Questions: 1. 2. 3. 4. 5. 6. 7. Explain the two functions of the financial management of a firm.

Identify the four main financial objectives of entrepreneurial ventures. Explain the difference between historical and pro forma financial statements. Explain the purpose of an income statement. Explain the purpose of a balance sheet. Explain the purpose of a statement of cash flows. Discuss how financial ratios are used to analyze and interpret a firms financial statements. 8. Discuss the role of forecasts in projecting a firms future income and expenses. 9. Explain what a completely new firm bases its forecasts on. 10. Explain what is meant by the term percent-of-sales method. 11. Discuss the differences among sole proprietorships, partnerships, corporations, and limited liability companies. 12. Explain why most fast-growth entrepreneurial ventures organize as corporations or limited liability companies rather than sole proprietorships or partnerships. 13. Explain the purpose of market segmentation. 14. Describe the importance of selecting a target market. 15. Explain why it is important for a start-up to establish a unique position in its target market. 16. Illustrate the two major ways in which a company builds a brand. 17. Identify the four components of the marketing mix. 18. Contrast cost-based pricing and value-based pricing. 19. Explain the difference between advertising and public relations. 20. Explain how firms can use social media to strengthen their brand and promote their products. 21. Weigh the advantages and disadvantages of selling direct versus selling through intermediaries. 22. Describe the seven-step sales process.

The Marketing Plan The most important part of a business plan is the Marketing Plan. To keep ones business on this plan must be geared toward the businesss missionits product and service lines, its markets, its financial situation and marketing/sales tactics. The business must be aware of its strengths and weaknesses through internal and external analysis and look for market opportunities.

 The business must analyze its products and services from the viewpoint of the customer outside-in thinking. What is the customer looking for and what does the customer want (benefits)? The business must gain knowledge of the marketplace from its customers. The business must analyze its target markets. What other additional markets can the business tap into and are there additional products or services the business can add? The business must know its competition, current and potential. By identifying the competitors strengths and weaknesses the business can improve its position in the marketplace. The business must make decisions on how to apply its resources to the target market(s). The business must utilize the information it has gathered about itself, its customers, its markets, and its competition by developing a written Marketing Plan that provides measurable goals. The business must select marketing/sales tactics that will allow it to achieve or surpass its goals. The business must implement the plan (within an established budget) and then measure its success in terms of whether or not the goals were met (or the extent to which they were). The Marketing Plan is an ongoing tool designed to help the business compete in the market for customers. It should be re-visited, re-worked, and re-created often. MARKETING PLAN VERSUS BUSINESS PLAN Of course, firms consider more than marketing when they make plans and therefore commonly develop business plans as well. Marketing constitutes such an important element of business that business plans and marketing plans coincide in many ways. Both marketing and business plans generally encompass: 1. Executive summary. 2. Company overview. 3. Objectives or goals, usually according to strategic plan and focus. 4. Situation analysis. 5. Market/product/customer analysis. 6. Marketing strategy. 7. Financial projections. 8. Implementation plan. 9. Evaluation and control metrics. However, a business plan also includes details about R&D and operations, and both may feature details about other key topics, depending on the focus of the company and the plan. STRUCTURE OF A MARKETING PLAN Executive Summary The executive summary essentially tells the reader why he or she is reading this marketing planwhat changes require consideration, what new products need discussion, and so forth and suggests possible actions to take in response to the information the plan contains. Company Overview

In this section, the plan provides a brief description of the company, including perhaps its mission statement, background, and competitive advantages. Objectives/Goals This section offers more specifics about why readers are reading the marketing plan. What does the company want to achieve, both overall and with this particular marketing plan? Situation Analysis It describes the strengths, weaknesses, opportunities, and threats facing the company. STP Analysis The analysis proceeds by assessing the market in which the company functions, the products it currently offers or plans to offer in the future, and the characteristics of current or potential customers Marketing Strategy The marketing strategy may be very specific, especially if the plan pertains to, for example, a stable product in a familiar market, or it may be somewhat open to varied possibilities, such as when the firm plans to enter a new market with an innovative product. Financial Projections On the basis of the knowledge already obtained, the marketing plan should provide possible developments and returns on the marketing investments outlined in the marketing strategy. Implementation Plan This portion of the marketing plan includes the timing of promotional activities, when monitoring will take place, and how expansions likely will proceed. Evaluation Metrics and Control The firm must have a means of assessing the marketing plans recommendations; the marketing plan therefore must indicate the methods for undertaking this assessment, whether quantitatively or qualitatively. Appendix The final section(s) offers additional information that might be of benefit, such as a list of key personnel, data limitations that may influence the findings, and suggestions of the plan, relevant legislation, and so forth.

Marketing Research for a new venture: Marketing Plan Outline Key Questions to Answer Mission Vision, Goals 1. What is the business mission & vision? (a successful business has a direction that all staff aligns with, and a clear picture of the future) 2. What are your goals, objectives, strategies and tactics? (What you want to do, why you are doing it and how will you accomplish this) Measurements

3. How will you measure and track your results? (Each goal should be measured and the results recorded in order to track what is working and what is not). Target Market 4. Who is your target Market? (focus on who is your customer and know their needs and wants. Logo, Slogan, Colors, Positioning Statement 5. Do you have a logo? (a logo should be a unique , simple mark that represents and brands your business?) 6. What is your slogan or tag line? ( An original, creative statement that tells your customer what your business is about) 7. What are your businesses colors? (Colors represent feelings and emotions and brands your identity) 8. What is your positioning statement? (A positioning statement sells your product or service, it sets you apart from your competitor. You must target your customer, say what you will do for that customer, how will you do it and why you do it better than your competitors.) Marketing Needs, Demographics, Trends 9. Is there a market demand for your Product or service? (you need to have a market or you dont have a business) 10 . Have you distributed a customers needs assessment/survey relating to your product or service? (you will find out what your customers needs and wants are-The results guide your marketing goals) 11. Who are your potential customers? What is their demographics? (age, income, interests, culture, habits, etc..) 12. Does your product or service keep up with the current trend?( It is important to stay on the cutting edge of technology & know what is important in the minds of your customer) Market Growth 13. How large is your market? ( the number of people using your product or service) 14. What market share do you anticipate? ( your sales, as a percentage of total sales for your product category.) 15. How will you attract and hold your share of the market or grow your market? (By maintaining quality service, adding new services or products, or increase advertising dollars) SWOT Analysis 16. What are your Strengths, Weaknesses, Opportunities and Threats? Competition 17. Who are your competitors? How are their businesses positioned?

(it is key to position your product or service different than your competition) 18. How unique is your business from the competition? How will you differentiate yourself from your competition? ( find your expertise, your benefit) 19. What can your business contribute to the world that no one else can? (this is about the understanding of what your main benefit is to your customer) Your Services/ Benefits 20. What are your services or products? (list your services and keep them short and to the point. Know your products.) 21. What are the benefits for your customer if they choose to use your service or product? (Customer will make their choice based on what they gain by using your service or product.) Your Image 22. How do your customers perceive you? (Their perception might not be what you want them to perceive you as, but this is key to know if your business and marketing is working.) 23. What image do you want to have? (List your values, expertise, quality and incorporate into your marketing then share with staff and implement & practice) Product, Promotion, Placement, Price 24. Is there a demand for your product or service? (people should be interested & your product or service should meet the needs of your customer) 25. How will you promote your business? How do you sell your products or services? ( You need to create awareness so your customers value your service or product, keep in mind top of mind awareness. Use the right message, Use the right media to deliver to the right market. 26. What advertising media placement will you use and How will you connect your product and services with your customer? (Your media placement should be driven by knowing your customer, place ads where your customer will see, or hear them.) 27. How will you Price your products or service? ( you need to cover your costs and make a profit-how you value your product or service also plays a role.) 28. Who will be your best suppliers? (research suppliers inorder to find the one that best fits your needs and your customers) Financials/ Budgets/Forecasts 29. What percentage of your budget is budgeted for marketing? (This includes cost for promotional items, events, tradeshows, sponsorships, media placement, production, website, newsletter, samples, etc...) 30. What are your current financial needs? Next years? In 5 years? (managing your budget is crucial, you may need to hire an accountant but you need to also be part of the process & know what is going on)

Marketing research Marketing research can be defined as the systematic and objective process of gathering, coding, and analyzing data for aid in making marketing decisions. Effective marketing research can help the new venture answer such important questions as: Who is the customer? The customer profile includes demographic characteristics, values and attitudes, buyer and shopping behavior, and buyer location. Customers can be local, regional, national, or international. Understanding the customer is the basis for market segmentation. Who are the players? The competitive profile of existing competitors and potential competitors can indicate the likelihood of retaliation and the nature of the reaction. For example, Minnesota Brewing failed to realize that competitors would cut prices to impede its new products introduction. How can the customer be reached? The distribution networks and channels represent the actual delivery of the product or service. Sometimes the answer to this question falls back on standard industry practices: ship by common carrier, retail channels, in-house sales force. But other times the distribution system is the businessas at Avon, Dominos Pizza, and Amway. Conducting Marketing Research Many entrepreneurs conduct some sort of marketing research in the early stages of new venture creation. Marketing research is also a common practice among small businesses. As many as 40 percent of smaller businesses do marketing research, and the vast majority are satisfied with the results. Marketing research need not be an expensive and time-consuming exercise. Answers to the important marketing questions are frequently well within the grasp of the entrepreneur, and most marketing research can be done by the founders themselves. Conducting marketing research plan is a six-step process. Step 1. Marketing research begins with a definition of the purposes and objectives of the study. The entrepreneur must pinpoint the aspect of the product or market that requires the research: product features, design characteristics, packaging. Knowing what questions need answers will help save time and money and make the results easier to interpret. In this important preliminary stage, the researcher should be clear on the specific nature of the problem. The key for the researcher is to determine what facts, knowledge, and opinions would help the entrepreneurs make a better decision.

