Managing Small Business Finance Accounting â€Myassignmenthelp.Com

Question: Discuss About The Managing Small Business Finance Accounting? Answer: Introduction In this module, the key focus is to understand practices, systems and methods of managing finance unit of a small business. The several aspects related to the implementation of financial plan and to monitor financial performance of a small business is discussed. Budgets, source of capital, legal requirements related to the taxation, credit policies, key performance indicators and recording and communicating financial plan are some key aspects discussed in this report to ensure effective implementation and management of financial plan of a small business. The five financial information which are required in order to profitably operate the agency in accordance with business plan are as follows- Personnel Numbers: It is important to consider overall objectives and numbers required to achieve the goals as stated in the business plan. Overhead expenses: Once all the plannings done according to the business plans, then it becomes quite necessary to make an estimation of all the expenses that are associated with the profitably operation of agency. These expenses can be termed as overhead expenses. All non labor expenses required to operate the business are categorized in this category (Business Queensland, 2017). Capital requirement: In addition to the expenses, there is also a need of information which depicts the requirement of capital in order to purchase the essentials of business and to carry out the operations of business smoothly. Revenue: The forecast of sales or revenue are based upon the market conditions and competitor analysis. This financial information is required to find out the profits that can be generated through agency in accordance with its business plan (NAB, 2017). Cost of Goods: The last information which is required for the profitably operations of business is the cost of goods in order to measure the profitability of agency for the cash flow and income statement. The five specialist services which are required to profitably operate the agency are as follows- Financial advisers: The services of financial adviser will help the agency in deriving information about the financial situation of their business and also provide various information regarding investment, succession planning, management of risk and superannuation. Legal experts: The services of legal experts will help the agency in solving a range of issues that arises at different stages in the cycle of business. The services of legal experts will help the agency in choosing business structure according to business plan, licensing and complying with all regulations, protection of rights on intellectual property, drafting of legal documents and resolving in disputes (Barth et. al., 2013). Legal experts also help the agency in decisions regarding insurance and finance. Business bankers Insurance brokers Budget: Budget can be defined as the estimation of possible costs or revenue and expenditure that will be incurred for performing the activities of business for the particular period of time. Points to be covered while preparing a financial budget: Budget depends on two factors that are first, accurate estimation of figures according to goals and objectives and second, variations between the actual budget and projected budget. Overall planning to start a business is depends on the budget estimation, so budget should be based on realistic factors (Palley, 2016). Preparation of budget should be done according to the contingency planning. Below is the financial budget for the year ending 31 March, 2018 of XYZ ltd. which shows the cash flows and profit acquired. Financial Budget for the financial year 2017-18 Agency name: XYZ Ltd. Address: 221 B, Baker Street, Sydney, Australia Period: 1 Year (From April, 2017 to March, 2018) Particulars Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Cash Flow Estimates Office utility bills: 10000 15000 25000 30000 80000 Office training expenses 15000 18000 20000 25000 78000 Gross staff wages 30000 35000 40000 50000 155000 Gross marketing Costs 20000 25000 15000 20000 80000 Total Cash Outflows 75000 93000 100000 125000 393000 Total Cash Inflows 100000 125000 140000 160000 525000 Net profit acquired 25000 32000 40000 35000 132000 Business Capital: Business capital can be defined as the money invested by the owner of the business for performing its operations. Capital is required for producing goods and services and purchasing assets for the business. Success of any company or agency depends on the easy access to capital formation. So capital formation depends on two sources such as equity capital and debt capital. Equity Capital: It represents the funds invested by the shareholders and investors for the purpose of getting ownership in the company. Debt Capital: It represents the amount of loan and credit taken by the companies which have to be paid in future with interest. To negotiate with creditors it is important to manage working capital requirements and daily performance of the business (Visscher, et al., 2011). Working capital management techniques are helpful in negotiating, securing and managing overall capital of the business. Preparation of Statement of Working capital: Working capital represents the difference between current assets and liabilities of the business. Generally, cash balance, stock, debtors and creditors are included in the working capital statement. Positive balance reflects the better picture of business which is helpful in negotiating with suppliers and creditors. Effective and proper formation of working capital statement facilitates efficient