow statement.

 Create a cash budget.

 File appropriate business tax returns for

your business.

Cash Flow Is Critical

 Cash flow refers to money coming in

and going out of your business.

 Without cash on hand, your business

will not be able to pay crucial bills.

 Goal: Never have a negative cash

balance.

Tracking Cash Flow

 Income statement is poor gauge of cash flow.

 Showing a profit does not mean adequate

cash is on hand, due to lag time between…

 … making sales and receiving customer payments.

 …paying for labor/materials and receiving finished goods.

 Noncash expenses, such as depreciation, can

distort the picture.

 Cash flow statement shows inflows and

outflows of money as they occur.

Rules to Keep Cash Flowing

 Collect cash as soon as possible.

 Pay your bills by the due date, not earlier.

 Check your available cash every day.

 Lease or finance instead of buying

equipment, where practical.

 Avoid buying inventory that you do not

need.

Keep an Eye on Working Capital

 Working capital equals:

 Current assets minus current liabilities

 Amount of cash that would remain if all

short-term debt was paid with the cash on hand

 If a firm runs out of working capital, it:

 Will not be able to spend the cash needed to bring

a new product to market

 Will still have ongoing bills to pay

 May not be able to stay in business

Cycles That Affect Cash Flow

 Transaction cycles—based on operations

 A manufacturer may have to pay its suppliers and employees before getting paid by customers.

 A residential cleaning firm may collect customer

payments on the same day as service is provided.

 Seasonal cycles—based on time of year

 A flower store may have more cash around

holidays but less at other times.

 A college bookstore has more cash after school

starts but less when it has to buy the inventory.

The Cash Flow Statement

 Sections of statement:

 “Inflows” (cash receipts)

 “Outflows” (cash disbursements)

 Net change in cash flow

 Categories of inflows and outflows:

 Operations

 Investment

 Financing

Sample Cash Flow Statement

Cash Flow for Tom’s Custom Blinds, Month of June 2011

Cash Inflows—Operations:

Total cash used in operations $58,775

Net Cash Flow from Operations $6,625 ($65,400 – $58,775)

Sample Cash Flow Statement (cont.)

Cash Flow for Tom’s Custom Blinds, Month of June 2011

Net Cash Flow from Financing $20,300

Net Increase/(Decrease) in Cash $20,675 ($6,625 – $7,000 + $20,300)

Cash, Ending: $21,175 (500 + $20,675)

Steps to Forecast Cash Flow

1 Project cash receipts from all possible

sources.

 Includes cleared checks, credit card payments, and cash itself (no orders)

 Note assumptions made when estimating

2 Subtract expenses that must be paid

during the forecast time period.

Managing Inventory

to Manage Cash

 Inventory creates risk because it might not

be sold at a profit.

 Sell inventory at a price that covers COGS,

storage costs, and pilferage (theft), and still earn a profit.

 Keep timely and accurate inventory records.

 Control stock levels to minimize amount of

cash tied up in inventory, and prevent waste.

Managing Receivables

to Manage Cash

 Bill and collect monies owed to your

business, in a timely manner.

 Use Aging Schedule to track Accounts

Receivable and estimate cash flow.

 Consider factoring—receivables

financing.

Managing Accounts Payable

to Manage Cash

 Use credit (the ability to borrow

money) wisely.

 Negotiate favorable payment terms

when opportunities arise.

 Track payables with an Aging

Schedule.

Capital Budgeting and Cash Flow

 Capital assets affect cash outflows when

purchased and cash inflows when liquidated.

 Use capital budgeting to understand the cash

flow required for investments and the expected

impact on operating cash flows.

 Calculate depreciation associated with capital

investment to anticipate the tax effects.

 Plan and analyze each potential capital project

separately to determine feasibility.

Burn Rate

 Pace at which your company will need to

spend capital to cover overhead costs

before generating a positive cash flow

(Cash Available + Revenue) Negative Cash Outflow per Month

= Number of Months Before Cash Runs Out

The Time Value of Money

(gain) over time through investment

worth discounted back to the present

 Reasons to have your money “now”:

 Inflation

 Risk

 Opportunity

Self-Employment Tax is:

 A federal tax that business owners pay on

the wages paid to themselves

 The Social Security tax obligation for those

who are self-employed

 The combined equivalent of the employee

and employer taxes paid for employees

 Paid quarterly, so cash should be put aside

for making payments on the due dates

Income and Sales Taxes

 Entrepreneurs pay income tax to federal

and state governments.

 Businesses are also subject to local

taxes.

 Tax returns must be filed (mailed or

submitted online) by specific dates each year.

 In most states, if you sell products or

services to the public, you must collect sales tax and submit it quarterly.

Tax Issues Vary By Legal Structure

personal income by owner

partners and reported on their individual tax

returns

except losses can be used as a tax shelter

without exposure to personal liability

Tax Issues Vary By Legal Structure (continued)

 Profits are taxed whether or not a share of the

profits is distributed to the owners.

 Owners also pay personal income tax on any

profit distribution they receive.

owner income on personal tax returns

separates the owner/partners from personal

liability

How to Avoid Tax Problems

 Keep accurate financial records throughout

 If you prepare your own tax returns:

 Purchase tax software.

 Ask a tax professional to review your paperwork.