Step 2. The next step is to determine the data sources best suited to the objectives of the study. Data come from two types of sources: primary and secondary. Primary data are generated from scratch by the research team. Three common entrepreneurial primary-data projects are the concept test, the product test, and the market test. Concept testing occurs very early in new venture planning, often before the final venture configuration is complete. The purpose of the concept test is to determine whether customers can envision how the product or service will work and whether they would purchase it. The customers respond to a description of the product or service; no physical representation yet exists. After reading the description, customers are asked if they understand the product and if they are likely to purchase. Concept testing can also be used for potential investors, suppliers, or members of the managerial team. Each of these groups is in a position to evaluate the new venture concept, and the entrepreneur can gauge whether the concept is likely to be accepted by these important stakeholders. In addition, feedback from these people at the concept stage enables the entrepreneur to make the type of adjustments and alterations to the concept that can save time, money, and reputation down the road. Product testing It requires having potential customers or investors react to the actual use of a new product or service. The subjects may use the product briefly, even take it home for a more intensive test. Product testing is less abstract than concept testing, and therefore the responses are more reliable. However, some products are so expensive to manufacture, even as prototypes, that product testing becomes unrealistic, and concept testing must suffice. Market testing It is the most complex and expensive approach, but it is also the most realistic and most likely to produce reliable results. In a market test, the product or service is introduced using the full marketing strategy but in a limited area that is representative of the broader market. It is an attempt to duplicate the conditions of actually marketing the product, usually on a limited geographic scale. For ventures with a limited geographic reach anyway, the market test is the actual beginning of business operations. Small manufacturing operations that seek broad product distribution would be candidates for market test research. Each of the three types of test has its costs and benefits, and proper selection requires a fit between the entrepreneurs needs and resources and the type of product or service under consideration. Secondary sources consist of data, information, and studies that others have already completed and published. These sources are useful for planning original data collection activities because they provide in-depth background information on customers and markets. They can be extremely useful for the new ventures marketing research efforts because most are easily accessed and either free or inexpensive. A virtually unlimited volume of information is available from hundreds of sources. Sometimes already-published studies are examples of concept, product, and market tests similar to those the new venture might conduct itself. These are frequently available

in public libraries and always available in the business library of major business schools. Additional resources can be located by searching the Internet. Step 3. The third step in marketing research is to develop the data collection instrument or test. Marketing research data can come from a single source or multiple sources. If a variety of sources are employed, the results are more likely to be valid. For customer studies, personal and telephone interviews, focus groups, and direct observation might be appropriate. Mail studies and surveys are common data sources. Whichever method is chosen in step 2, a properly designed data collection instrument is required. This is self-evident for interviews and surveytype research, but it is also important for secondary data sources. These data sources have the potential to overwhelm the marketing researcher because there are so much data and the researcher will tend to believe that all of it is important. Too much data are as dangerous as too little because of the extra expense and the difficulty of coding and analyzing large data sets. The researcher should have a clear idea of the specific data required before investigating secondary sources. Step 4. The fourth step is the design and choice of the sample. Occasionally the researcher will be able to speak to all of the firms customers or collect data on all of the companies of interest. If this is the case, the researcher has not a sample but a census. Usually, however, there are too many people or companies to speak to, so it is necessary to choose a small proportion of them as representative of the total population. This is a sample. The key issues in sample design are representativeness and reliability. A sample does not have to be large to be representative of the whole population. National polls of voters may contain as few as 1,500 participants representing 60 million voters. Yet these polls are often very accurate. For statistically pure national samples, the venture probably should employ professional marketing researchers. For smaller, do-ityourself efforts, the researchers simply need to ensure that the people they speak to have the information desired. Very small samples of one, two, and three respondents are seldom sufficient. Step 5. The fifth step is data collection. This is the actual execution of the study. Data need to be collected in an unbiased and uniform manner. The correct design of the instrument and of the sample help to ensure this. Additional measures are also needed, such as training survey recorders and telephone interviewers, checking data records for errors, and scanning responses. Step 6. The final stage of a marketing research project is the analysis of the data and the interpretation of the results. Often a final report is written, even when the project is relatively small and the goals

of the study fairly narrow. This ensures that a record exists for the future and that others in the organization can refer to the study as necessary. Many entrepreneurs must do their market research with limited funds. They face a chicken or egg situationthey cannot obtain financing without good market research, and they are unable to afford a large market research effort without financing. But the most expensive research is research conducted in a slovenly way. At best, it will lead to repeating the effort; at worst it will lead to erroneous conclusions. Still, the entrepreneur must conduct good market research on the cheap. Cost-saving recommendations include: . Use the telephone instead of mail surveys and door-to-door interviewing. Avoid research in high-cost cities; test more than one product at a time. Avoid collecting unnecessary data

The difference between a business plan and a contingency plan The difference between a business plan and a contingency plan is that the former is a roadmap for starting a business, while the latter is in place to ensure a business can continue after a disaster. Disasters can include fire, theft, major weather events, or labor strikes. Entrepreneurs are typically the users of business plans, while established companies in business for several years will have a need for a contingency plan. These are the most common differences between a business plan and a contingency plan. Writing a business plan is often the first step to starting a business. Sections include: information on the general idea for the business, steps necessary to find a location and materials for producing goods or services, detailed financial needs, a marketing plan, and other bits of information. While the business plan and a contingency plan may coincide in some parts, they will most often be two completely different documents. Entrepreneurs will usually make a contingency plan that provides information on what actions will be taken if the new business venture struggles during the early months and years of operation. Banks, lenders, and investors are typically the primary users of business plans. These groups make plans to lend money for new businesses in hopes of making an investment from the growth of the business. Eventually, the business plan and contingency plan may grow and mesh together as the business grows in size. CONTINGENCY PLANNING Contingency planning aims to prepare an organization to respond well to an emergency and its potential humanitarian impact. Developing a contingency plan involves making decisions in advance about the management of human and financial resources, coordination and

communications procedures, and being aware of a range of technical and logistical responses. Such planning is a management tool, involving all sectors, which can help ensure timely and effective provision of humanitarian aid to those most in need when a disaster occurs. Time spent in contingency planning equals time saved when a disaster occurs. Effective contingency planning should lead to timely and effective disaster-relief operations. The contingency planning process can basically be broken down into three simple questions: What is going to happen? What are we going to do about it? What can we do ahead of time to get prepared?

Contingency planning is most often undertaken when there is a specific threat or hazard; exactly how that threat will actually impact is unknown. Developing scenarios is a good way of thinking through the possible impacts. On the basis of sensible scenarios it is possible to develop a plan that sets out the scale of the response, the resources needed and the practical management tasks that will be needed. The key elements of a contingency plan are protection, detection, and recoverability. A contingency plan acknowledges that disaster can happen: the organization must design a plan to accommodate the survival of organizational operations in the event of flood, fire, earthquake, electrical disturbance, or other unexpected events that can disrupt the organizations systems. Risk analysis should offer guidance on the likelihood of various contingencies, and in what resources to invest providing such recovery methods as off-site systems, backups and so on. Several references discuss contingency planning. Every effective contingency plan must consider backing up data files. Most critical to the firm is that a contingency plan:

exists; is communicated to employees; and is tested regularly.

A contingency is an unexpected event or situation that affects the financial health, professional image, or market share of a company. It is usually a negative event, but can also be an unexpected windfall such as a huge order. Anything that unexpectedly disrupts a company's expected operation can harm the company even if the disruption is because of a windfall. That is why companies create contingency plans for many possible situations, so company management has a pre-researched plan of action to immediately follow. Some threats usually covered in

contingency plans are crisis management, business continuity, asset security, mismanagement and reorganization. Contingency plans provide focused information for use by internal users. Owners, managers, and supervisors often need the contingency plan for guidance during major disruptions to the business. Large or established companies can incorporate a business plan and contingency plan into their overall corporate governance strategy. Publicly held companies will need these plans in place to assure investors that the company will not be unprepared for natural or manmade disasters or unplanned events. Lenders may also require these plans for companies that operate in dangerous or unstable environments, such as oil, mining or shipping companies, as these businesses are more prone to disruption. Writing a business plan and a contingency plan will also help owners and managers uncover weaknesses in planned business operations. Companies may determine they need to alter operations if they will be unable to continue normal operating procedures during a major disruption. In some cases, the plans are only that plans and may need to be changed or discarded at a moment's notice. Companies may be unable to have contingencies in place for all unforeseen events. Sometimes, changes are needed that were not previously written down in the plan. Crisis Management Many types of crises that can affect the well-being of a company include natural disasters, terrorist attacks, fire in the warehouse, on the job injuries or even angry customers. Plans to deal with crises generally include department by department SWOT analysis (strengths, weaknesses, opportunities, threats) that attempt to identify vulnerabilities and potential challenges. Continuity Plan Business continuity plans cover a range of situations, including the death of a key executive or manager, crisis events that threaten to shut down business operations for an extended period of time, and any other financial situation or unexpected event that threatens to destroy or injure the company. Continuity plans generally involve insurance policies that provide for the cost of keeping the company in operation, and the cost and hiring of consultants that are specialists in solving the types of problems besetting the company. Asset Security Theft or destruction of intellectual property, such as trade secrets or computer programs, key machinery or equipment, or any other valuable assets a company needs for its operations and maintenance of its market position are generally covered by a security plan. This also includes