management of capital for future. Effective budgeting techniques and contingency plans: Budget is helpful in maintaining the level of optimum cash required in present as well in future for the business operations. Planning for the new venture needs effective budgeting techniques which give estimation of how much capital is required (Development of Canada, 2017). With the help of projected capital it can be easily find out how much is required from owners fund and how much is from other sources. Efficient contingency plans are required to manage and secure capital for long term. Meaning of Provision for Taxation: Provision for taxation can be defined as the estimation of tax liability on the profit of current year paid by company (Hatten, 2015). Estimated amount of tax can be more or less than actual payment of tax liability. Characteristics of provision for taxation: It can be the short-term source of capital because payment of tax is not at the time when provision for taxation made. It is short term source of finance at zero cost of financing. Sometimes companies estimate excess provision for tax which leads to the mishandling of tax. Strategy for provision for taxation: There are various techniques for adequate provision for taxation: Generally, the ending date of the financial year is not similar as the ending date of the taxation year. So, the companies cannot calculate the exact amount of tax liability. For the purpose of calculating amount of taxation, apply the rate of tax on the amount of profit before tax. The amount of profit before tax is generated by deducting the financial and operating expenses from the gross profit adding other income (Gitman, et al., 2015). It is great advantage for companies to take loan from financial institution to get rebate from taxation. Effective tax planning is helpful in reducing the tax liability for a business. A budget for the company also includes the planned provision which is calculated by the experts in tax planning. Experts will give advice to financial manager to minimize the tax liability and management of financial account. There are various systems that can be implemented in order to maximize cash flow are-Development of credit policy: Credit policy should be developed in order to define the credit limits of every debtor whether new or old. Credit limit of the debtors should be set according to the risk taking capacity of the individual. Credit terms should include length for the payment and the charges applicable for the late payment by debtors. Monitoring and reporting should be there in order to make evaluation of debtors (Barrow et. al., 2012). Assessment of debtor: For maximization of cash flow, debtor assessment should be there in order to make contingencies for the debtors who are in default. The agency can run a check on the debtors in order to make sure that the debtors are trading legitimate business. The Australian Company Number (ACN) can be used in order to determine the name of business and its profitability with the help of credit reporting agency. Credit testimonials can also be used by agency in order to know the relationship with the debtor with other creditors in order to determine the financial condition of the debtor. Management of risk: Risk management is the key to maximize the cash flow of the agency. This will help the agency in maintaining good relationship with the debtors. The accounts department of the agency should monitor changes which are against the debtors report and makes timely communication with the debtor in order to keep the payments and relationship with them accordingly. Risk management helps the agency in allowing contingencies that will benefit in the phase of long term (Tahir and Darton, 2010). A sound credit policy of the agency will avoid time consuming and expensive litigations in order to maximize the cash flow. KPIs (Key Performance Indicators): KPIs are the tools for measuring and comparing the financial performance of a company with competitions in its industry. Key performance indicators are helpful in setting targets and goals in quantifiable terms to monitor the overall performance of the organization (Parmenter, 2015). For the purpose of getting long term success five KPIs are very important for small businesses to measure its performance are as follows: Gross and Net profit Margin: Gross profit margin is helpful in finding out the percentage of revenue over and above the cost of goods sold. It indicates how much revenue business is making for meeting its direct costs and operating expenses. Net profit margin is the indicator of profitability position against all the possible expenses in a financial year. Account Receivables as an indicator: Account receivable ratio is helpful in measuring the debtors position that is how frequently they are making the payments of bills. Account payables as indicator: Account payable ratio is the indicator of how frequently company is making payment to its creditors and showing credit worthiness. Finding liquidity ratios: Current ratio and quick ratios both are indicator of meeting short term liabilities of a business (Bhattacharya, et al., 2014). These are helpful in measuring the short term liquidity position of the business. Finding Leverage ratios: Debt to equity ratio is helpful in finding out how much equity capital a company is having against its long term debt. It measures the long term liquidity position of the company. KPIs which show the financial performance are calculated on the basis of components of balance sheet and income statement. So, financial manager, operation manager and overall staffs are responsible for maintaining the key financial position indicators. In a small business, the