the security of the company's internal computer network and confidential files. A security plan attempts to block any negative contingencies that might occur, but when they do, the company's contingency plan prescribes backup of certain customer and corporate records, and intellectual assets. Legal strategies are also included in a contingency plan for the purpose of helping to mitigate the damage created by such events. Mismanagement Fraud, theft, operational errors, mismanagement and personal scandal are all crises that require special public relations strategies as well as various types of insurance. The handling of these crises involves careful attention to legal considerations and liability to the shareholders and if not handled immediately with efficiency and confidence, they can ruin the company's professional image and ability to do business. For this reason, companies create a system of checks and balances to prevent such problems in addition to creating detailed action plans to deal with these contingencies. Reorganization After the worst has happened, the company's contingency plan also covers how the company will re-establish normal operations and reorganize to limit any future contingencies. Reorganization to meet new challenges is important whether the company is dealing with negative events or the unexpected pressure of having to rapidly expand production to function in spite of the demands of a windfall order. Factors That Influence Contingency Planning A small business can be negatively impacted by all sorts of changes or events, from natural disasters to entrance of new competitors into a market. A contingency plan is a document that outlines how a business will respond to such emergencies if they happen to occur. Contingency planning is the process of creating a contingency plan. Goals One of the primary factors that influences contingency planning are the goals of the business owner or owners. The way business owners choose to respond to different contingencies will reflect their ultimate goal for the business. For example, a business owner might have the goal of selling his company in the future, so he might outline the circumstances under which he will sell the business or how he will respond to purchase offers in a contingency plan.

Government Regulations Government regulations can have a large impact on businesses, and a contingency plan might include instructions for how the company should deal with changing regulations. For example, if the government increases taxes on certain types of business operations, it could reduce the profitability of those operations, prompting a business to shift its focus toward more profitable activities. Profitability A business owner might decide to pursue different courses of actions in response to certain contingencies based on the profitability of the company. For example, a business owner might be more willing to sell his company if turns out not to be as profitable as he planned. Business owners might also plan to shut down a business in the future if it fails to make a profit within a certain time frame. Considerations The amount of time spent on brainstorming possible contingencies and how to deal with them can influence the thoroughness of contingency planning. If managers spend an inadequate amount of time planning for contingencies or thinking about the possible responses to contingencies, they might fail to plan for certain events or choose the best way to respond to contingencies. Companies not prepared to deal with contingencies might be slower to respond to opportunities and threats. THE ORGANIZATIONAL PLAN DEVELOPING THE MANAGEMENT TEAM Potential investors are interested in the management team and its ability and commitment to the new venture. Investors usually demand that the management team not operate the business parttime while employed full time elsewhere. It is also unacceptable for the entrepreneurs to draw a large salary. The entrepreneur should consider the role of the board of directors and/or a board of advisors in supporting the management of the new venture. LEGAL FORMS OF BUSINESS There are three basic legal forms and one new form of businesses. The three basic forms are: Proprietorship. Partnership. Corporation A new form is the limited liability company, which is now possible in most states.

The entrepreneur should evaluate the pros and cons of each of the legal forms prior to submitting a business plan. He should determine the priority of several factors discussed below. It is also necessary to consider intangibles such as image to suppliers, existing clients, and prospective customers.

Types of Business Organization It is important that the business owner seriously considers the different forms of business organizationtypes such as sole proprietorship, partnership, and corporation. Which organizational form is most appropriate can be influenced by tax issues, legal issues, financial concerns, and personal concerns. For the purpose of this overview, basic information is presented to establish a general impression of business organization. Sole Proprietorship A Sole Proprietorship consists of one individual doing business. Sole Proprietorships are the most numerous form of business organization in the United States, however they account for little in the way of aggregate business receipts. Advantages

Ease of formation and dissolution. Establishing a sole proprietorship can be as simple as printing up business cards or hanging a sign announcing the business. Taking work as a contract carpenter or freelance photographer, for example, can establish a sole proprietorship. Likewise, a sole proprietorship is equally easy to dissolve. Typically, there are low start-up costs and low operational overhead. Ownership of all profits. Sole Proprietorships are typically subject to fewer regulations. No corporate income taxes. Any income realized by a sole proprietorship is declared on the owner's individual income tax return.

Disadvantages

Unlimited liability. Owners who organize their business as a sole proprietorship are personally responsible for the obligations of the business, including actions of any employee representing the business. Limited life. In most cases, if a business owner dies, the business dies as well. It may be difficult for an individual to raise capital. It's common for funding to be in the form of personal savings or personal loans.

The most daunting disadvantage of organizing as a sole proprietorship is the aspect of unlimited liability. An advantage of a sole proprietorship is filing taxes as an individual rather than paying corporate tax rates. Some hybrid forms of business organization may be employed to take advantage of limited liability and lower tax rates for those businesses that meet the requirements. These include S Corporations, and Limited Liability Companies (LLC's). Where S-Corps are a Federal Entity, LLC's are regulated by the various states. LLC's give the option for profits from the business to pass through to the owner's individual income tax return. Partnership A Partnership consists of two or more individuals in business together. Partnerships may be as small as mom and pop type operations, or as large as some of the big legal or accounting firms that may have dozens of partners. There are different types of partnerships general partnership, limited partnership, and limited liability partnershipthe basic differences stemming around the degree of personal liability and management control. Advantages

Synergy. There is clear potential for the enhancement of value resulting from two or more individuals combining strengths. Partnerships are relatively easy to form, however, considerable thought should be put into developing a partnership agreement at the point of formation. Partnerships may be subject to fewer regulations than corporations. There is stronger potential of access to greater amounts of capital. No corporate income taxes. Partnerships declare income by filing a partnership income tax return. Yet the partnership pays no taxes when this partnership tax return is filed. Rather, the individual partners declare their pro-rata share of the net income of the partnership on their individual income tax returns and pay taxes at the individual income tax rate.

Disadvantages

Unlimited liability. General partners are individually responsible for the obligations of the business, creating personal risk. Limited life. A partnership may end upon the withdrawal or death of a partner. There is a real possibility of disputes or conflicts between partners which could lead to dissolving the partnership. This scenario enforces the need of a partnership agreement.

As pointed out, unlimited liability exists for partnerships just as for sole proprietorships. One way to alleviate this risk is through Limited Liability Partnerships (LLP's). As with LLC's, LLP's may offer some tax advantages while providing some risk protection for owners.

Corporation A corporation is a legal entity doing business, and is distinct from the individuals within the entity. Public corporations are owned by shareholders who elect a board of directors to oversee primary responsibilities. Along with standard, for-profit corporations, there are charitable, notfor-profit corporations. Advantages

Unlimited commercial life. The corporation is an entity of its own and does not dissolve when ownership changes. Greater flexibility in raising capital through the sale of stock. Ease of transferring ownership by selling stock. Limited liability. This limited liability is probably the biggest advantage to organizing as a corporation. Individual owners in corporations have limits on their personal liability. Even if a corporation is sued for billions of dollars, individual shareholder's liability is generally limited to the value of their own stock in the corporation.

Disadvantages

Regulatory restrictions. Corporations are typically more closely monitored by governmental agencies, including federal, state, and local. Complying with regulations can be costly. Higher organizational and operational costs. Corporations have to file articles of incorporation with the appropriate state authorities. These legal and clerical expenses, along with other recurring operational expenses, can contribute to budgetary challenges. Double taxation. The possibility of double taxation arises when companies declare and pay taxes on the net income of the corporation, which they pay through their corporate income tax returns. If the corporation also pays out dividends to individual shareholders, those shareholders must declare that dividend income as personal income and pay taxes at the individual income tax rates. Thus, the possibility of double taxation.

Ownership In the proprietorship, the owner has full responsibility for operations. In a partnership, there may be owners with general or with limited ownership. In the corporation, ownership is reflected by ownership of shares of stock. Liability of Owners

To satisfy any outstanding debts of the business, creditors may seize personal assets of the owners in proprietorships or regular partnerships. In a partnership the general partners share the amount of personal liability equally, regardless of their capital contribution. In a limited partnership, the limited partners are liable only for their capital contributions. The proprietor and general partners are liable for all aspects of the business. Since the corporation is a legal entity that is taxable and absorbs liability, the owners are liable only for the amount of their investment. Costs of Starting a Business The more complex the organization, the more expensive it is to start. The least expensive is the proprietorship, where the only costs may be for filing for a business name. In a partnership a partnership agreement is needed, in addition this requires legal advice and should explicitly convey all parties' responsibilities, rights and duties. A limited partnership may be more complex to form because it must comply strictly with statutory requirements. The corporation can be created only by statute. The owners are required to register the name and articles of incorporation and meet state statutory requirements. Filing fees and an organization tax may be incurred. Legal advice is necessary to meet the statutory requirements. Continuity of Business In a sole proprietorship, the death of the owner results in the termination of the business. In a limited partnership, the death of a limited partner has no effect on the existence of the Partnership. A limited partner may be replaced, depending on the partnership agreement. If a general partner in a limited partnership dies or withdraws, the limited partnership is terminated unless the partnership agreement specifies otherwise. In a partnership, the death or withdrawal of one of the partners results in termination of the partnership, but this can be overcome by the partnership agreement. a. Usually the partnership will buy out the withdrawn partner's share at a predetermined price.

b. Another option is to have a member of the withdrawn partner's family take over as partner. The corporation has the most continuity, as the owner's death or withdrawal has no impact on continuity of the business, unless it is a closely held corporation Transferability of Interest Each of the forms of business offers different advantages as to the transferability of interest. In a proprietorship, the entrepreneur has the right to sell any assets. In the limited partnership, the limited partners can sell their interests at any time without consent of the general partners. A general partner cannot sell any interest unless specified in the partnership agreement. In a corporation shareholders may transfer their shares at any time. In the S Corporation, the transfer of interest can occur only as long as the buyer is an individual. Capital Requirements The need for capital during the early months can become one of the most critical factors in keeping a new venture alive. For a proprietorship, any new capital can only come from loans or by additional personal contributions. Often an entrepreneur will take a second mortgage as a source of capital. Any borrowing from an outside investor may require giving up some equity. Failure to make payments can result in foreclosure and liquidation of the business. In the partnership, loans may be obtained from banks or additional funds may be contributed by each partner, but both methods require change in the partnership agreement. In the corporation, new capital can be raised by: a. Stock may be sold as either voting or nonvoting. b. Bonds may be sold. c. Money may also be borrowed in the name of the corporation. Management Control

The entrepreneur will want to retain as much control as possible over the business. In the proprietorship, the entrepreneur has the most control and flexibility in making business decisions. In a partnership the majority usually rules unless the partnership agreement states otherwise. In a limited partnership the limited partners have no control over business decision. Control of day-to-day business is in the hands of management. Major long-term decisions may require a vote of the major stockholders.

As the corporation increases in size, the separation of management and control is probable. Stockholders can indirectly affect the operation by electing someone to the board of directors Distribution of Profits and Losses Proprietors receive all profits from the business. In the partnership, the distribution of profits and losses depends on the partnership agreement. Corporations distribute profits through dividends to stockholders. Attractiveness for Raising Capital In both the proprietorship and partnership, the ability to raise capital depends on the success of the business and personal capability of the entrepreneur. Because of its limitations on personal liability, the corporation is the most attractive form for raising Capital Types of Organizational Designs Organizational designs fall into two categories, traditional and contemporary. Traditional designs include simple structure, functional structure, and divisional structure. Contemporary designs would include team structure, matrix structure, project structure, boundaryless organization, and the learning organization. I. Traditional Designs 1. Simple Structure

A simple structure is defined as a design with low departmentalization, wide spans of control, centralized authority, and little formalization. This type of design is very common in small start up businesses. For example in a business with few employees the owner tends to be the manager and controls all of the functions of the business. Often employees work in all parts of the business and dont just focus on one job creating little if any departmentalization. In this type of design there are usually no standardized policies and procedures. When the company begins to expand then the structure tends to become more complex and grows out of the simple structure. 2. Functional Structure A functional structure is defined as a design that groups similar or related occupational specialties together. It is the functional approach to departmentalization applied to the entire organization.

3. Divisional Structure A divisional structure is made up of separate, semi-autonomous units or divisions. Within one corporation there may be many different divisions and each division has its own goals to accomplish. A manager oversees their division and is completely responsible for the success or failure of the division. This gets managers to focus more on results knowing that they will be held accountable for them. II. Contemporary Designs 1. Team Structure A team structure is a design in which an organization is made up of teams, and each team works towards a common goal. Since the organization is made up of groups to perform the functions of the company, teams must perform well because they are held accountable for their performance. In a team structured organization there is no hierarchy or chain of command. Therefore, teams can work the way they want to, and figure out the most effective and efficient way to perform their tasks. Teams are given the power to be as innovative as they want. Some teams may have a group leader who is in charge of the group. 2. Matrix Structure A matrix structure is one that assigns specialists from different functional departments to work on one or more projects. In an organization there may be different projects going on at once. Each specific project is assigned a project manager and he has the duty of allocating all the resources needed to accomplish the project. In a matrix structure those resources include the different functions of the company such as operations, accounting, sales, marketing, engineering, and human resources. Basically the project manager has to gather specialists from each function

in order to work on a project, and complete it successfully. In this structure there are two managers, the project manager and the department or functional manager. 3. Project Structure A project structure is an organizational structure in which employees continuously work on projects. This is like the matrix structure; however when the project ends the employees dont go back their departments. They continuously work on projects in a team like structure. Each team has the necessary employees to successfully complete the project. Each employee brings his or her specialized skill to the team. Once the project is finished then the team moves on to the next project. 4. Autonomous Internal Units Some large organizations have adopted this type of structure. That is, the organization is comprised of many independent decentralized business units, each with its own products, clients, competitors, and profit goals. There is no centralized control or resource allocation. 5. Boundaryless Organization A boundaryless organization is one in which its design is not defined by, or limited to, the horizontal, vertical, or external boundaries imposed by a predefined structure. In other words it is an unstructured design. This structure is much more flexible because there is no boundaries to deal with such as chain of command, departmentalization, and organizational hierarchy. Instead of having departments, companies have used the team approach. In order to eliminate boundaries managers may use virtual, modular, or network organizational structures. In a virtual organization work is outsourced when necessary. There are a small number of permanent employees, however specialists are hired when a situation arises. Examples of this would be subcontractors or freelancers. A modular organization is one in which manufacturing is the business. This type of organization has work done outside of the company from different suppliers. Each supplier produces a specific piece of the final product. When all the pieces are done, the organization then assembles the final product. A network organization is one in which companies outsource their major business functions in order to focus more on what they are in business to do. 6. Learning Organization A learning organization is defined as an organization that has developed the capacity to continuously learn, adapt, and change. In order to have a learning organization a company must have very knowledgeable employees who are able to share their knowledge with others and be able to apply it in a work environment. The learning organization must also have a strong organizational culture where all employees have a common goal and are willing to work together through sharing knowledge and information. A learning organization must have a team design and great leadership. Learning organizations that are innovative and knowledgeable create leverage over competitors.

What is Job Design? Meaning Job design means to decide the contents of a job. It fixes the duties and responsibilities of the job, the methods of doing the job and the relationships between the job holder (manager) and his superiors, subordinates and colleagues. Job design also gives information about the qualifications required for doing the job and the reward (financial and non-financial benefits) for doing the job. Job design is mostly done for managers' jobs. While designing the job, the needs of the organization and the needs of the individual manager must be balanced. Needs of the organization include high productivity, quality of work, etc. Needs of individual managers include job satisfaction. That is, they want the job to be interesting and challenging. Jobs must not be made highly specialized because they lead to boredom. It is believed that a well designed job motivates the employees for higher level of performance. Poorly designed jobs often result in boredom and employee frustration, high turnover, reduced motivation, low level of productivity and increase in operating cost. To avoid such negative consequences, the jobs have to be designed systematically and scientifically Thus, job design is a systematic process of organizing work into the tasks required to perform a specific job. It defines the contents and the way the tasks are combined to complete a job. Job design integrates the tasks, function and relationship in order to achieve certain organizational objectives. It is a logical sequence of job analysis which provides job-related data and skill requirement of the incumbent. There are three important influences of job design, they are- work flow analysis, business strategy and organizational structure. Job design is a process through which job related data are revealed and the contents as well as methods of performing different tasks are specified. It plays a key role in bringing organizational productivity and employee motivation at work. Therefore, job design is a process by which required and job-related information is gathered to determine different tasks to be included in the job. The manner in which the work activities are scheduled can influence the motivational level of employees. Hence it is an essential tool of human resource management which helps to enhance organizational productivity and challenges at work. A brief description of steps in job design is as follows:

1. Specification of tasks: This is the first step of job design under which the individual task is specified. It means different tasks to be included in a job are categorized and specified.

2. Combination of task: After specifying the individual tasks to be included in a job, they are combined into a group and assigned to individual employee or group for performance.

3. Specification of method: Under this step, different methods of performance of each tasks are identified and determined. Factors Affecting Job Design The guidelines influencing or factors affecting job design are depicted below. 1. Proper scope of job The scope of the job should be proper. If the scope is narrow (less), then the job will not be challenging. It will not give an opportunity for development. The manager will not get satisfaction after completing an easy job. If the scope of the job is very wide, then the manager will not be able to handle it properly. This will cause stress, frustration and loss of control. Therefore, scope of the job must be balanced and proper. 2. Full-time challenge of the job The job should be so challenging that it takes up the full-time and effort of the manager. So, the service of the manager must be fully utilized. If not, the manager will have a lot of free time. He will use this free time to interfere in the work of his subordinates. This will cause problems and conflicts because subordinates do not like unnecessary interference from their superiors. 3. Managerial skills The skills of the manager should be considered before designing his job. All managers do not have equal skills. So jobs should be designed after considering the skills of the manager. So, a manager having a high level of skill should be given very challenging jobs while a manager having a low level of skill should be given fewer challenging jobs. Jobs must be made flexible so that it can be changed according to the skills of the manager. 4. Organizations requirements Jobs must be designed according to the requirements of the organization. We cannot use the same job design for all organizations.