proper recording and communication of financial procedure is critical to inform the relevant stakeholder and other parties regarding the expected tasks, ways to perform tasks and delegated persons for each tasks. Financial procedures are set of instructions that help in execution of business plan. The best method to record and communicate the financial procedure is to develop financial procedure manual (Boyd et al., 2014). The key purpose of this manual is to guide the staff for best practice, who are responsible for administering financial activities and to inform the information of financial procedures to the relevant parties. This allows a small business to record the all instruction in form of policy in a systematic manner (Blythe and Zimmerman, 2013). The manual is effective to include all aspects related to the administration of financial aspects of the business. There can be two methods to communicate manual to the staff and other parties including manual and electric. The best way is to use electronic method as it helps to make quick changes in accordance to the any modification in the financial plan. Manual method is too complex and time consuming as in this more paper work is required than electronic method. E-mail, news-letter and official website can be used to communicate the financial procedure manual. It is fastest means to record, update and to change the data related to financial procedure. A gantt chart may also include in the manual to communicate this manual in a pictorial manner with the help of electronic method (Drake and Fabozzi, 2010). Thus, electronic financial procedure manual is best way for small business to record and communicate the financial procedures. A computerised accounting system would be implemented to regulate and monitor financial performance targets on regularly basis. In this system, monthly financial reports would be developed to record financial transactions for determining the expenditures and revenue of a firm overtime. In this system, two financial statements namely profit and loss and balance sheet will also be included in this system. Profit and loss statement helps to report income and expenses of business overtime and to determine the situation of business from profitability perspectives (Baltzan et al., 2015). On the other side, balance sheet facilitates recording of assets, liabilities and net equity for over a specific time period. The accounting system will also include developed financial budgets as it would be enabled to determine the expected expenditure and revenue for a specific period. Through this accounting system, actual performance reported in financial statements would be compared to the budgets for m monitoring and reporting the financial performance targets. For example: the sales budget indicates that expenses over a specific time period would be $45000. This will be compared with the expenses reported in profit and loss statement (Hawawini and Viallet, 2010). Higher actual expenses from the actual expenses will indicate the need of taking required measures for improving revenue. The data related to the monitoring and reporting on financial performance targets will be used to determine the shortage or excess finance in business. For example: in case of determining excess expenditure than expected, more sources of finance will include in the financial plan to avoid the risk of capital shortage and operational disturbance (Kinney and Raiborn, 2010). Financial plan will be changed in accordance to the obtained information from the assessment of financial performance targets with the help of accounting system. In order to monitor marketing and operational strategies, a performance measurement system would be implemented in this agency. This system will include certain metrics to access the efficiency and effectiveness of both marketing and operational strategies. Different matrices will be used to measure marketing and operational performance of this agency. The current status of performance will be reported in accordance to the included matrices and it would be helpful to monitor the performance of implemented strategies (Tinkelman, 2015). The key operational metrics can include customer satisfaction score, employee satisfaction, productivity, cash flow and gross margin. These would be the key matrices to monitor the operational strategy due to their effectiveness in presenting the results in quantifying manner. For example: each customer would be asked to rate the quality of service on which basis the performance management system would present the average customer satisfaction score. Low customer satisfaction score will aware management regarding the improvement in operations (Karadgi, 2014). Similarly, monitoring of other stated metrics will help to determine the employee satisfaction, which plays key role in delivering better operational performance. Similarly, marketing metrics in this system will include number of qualified leads, comments, shared content, time spent on site, queries and others. The report on such performance matrices may help to monitor the performance of marketing strategies in terms of attracting and acquiring customers. Similarly, the queries and comments of the customers will also be monitored on regularly basis to access the satisfaction of customers and to share this report to the operational department of the agency for ensuring required changes in the quality of the offerings (Blythe and Zimmerman, 2013). Financial ratio is a technique to analyze relative magnitude of any two values of financial statements. It is a method to determine relationship between the two financial accounts of business. They key purpose of financial ratio is to