5. Individual likes and dislikes People have different likes and dislikes. Some people like to work alone while some people prefer to work in groups. Some people want to do only planning and decision making while other people like to implement these plans and decision. So, individual likes and dislikes must be considered while designing the job. 6. Organizational structure Organizational structure also affects the job design. Individual jobs must fit into the organizations structure. 7. Technology The level of technology used by the organization also affects the job design. An organization having a high level of technology will have different job designs compared to an organization having a low level of technology. Importance and Benefits Of Job Design Job design is a very important function of staffing. If the jobs are designed properly, then highly efficient managers will join the organization. They will be motivated to improve the productivity and profitability of the organization. However, if the jobs are designed badly, then it will result in absenteeism, high labor turnover, conflicts, and other labor problems. Job design is important for an organization to perform the organizational activities in the most efficient and effective manner. It provides the required information about the incumbent and also specifies the way of performing the tasks. Therefore, job design is very important for the organization due to its benefits as follows: 1. Organizational Design The job design specifies the contents and procedures of performing the task in the organization. Hence, it helps in designing organizational structure. The organizational structure is determined by the job design process. It plays a key role in assessing the need and requirement of organizational structure.. Job design also specifies organizational culture, norms and values that its members need to follow to achieve organizational goals.

2. Structure Of Competent Employee

Job design is a systematic approach of providing job-related data and information on skills, knowledge and ability of the incumbent to perform the task. On the basis of the information provided by it, the job description and job specification schedule are prepared, which helps to the best suited candidate for the job. It provides a milestone to select the competent employee who is capable of performing the task well in the organization. 3. Motivation And Commitment Of Employees Job design makes the work more interesting and challenging, which motivates the employees for higher level of performance. The challenging and interesting job provides better pay for the employees which inspires them for better job performance. Along with motivation job design also brings high degree of commitment in them towards organizational objectives. This helps to increase organizational productivity and employee satisfaction at work. 4. Environmental Adaptation An organization is operated in a dynamic environment. Hence, any change in the environmental forces can have direct impact upon organizational performance. Therefore, a systematic job design process tries to address the change that has occurred in the organizational environment. The process of job design and job redesign is prepared in such a way that it adapts the change in the environmental forces. 5. Labor Relation A well prepared job design brings a harmonious relation between employees and management. On the other hand, poorly prepared job design creates employee-grievances, in disciplinary actions, greater employee turnover, greater absenteeism and conflict. 6. Quality Of Work Life A quality of work life is understood as an efficient relationship between employees and organizational working environment. A properly prepared job design leads to improvements in quality of work life. With a good design of work schedules, people see a growing future in organization which ultimately leads to high motivation at work and a positive change in their thoughts and beliefs. Finally, these changes will have a direct impact upon the quality of work life.

7. Organizational Productivity The job design specifies the contents and working procedures of how the task is performed. This leads to a positive change in job performance and job analysis. As a result of which, the organizational productivity will be enhanced through efficient work performance.

Methods Of Job Design Job design methods seek how to design jobs. Jobs can be designed to range them from very simple to highly complex ones depending on the skill requirement to perform the job. The well known methods of job design are as follows: 1. Classical Approach The classical approach of job design is greatly influenced by the work of F.W Taylor. From his work, time and motion study, he realized that by bringing a proper match between labor, tools and tasks it would be possible to increase productivity. Hence under this approach, the job is designed in the basis of organizational requirements. Its purpose is to simplify the tasks and break them down into small work units. The primary focus of this approach is planning, standardizing and improving human effort at work in order to optimize organizational productivity. Different methods under classical approach are as follows: * Work Simplification: It is a process through which the job is broken down into small work units. * Job Rotation: It is a process of transferring workers from one job to another or from one work unit to another without disrupting the flow of work. * Job Enlargement: It refers to a process of expanding the job's duties. It increases a number of different tasks performed by an individual in a single job. 2. Socio-technical Approach This is another important approach of job design in which social and technical aspects of the organization are considered. Under it, jobs are designed according to individual needs and organizational requirements. Furthermore, this approach considers both job-related technical systems as well as accompanying social forces of the job. It means it includes an entire job situation along with organizational and social factors while designing jobs. This approach leads to development of self-managed work teams in organization. The technical and social aspects of job are analyzed in order to create jobs which have supportive relationship. Moreover, it requires a combined efforts of employees, supervisors, and union representatives to design and redesign the jobs under this approach. Hence, it is situational approach as it assesses the technical requirements and social surroundings of the job. 3. Behavioral Approach Behavioral approach is concerned with behavioral factors such as: autonomy, variety, task identity, task significance, feedback mechanism etc. It means the above mentioned behavioral factors are analyzed and considered while designing the jobs under this approach. The different behavioral methods are as follows:

* Job Enrichment: It is concerned with the process of putting specialized tasks together so that the individual who is assigned with the task is responsible to perform the whole task. * Job Characteristics: This method states that job characteristics affect the job designing process. It focuses on job redesign, work structuring, job enrichment, and so on to improve organizational productivity and quality of work life of employees. * Autonomous Team: It is a group of workers in which they solve problems, implement solution and take full responsibility for outcomes. They are self-directed and self-managed work groups who perform related or interdependent tasks. * Modified Work Schedule: It is a technique of job design through which the working schedules, timing, work week etc. are rescheduled as per the convenience of the workers. Manpower Planning Manpower Planning which is also called as Human Resource Planning consists of putting right number of people, right kind of people at the right place, right time, doing the right things for which they are suited for the achievement of goals of the organization. Human Resource Planning has got an important place in the arena of industrialization. Human Resource Planning has to be a systems approach and is carried out in a set procedure. The procedure is as follows: 1. 2. 3. 4. Analyzing the current manpower inventory Making future manpower forecasts Developing employment programmes Design training programmes

Steps in Manpower Planning 1. Analyzing the current manpower inventory- Before a manager makes forecast of future manpower, the current manpower status has to be analyzed. For this the following things have to be noted Type of organization Number of departments Number and quantity of such departments Employees in these work units Once these factors are registered by a manager, he goes for the future forecasting. 2. Making future manpower forecasts- Once the factors affecting the future manpower forecasts are known, planning can be done for the future manpower requirements in several work units.

The Manpower forecasting techniques commonly employed by the organizations are as follows: Expert Forecasts: This includes informal decisions, formal expert surveys and Delphi technique. ii. Trend Analysis: Manpower needs can be projected through extrapolation (projecting past trends), indexation (using base year as basis), and statistical analysis (central tendency measure). iii. Work Load Analysis: It is dependent upon the nature of work load in a department, in a branch or in a division. iv. Work Force Analysis: Whenever production and time period has to be analysed, due allowances have to be made for getting net manpower requirements. v. Other methods: Several Mathematical models, with the aid of computers are used to forecast manpower needs, like budget and planning analysis, regression, new venture analysis. 3. Developing employment programmes- Once the current inventory is compared with future forecasts, the employment programmes can be framed and developed accordingly, which will include recruitment, selection procedures and placement plans. 4. Design training programmes- These will be based upon extent of diversification, expansion plans, development programmes,etc. Training programmes depend upon the extent of improvement in technology and advancement to take place. It is also done to improve upon the skills, capabilities, knowledge of the workers. Importance of Manpower Planning 1. Key to managerial functions- The four managerial functions, i.e., planning, organizing, directing and controlling are based upon the manpower. Human resources help in the implementation of all these managerial activities. Therefore, staffing becomes a key to all managerial functions. 2. Efficient utilization- Efficient management of personnels becomes an important function in the industrialization world of today. Seting of large scale enterprises require management of large scale manpower. It can be effectively done through staffing function. 3. Motivation- Staffing function not only includes putting right men on right job, but it also comprises of motivational programmes, i.e., incentive plans to be framed for further participation and employment of employees in a concern. Therefore, all types of incentive plans becomes an integral part of staffing function. 4. Better human relations- A concern can stabilize itself if human relations develop and are strong. Human relations become strong trough effective control, clear communication, effective supervision and leadership in a concern. Staffing function also looks after i.

training and development of the work force which leads to co-operation and better human relations. 5. Higher productivity- Productivity level increases when resources are utilized in best possible manner. higher productivity is a result of minimum wastage of time, money, efforts and energies. This is possible through the staffing and it's related activities ( Performance appraisal, training and development, remuneration) Need of Manpower Planning Manpower Planning is a two-phased process because manpower planning not only analyses the current human resources but also makes manpower forecasts and thereby draw employment programmes. Manpower Planning is advantageous to firm in following manner: 1. Shortages and surpluses can be identified so that quick action can be taken wherever required. 2. All the recruitment and selection programmes are based on manpower planning. 3. It also helps to reduce the labour cost as excess staff can be identified and thereby overstaffing can be avoided. 4. It also helps to identify the available talents in a concern and accordingly training programmes can be chalked out to develop those talents. 5. It helps in growth and diversification of business. Through manpower planning, human resources can be readily available and they can be utilized in best manner. 6. It helps the organization to realize the importance of manpower management which ultimately helps in the stability of a concern. Obstacles in manpower planning: Following are the main obstacles that organizations face in the process of manpower planning: 1. Under Utilization of Manpower: The biggest obstacle in case of manpower planning is the fact that the industries in general are not making optimum use of their manpower and once manpower planning begins, it encounters heavy odds in stepping up the utilization. 2. Degree of Absenteeism: Absenteeism is quite high and has been increasing since last few years. 3. Lack of Education and Skilled Labour: The extent of illetracy and the slow pace of development of the skilled categories account for low productivity in employees. Low productivity has implications for manpower planning. 4. Manpower Control and Review: a. Any increase in manpower is considered at the top level of management b. On the basis of manpower plans, personnel budgets are prepared. These act as control mechanisms to keep the manpower under certain broadly defined limits.

c. The productivity of any organization is usually calculated using the formula: Productivity = Output / Input . But a rough index of employee productivity is calculated as follows: Employee Productivity = Total Production / Total no. of employees d. Exit Interviews, the rate of turnover and rate of absenteesim are source of vital information on the satisfaction level of manpower. For conservation of Human Resources and better utilization of men studying these condition, manpower control would have to take into account the data to make meaningful analysis. e. Extent of Overtime: The amount of overtime paid may be due to real shortage of men, ineffective management or improper utilization of manpower. Manpower control would require a careful study of overtime statistics. Few Organizations do not have sufficient records and information on manpower. Several of those who have them do not have a proper retrieval system. There are complications in resolving the issues in design, definition and creation of computerized personnel information system for effective manpower planning and utilization. Even the existing technologies in this respect is not optimally used. This is a strategic disadvantage. Financial Plan: Breakeven analysis and profit planning dealt with an important aspect of managing a business: that of planning. The planning process, ideally, begins with some idealistic objective, such as producing the best product at the lowest cost. This objective, in turn, dictates that certain long-term objectives be achieved, such as developing an innovative product that can be produced in an efficient manner. Similarly, the long-term objectives require that certain short-term objectives be realized, such as generating sufficient cash flows to fund the research and development required to come up with the innovative product.

Planning

Short-term Objectives

Intermediate-term Objectives

Long-term Objectives

Implementing Conversely, realizing these goals must occur in the reverse order: if a positive cash flow is not generated, there will be no funding for R&D to develop the product that you want to produce. Breakeven analysis and profit planning are short-term planning tools. In fact, many businesses do not breakeven for several years, let alone show a profit (witness many of the Internet companies). There are other tools available for evaluating such endeavors. Undoubtedly, one of the short-term objectives of such companies is to secure the financing sources required to survive until such time as a profit is realized. Critical to the success of any business, is the planning of the cash flows; i.e., cash budgeting. A budget is a plan and budgeting refers to planning. You budget your time just as you budget your cash flows. Planning is an integral part of a management-by-objective style of business management. The alternative is management-by-crisis wherein all of ones time is spent putting out fires a reactive approach to management rather than a proactive approach. The budget provides the framework by which management intends to achieve its short-term goals. For the financial manager, the cash budget aids in the performance of the job of making sure that funds are available when needed as well as planning for the efficient use of any surplus funds that exist. The ability to anticipate the financial needs of the firm allows time to find sources of funds. The complexity of the cash flows can be illustrate by the use of a simple diagram that illustrates the nature of the numerous cash inflows and outflows that confront a firm. Let the Cash Reserve box represent the checking account of the company: Into the Cash Reserve go intermittent inflows of funds from lenders and shareholders, and money flows back in the form of interest and principal payments to lenders and dividends to stockholders. There are intermittent outflows of funds to pay wages, taxes and insurance as well. Occasionally, there are tax refunds, payment on insurance claims, etc., that result in cash flows returning to the company. Near Cash (or Near Money) represents investment in short-term marketable securities so that cash surpluses can earn a rate of return. This is a where short-term surpluses of cash are stored. Money is spent to purchase fixed assets, which are later sold when it is time to replace them. Accounts payable must be paid. The accounts payable arise from inventory purchases which are sold to customers on either a cash basis or on credit, in which case the receivables must be collected. There are returns by our customers to us, as well as our returns to suppliers, in which case refunds are paid.

As the number of suppliers, customers, lenders, etc., multiplies so does the complexity of the cash flows. Stories abound of companies that are showing a profit (in the accounting sense) but ultimately fail due to the lack of cash flow to make loan payments, pay suppliers, pay wages, taxes, and so on.
Intermittant Inflows (Debt, Equity) Intermittant Outflows (Taxes, Insurance, Wages) Fixed Assets

Near Cash

Cash Reserve Accounts Receivable

Accounts Payable Inventory

Cash Sales Credit Sales

The Cash Budget The cash budget in finance always starts with detailing the receipts of cash. Typically, receipts are comprised of cash sales and the collection of accounts receivable. As indicated in the text, even the collection of receivables may require a separate worksheet. Note also that if there is a 5% bad debt expense anticipated, the collections should only add up to 95%. That is,

bad debt expense is not a cash outflow, it is a receipt that is not collected and, thus, not an item that appears on the cash budget since the budget only represents cash inflows and outflows. Other sources of cash inflows, such as the sale of stock that is anticipated, would also be reflected under the Receipts section of the cash budget. The next category is Disbursements where we list any and all cash payments that are to be made including salaries, rent, interest and principal payments, dividends, purchases of fixed assets, but NOT depreciation (since it is not cash) any cash outflow that is to be made. The difference between the Receipts and Disbursements is the Net Cash Gain (Loss). The various periods for which a cash budget is being prepared can be all be done at the same time up to this point. Beyond this point in the budgeting process, however, the periods must be taken sequentially since each period depends upon the previous one. Receipts Cash Sales Collection of A/R Total Receipts March 20 75 95 April 30 45 75

Disbursements Wages Payment of A/P Rent Insurance Debt Payment 35 50 15 10 0 0 115 (40) (5) (45) (5) 35 40 15 0 20 5

Dividends Total Disbursements 110 Net Cash Gain (Loss) Plus: Beginning Cash Cumulative Cash Less: Minimum Cash (5) (15)

10

(5)

Surplus (Deficit)

(10)

(50)

After calculating the Net Cash Gain (Loss) for each period, the Beginning Cash is added to determine the Cumulative Cash (or Ending Cash) on hand at the end of the period. This amount becomes the Beginning Cash for the following period. From the Cumulative Cash figure, we subtract the Minimimum Cash that we desire to have on hand. This minimum could be a safety stock of cash or it could be a required amount that a lender mandates we keep available (and probably restricted in use). The remaining amount after subtracting the Minimum Cash Required is our Surplus (Deficit).

Unlike the cash budgets you have probably seen before, this is a cumulative cash budget. Notice that the Surplus (Deficit) is a cumulative amount that indicates what the total position of the firm is at any point in time. Thus, our cash budget indicates that we will need $10 in financing for March and an additional $40 in April, for a total of $50 in financing requirements. The budget shows us our total financing requirements so that we can go to a bank, for example, and request a line of credit of $50 to cover our financing requirements. (Ideally, of course, the budget will also show how we intend to repay the loan as well.) The cumulative cash budget allows us to determine our total financial requirements in advance, allowing us time to find a willing supplier of funds. The only thing worse than having to find funding at the last minute, is having to go back and ask for more money at a later date. The lender will know in advance the level of commitment that must be made and, if we are turned down, we have time to line up another source of funds.

WORKING CAPITAL MANAGEMENT Meaning of Finance: Finance is the Art & Science of Managing Money . It is the Art of passing currency from hand to hand until it finally disappears Types & Sources of Finance Long Term Sources of Finance - Finance required to meet Capital Expenditure. Also, known as Fixed Capital Finance Short Term Sources of Finance - Finance required to meet day-to-day Business requirements. Also, known as Working Capital Meaning of Working capital

Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash requirements of its operations Working Capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities) .It refers to the amount of Current Assets that exceeds Current Liabilities (i.e. CA CL) - Working Capital refers to that part of the firms Capital, which is required for Financing Short Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories. -Working Capital is also known as Revolving or Circulating Capital or Short-Term Capital Concepts of Working Capital:(1) On the Basis of Concept: (i) Gross Working Capital (ii) Net Working Capital (2) On the Basis of time or Need:(i) Permanent Working Capital (ii) Temporary Working Capital I. On the Basis of Concept: (1) Gross Working Capital Concept (2) Net Working Capital Concept. (1) Gross working capital: Gross working capital; refers to firm's investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, shortterm securities, debtors, bill receivables and stock. According to this concept, working capital means Gross working Capital which is the total of all current assets of a business. It can be represented by the following equation: Gross Working Capital = Total Current Assets Definitions favoring this concept are:According to Mead, Mallot and Field : "Working Capital means total of Current Assets". (2) Net Working Capital Concept: Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payables, and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative Net working capital occurs when current liabilities are in excess of current assets.

Net Working Capital = Current Assets - Current Liabilities II. On the basis of time or need (1) Permanent or Fixed Working Capital:The need for working capital fluctuates from time to time. However, to carry on day-to-day operations of the business without any obstacles, a certain minimum level of raw materials, work-in-progress, finished goods and cash must be maintained on a continuous basis. The amount needed to maintain current assets on this minimum level is called permanent or regular working capital. The amount involved as permanent working capital has to be meet from long-term sources of finance, e.g. (i) Capital (ii) Debentures (iii) Long-term loans. (2) Temporary or Variable or Fluctuating Working Capital:Depending upon the changes in production and sales, the need for working capital, over and above the permanent level of working capital is called temporary, fluctuating or variable working capital. It may be two types:(a)Seasonal-Due to seasonal changes, level of business activities is higher than normal during some months of year and therefore additional working capital will be required along with the permanent working capital. It is so because during peak season, demand rises and more stock is to be maintained to meet the demand . (b) Special- Additional doses of working capital may be required to face cut throat competition in the market or other contingencies like strikes, lock outs, theft etc. ADEQUATE WORKING CAPITAL: The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from firm's point of view. Excessive working capital means holding costs and idle funds which earn no profit for the firm. Paucity of working capital not only impairs the firm's profitability but also results in production interruptions and inefficiencies and sales disruption Importance/Need/Advantage of Adequate Working Capital: (1) Availability of Raw Materials Regularly:Adequacy of working capital makes it possible for a firm to pay the suppliers of raw materials on time. As a result it will continue to receive regular supplies of raw materials and thus there will be no disruption in production process.