evaluate the financial health of a business and to facilitate informed decision making. It facilitates benchmarking in which business processes of a company are compared with the competitors having best practices. Through this, gap in the performance of business processes is determined, which provides insightful financial information about a firms operations and assists in decision-making (Inman, 2014). There four types of financial ratios are used in business such as profitability, liquidity, leverage and efficiency. Each ratio is used to for fulfilling different purposes. Profitability ratios are used to access the ability of business to generate revenue in against to its expenses in a specific time period. Return of assets, profit margin and return on equity are some key profitability ratios. The purpose of this ratio is to enable management to determine areas, which needs improvement to increase business profitability Liquidity ratios mainly includes current and quick ratio and their key purpose is to determine the cash position of a firm and to plan financial resources accordingly (Ward, 2012). Leverage ratios are used to determine the competency of firms capital structure in terms of surviving in long run. Debt to equity ratio is key leverage ratio, which is used to determine the proportion of debt in relative to the equity. Through this, management can take better decisions to make the capital structure more competent. Efficiency ratios are used to access the ability of firm to employ its assets and to manage liabilities. It helps management to determine how efficient is business in terms of employing assets to generate sales (Atrill and McLaney, 2014). Through this information, management takes informed decisions to include strategies for improving the business efficiency and increasing profitability. The current financial ratios are calculated below to state the more favourable or less favourable for the investors: For the first given scenario, the calculation of financial ratio is stated below: Financial Ratio(Current profit/ Current Liabilities) Current profit 450000 Current Liabilities 100000 4.50 Financial ratio for this agency is calculated by dividing current profit with the current liabilities over a specific time period. This helps to determine the profitability of firm in relative to its current liabilities. On the basis of obtained ratio of 4.50 from the calculation, it can be stated that the profitability is 4.5 times higher than the liabilities, which indicates ability of this agency to meet with the liabilities of business (Ord and Fildes, 2012). Due to this, the agency is more favourable for the investors as it shows ability to survive and to offer attractive returns. The calculation of financial ration for the second scenario is depicted below: Financial Ratio(Current profit/ Current Liabilities) Current profit 70000 Current Liabilities 60000 1.17 It can be stated on the basis of above ratio that this agency is less favourable as its profitability is approximately one times higher than the liabilities. This indicates that this firm may face shortage of funds due to high liabilities and low profitability. It may affect the business survival and the returns of investors (Sagner, 2010). Thus, it is determined that agency is less favourable for investment purpose. Variance analysis method is the best method to access the financial plan of business and to determine the variations so that alternative plans can be developed accordingly. It is a qualitative technique in which actual performance of a business is compared to the planned performance. In this, budgets have prepared to benchmark the performance of the agency. The budget serves as means of benchmarks against which the actual performance of the business is compared. It is an effective method to analyze the variance in performance from month to month (Kinney and Raiborn, 2012). The method of variance analysis helps to determine the difference in performance and to interpret the reasons of variance. On the basis of variance results, required changes can be interpreted effectively. For example: sales during a month were $20,000 lower than the budgeted sales of $40,000. The reason of this variance may loss of a customer, which was a frequent buyer. The reason of losing customer may due to the several instances of late reply on consumers queries for sites in the last month (Snedecor, 2012). On this basis, management may add training and development programs for employees to educate them about the skills of communicating the client promptly. This will lead to an increase in the budget allocated to the marketing operations in financial plan. Management may also decide to implement new IT system for managing customers queries and replies more effectively (Tracy, 2011). This will also lead an increase in the budget allocated to the IT department. Conclusion It can be concluded on the basis of above discussion that an effective implementation and management of financial plan in small business requires careful planning of practices, methods and systems as they play a supportive role in bringing success. By using appropriate techniques of financial management such as budgets, KPIs, performance measurement, policies and other a small business can manage finance effectively. References Atrill, P. and McLaney, E. (2014) Accounting and Finance for Non-Specialists. 9th edn. England: Pearson Education Limited. Baltzan, P., Fisher, J. and Lynch, K. (2015) Business-Driven Information Systems. 3rd edn. Australia: McGraw-Hill Education. Barrow, C., Barrow, P. and Brown, R. (2012)The business plan workbook. UK: Kogan Page Publishers. 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