(2) Full Utilization of Fixed Assets:Adequacy of working capital makes it possible for a firm to utilize its fixed assets fully and continuously. For example, if there is inadequate stock of raw material, the machines will not be utilized in full and their productivity will be reduced. (3) Cash Discount:A firm having the adequate working capital can avail the cash discount by purchasing the goods for cash or by making the payment before the due date. (4) Increase in Credit Rating:Paying its short-term obligations in time leads to a strong credit rating which enables the firm to purchase goods on credit on favorable terms and to maintain its line of credit with banks etc. it facilities the taking of loan in case of need. 5) Exploitation of Favorable Market conditions:Whenever there are chances of increase in prices of raw materials, the firm can purchase sufficient quantity if it has adequate of working capital. Similarly, if a firm receives a bulk order for the supply of goods it can take advantage of such opportunity if it has sufficient working capital. (6) Facility in Obtaining Bank Loans:Banks do not hesitate to advance even the unsecured loan to a firm which has the sufficient working capital. This is because the excess of current assets over current liabilities itself is a good security. (7) Increase in Efficiency of Management:Adequacy of working capital has a favorable psychological effect on the managers. This is because no obstacle arises in the day-to-day business operations. Creditors, wages and all other expenses are paid on time and hence it keeps the morale of managers high (8) Ability to face crisis:Adequate working capital enables a concern to face business crisis in emergencies such as depression. Because during such periods, generally, there is much pressure on working capital. (9) Solvency of the business:Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. (10) Good will Sufficient working capital enables a business concern to male prompt payments and hence helps in creating and maintaining good will. EXCESSIVE AND INADEQUATE WORKING CAPITAL: A business enterprise should maintain adequate working capital according to the needs of its business operations. The amount of working capital should neither be excessive nor inadequate. If the working capital is in excess if its requirements it means idle funds adding to the cost of capital but which earn nom profits for the firm. On the contrary, if the working capital is short of

its requirements, it will result in production interruptions and reduction of sales and, in turn, will affect the profitability of the business adversely. Disadvantage of Excessive Working Capital:(1) Excessive Inventory:Excessive working capital results in unnecessary accumulation of large inventory. It increases the chances of misuse, waste, theft etc. (2) Excessive Debtors:Excessive working capital will results in liberal credit policy which, in turn, will results in higher amount tied up in debtors and higher incidence of bad debts. (3) Adverse Effect on Profitability:Excessive working capital means idle funds in the business which adds to the cost of capital but earns no profits for the firm. Hence it has a bad effect on profitability of the firm. (4) Inefficiency of Management:Management becomes careless due to excessive resources at their command. It results in laxity of control on expenses and cash resources. Disadvantage of Inadequate Working Capital: (1) Difficulty in Availability of Raw-Material:Adequacy of working capital results in non-payment of creditors on time. As a result the credit purchase of goods on favorable terms becomes increasingly difficult. Also, the firm cannot avail the cash discount. (2) Full Utilization of Fixed Assets not Possible: Due to the frequent interruption in the supply of raw materials and paucity of stock, the firm cannot make full utilization of its machines etc. (3) Difficulty in the Maintenance of Machinery: Due to the inadequacy of working capital, machines are not cared and maintained properly which results in the closure of production on many occasions. (4) Decrease in Credit Rating: Because of inadequacy of working capital, firm is unable to pay its short-term obligations on time. It decays the firm's relations with its bankers and it becomes difficult for the firm to borrow in case of need. (5) Non Utilization of Favorable Opportunities: For example, a firm cannot purchase sufficient quantity of raw materials in case of sudden decrease in the prices. Similarly, if the firm receives a big order, it cannot execute it due to shortage of working capital. (6) Decrease in Sales:

Due to the shortage of working capital, the firm cannot keep sufficient stock of finished goods. It results in the decrease in sales. Also, the firm will be forced to restrict its credit sales. This will further reduce the sales. (7) Difficulty in the Distribution of Dividends: Because of paucity of cash resources, firm will not be able to pay the dividend to its shareholders. (8) Decrease in the Efficiency of Management: It will become increasingly difficult for the management to pay its creditors on time and pay its day-to-day expenses. It will also be difficult to pay the wages regularly which will have an adverse effect on the morale of managers. DETERMINANTS OF WORKING CAPITAL: A firm should have neither too much nor too little working capital. A large number of factors, each has a different importance, influencing working capital needs of firms. The importance of factors also changes for a firm over time. Therefore, an analysis of relevant factors should be made in order to determine total investment in working capital. The following is the description of factors which generally influence the working capital requirements. The working capital requirement is determined by a large number of factors but, in general, the following factors influence the working capital needs of an enterprise: (1) Nature of Business :Working capital requirements of an enterprise are largely influenced by the nature of its business. For instance, public utilities such as railways, transport, water, electricity etc. have a very limited need for working capital because they have invested fairly large amounts in fixed assets. Their working capital need is minimal because they get immediate payment for their services and do not have to maintain big inventories. On the other extreme are the trading and financial enterprises which have to invest fewer amounts in fixed assets and a large amount in working capital. This is so because the nature of their business is such that they have to maintain a sufficient amount of cash, inventories and debtors. Working capital needs of most of the manufacturing enterprises fall between these two extremes, that is, between public utilities and trading concerns. (2) Size of Business:Larger the size of the business enterprise, greater would be the need for working capital. The size of a business may be measured in terms of scale of its business operations. (3) Growth and Expansion:As a business enterprise grows, it is logical to expect that a larger amount of working capital will be required. Growing industries require more working capital than those that are static. (4) Production cycle:-

Production cycle means the time-span between the purchase of raw materials and its conversion into finished goods. The longer the production cycle, the larger will be the need for working capital because the funds will be tied up for a longer period in work in process. If the production cycle is small, the need for working capital will also be small. (5) Business Fluctuations:Business fluctuations may be in the direction of boom and depression. During boom period the firm will have to operate at full capacity to meet the increased demand which in turn, leads to increase in the level of inventories and book debts. Hence, the need for working capital in boom conditions is bound to increase. The depression phase of business fluctuations has exactly an opposite effect on the level of working capital requirement. (6) Production Policy:The need for working capital is also determined by production policy. The demand for certain products (such as woolen garments) is seasonal. Two types of production policies may be adopted for such products. Firstly, the goods may be produced in the months of demand and secondly, the goods may be produces throughout the year. If the second alternative is adopted, the stock of finished goods will accumulate progressively upto the season of demand which requires an increasing amount of working capital that remains tied up in the stock of finished goods for some months. (7) Credit Policy Relating to Sales:If a firm adopts liberal credit policy in respect of sales, the amount tied up in debtors will also be higher. Obviously, higher book debts mean more working capital. On the other hand, if the firm follows tight credit policy, the magnitude of working capital will decrease (8) Credit Policy Relating to Purchase:If a firm purchases more goods on credit, the requirement for working capital will be less. In other words, if liberal credit terms are available from the suppliers of goods (i.e., creditors), the requirement for working capital will be reduced and vice versa. (9) Availability of Raw Material:If the raw material required by the firm is available easily on a continuous basis, there will be no need to keep a large inventory of such materials and hence the requirement of working capital will be less. On the other hand, if the supply of raw material is irregular, the firm will be compelled to keep an excessive inventory of such raw materials which will result in high level of working capital. Also, some raw materials are available only during a particular season such as oil seeds, cotton, etc. They would have to be necessarily purchased in that season and have to be kept in stock for a period when supplies are lean. This will require more working capital.

(10) Availability of Credit from Banks:If a firm can get easy bank facility in case of need, it will operate with less working capital. On the other hand, if such facility is not available, it will have to keep large amount of working capital. (11) Volume of Profit:The net profit is a source of working capital to the extent it has been earned in cash. Higher net profit would generate more internal funds thereby contributing the working capital pool. (12) Level of Taxes:Full amount of cash profit is not available for working capital purpose. Taxes have to be paid out of profits. Higher the amount of taxes less will be the profits for working capital. (13) Dividend Policy:Dividend policy is a significant element in determining the level of working capital in an enterprise. The payment of dividend reduces the cash and thereby, affects the working capital to that extent. On the contrary, if the company does not pay dividend but retains the profits, more would be the contribution of profits towards capital pool. (14) Depreciation Policy:Although depreciation does not result in outflow of cash, it affects the working capital indirectly. In the first place, since depreciation is allowable expenditure in calculating net profits, it affects the tax liability. In the second place, higher depreciation also means lower disposable profits and, in turn, a lower dividend payment. Thus, outgo of cash is restricted to that extent. (15) Price Level Changes:Changes in price level also affect the working capital requirements. If the price level is rising, more funds will be required to maintain the existing level of production. Same level of current assets will need increased investment when prices are increasing. However, companies that can immediately their product prices with rising price levels will not face a severe working capital problem. Thus, it is possible that some companies may not be affected by rising prices while others may be badly hit. (16) Efficiency of Management:Efficiency of management is also a significant factor to determine the level of working capital. Management can reduce the need for working capital by the efficient utilization of resources. It

can accelerate the pace of cash cycle and thereby use the same amount working capital again and again very quickly. INCOME STATEMENT: Income statement is an important component of a set of financial statements. It measures the performance of a business during an accounting period by calculating one or more of the following: 1. 2. 3. 4. Gross Profit Operating Income Net Income Earnings per Share (EPS)

There are four basic elements of a typical income statement. These are: Revenues: Revenues are the earnings from usual business activities. In most cases, revenues are earned from sales of goods and services. Gains: Gains are the enhancements in the assets or the reductions in liabilities caused by activities outside the usual course of business and which are eligible to be recorded according to acceptable accounting practices. Expenses: Expenses include consumption of assets or the creation of liability against the business in the course of normal business activities. Losses: Losses are the reductions in assets or the enhancements in liabilities caused by activities other than those in the main course of business. One of the Principles of GAAP is the Matching Principle. Matching requires that when you post sales into the system for an accounting period (month), you must also post the costs of the products or services you sold during that period in the same accounting period (month). The Matching Principle essential to Financial Statements, particularly the Income Statement, because it makes them meaningful. The Income Statement, also called the P&L or Profit and Loss Statement, is a Current Year statement, it does not cross years. The Income Statement provides cumulative To Date financial data for the current business (Fiscal) year. So, the March Income Statement shows the totals for January, February and March together in one column and the totals for the previous December would not be part of the totals for that column.

Unlike the Trial Balance, the Income Statement and Balance Sheet each only show a portion of the General Ledger Accounts. The GL Accounts are split between the Income Statement and the Balance Sheet by their Accounting Types. The Income Statement Accounting Types are Revenue, Cost of Goods Sold and Expenses. The Accounts that are not on the Income Statement are on the Balance Sheet. As its name suggests, the purpose of the Income Statement is to report Income. Income = Revenue - Expenses. It is almost that simple, but there is more to the Income Statement than a simple calculation. The format for the Income Statement is: Revenue - Cost of Goods Sold = Gross Margin - Expenses = Operating Income + Other Revenue - Other Expenses = Net Income The Income Statement uses intermediate steps to reach Net Income. The first of these steps is Gross Margin. Gross Margin = Revenue - Cost of Goods Sold and represents the amount of revenue that is left after costs to cover operating expenses. Gross Margin is meaningful because it shows the direct relationship between the costs of products or services and their sales. The Gross Margin % can be compared to industry standards to make sure your pricing and costs are competitive. It is calculated as:

Gross Margin = Revenue - Cost of Goods Sold Gross Margin % = Gross Margin ($) / Revenue

The next intermediate step towards Net Income is Operating Income. Operating Income = Gross Margin - Expenses and is the amount of profit (income) from normal (usual) operations. The final step in calculating Net Income is to add the amounts for the Accounts categorized as Other Revenue and to subtract the amounts for the Accounts categorized as Other Expenses. Other Revenues include any money in (gain) that is not received from the sale of the usual

business products or services, this might be a gain on the sale of an asset like a vehicle. Other Expenses include any money out (loss or expense) that is not part of the usual expenses or cost of goods sold. Other Expenses might include some interest charges or a loss on the sale of an asset. Income Statement Sales Cost of Goods Sold Gross Margin Rent Office Supplies Subscriptions Utilities Fuel Repairs & Maintenance Credit Card Interest Operating Income

$50,000 $0 $50,000 $3,000 $150 $300 $125 $275 $500 50 $45,600

Other Revenues and Expenses $0 Net Income $45,600 This Income Statement is produced from the transactions that have been posted in previous posts. The presence of sales but no costs on this Income Statement indicate that either my entries for the period are incomplete or Ive violated the matching principle because if I have sales, I must have some associated costs. Net Income is the amount of revenue that was not spent on operations, it represents the amount of the increase in overall value. Remember not to confuse the terms Revenue or Income with Cash. The Net Income amount here is $45,600 and if you check the Trial Balance from the previous post, the Checking Account Balance is $44,350. Account Description 4000 7000 7020 7040 7060 7100 Sales Rent Office Supplies Subscriptions Utilities Fuel Debits Credits $50,000 $3,000 $150 $300 $125 $275

7200 7300 Totals

Repairs and Maintenance $500 Credit Card Interest and Fees $50 $4,400 $50,000

Remember from the Trial Balance report which shows all accounts and their balances that the total debit amounts were equal to the total credit amounts. The Income Statement splits the accounts with the Balance Sheet and so the total debits and total credits on each of these statements will not be equal, but the debits and credits of their combined accounts are equal. So, lets take a look at the Accounts that are not listed on the Income Statement. Account Description 1000 1200 1500 1520 2000 Totals Checking Account Accounts Receivable Office Equipment Office Furniture Accounts Payable Debits $44,350 $0 $1,300 $1,650 $1,700 $47,300 $1,700 Credits

The difference between the balances of the Income Statement Accounts, $45,600, is equal to the difference between the Balance Sheet Account balances. This listing of the Balance Sheet Accounts shows where the Net Income went. $47,300 increase in assets - money still due $1,700 = $45,600 = Net Income of $45,600. The Income Statement Accounts accumulate their balances throughout the fiscal year and at the end of the year, the accounts are reset to zero (closed out) and the difference between their total debits and total credits (Net Income) is transferred to the Balance Sheet. The Balance Sheet account used in the transaction is an Equity account and is either Retained Earnings or Owners Capital depending on the structure of the business. Closing The entry to close out the year for the Income Statement Accounts in our examples is: Account Description 4000 3500 7000 7020 Sales Retained Earnings Rent Office Supplies Debits $50,000 $45,600 $3,000 $150 Credits Entries:

7040 7060 7100 7200 7300

Subscriptions Utilities Fuel Repairs and Maintenance Credit Card Interest and Fees $50,000

$300 $125 $275 $500 $50

Totals

$50,000

CASH FLOW STATEMENT: The Cash Flow Statement (Statement of Cash Flows) provides an overview of the way Funds move through an Entity, how they impact Overall Value and eventually reconcile with Cash Balances and determine Net Cash Flow in any given year. The Cash Flow Statement is essentially the same as a yearly Balance Sheet - its just organized a little bit differently and is more summarized. The Balance Sheet accumulates its amounts from the beginning, the Cash Flow Statement only accumulates its balances over one business year. Since the Balance Sheet Accounts carry their balances from year to year, the Cash Flow Statement presents its amounts as either Increases or Decreases to groups of Accounts throughout the year. Cash Flow Statement: Since the end result of the Cash Flow Statement is Net Cash, it is at the bottom of the report and everything else on the report funnels down to the bottom to come to the final Net Cash number. The Cash Flow Statement uses the three categories: Operating, Investing and Financing. Net Income is listed first and Cash is listed last. It is Opposite from the Balance Sheet.

Operating Activities o Net Income o + Depreciation Expense (+ Increase and -Decrease in Accumulated Depreciation) o + Increases in Current Liabilities o + Decreases in Current Assets o - Increases in Current Assets o - Decreases in Current Liabilities Investing Activities

+ Decreases in Long Term/Fixed Assets (Independent of Accumulated Depreciation) o - Increases in Long Term/Fixed Assets (Independent of Accumulated Depreciation) Financing Activities o + Increases in Long Term Liabilities/Debt o - Decreases in Long Term Liabilities/Debt o + Increases in Owners Capital o - Decreases in Owners Capital o - Increases in Dividends Cash (Beginning Cash Balance - Net Increase/Decrease = Ending Cash Balance)

The net contribution to cash is summarized for each section and then combined to equal Net Cash Flow. Net Cash Flow is then combined with the Beginning Cash Balance to reconcile to the Ending Cash Balance for the year. Net Cash Flow is the difference between the Beginning and Ending Cash Balances. The Cash Flow Statement is an important indicator of available cash for operations but also of how an entity is generating cash, if it is able to sustain itself and its growth through its operations or if it generated cash through increased debt and equity and/or decreased capital assets. Statement of Cash Flows (Including Depreciation Entries from Balance Sheet Post) Statement of Cash Flows Cash Flows From Operating Activities Net Income Depreciation Increase in Payables Net Cash Provided by Operating Activities Cash Flows From Investing Activities Increase in Fixed Assets Net Cash Used by Investing Activities Cash Flows From Financing Activities $0 $0

$45,104 $496 $1,700 $47,300 $2,950 -$2,950

Net Cash Provided by Financing Activities

 Increase in Cash and Cash Equivalents (Net Cash Flow) Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year $44,350 $0 $44,350

Balance sheet: The Balance Sheet is the financial statement that summarizes the value of an entitys resources and the claims on those resources at any given time. Balance Sheet accounts start accumulating their balances from the beginning of the entity and continue until the end. This contrasts with the Income Statement whose accounts are reset to zero at the end of each fiscal (business) year. The Accounting Types reported on the Balance Sheet are: Assets - Assets are items of value that are owned by the business and their value is expected to last beyond the current fiscal (business) year. Liabilities are essentially debts, they are agreements to delay payments and so, are sources of funds because they provide a way to acquire or pay for goods and services without a direct transfer of cash at the time of the exchange. Equity (Owners Equity) is a source of funds through direct owner investment (stock or owners capital accounts or owner re-investment (retained earnings) when some or all of the income from the previous year is retained by the business rather than distributing it to the owners. The Balance Sheet uses the three categories: Assets, Liabilities and Equity. Notice that Cash is listed first and Net Income is listed last.

Assets Current Assets (including Cash) o Fixed Assets (Net of Accumulated Depreciation) Liabilities o Current Liabilities o Long Term Liabilities Equity o Owners Capital (Contributions, Stock and Paid in Capital) o Retained Earnings o Net Income
o

The Balance sheet Equity Section refers to Total Equity which is Owners Equity + Net Income. The Net Income portion is easily calculated because since the total debits and total credits of all financial accounts must be equal, and the Balance Sheet and Income Statement split the Accounts between them. The difference between the Balance Sheet Accounts will equal the difference between the Income Statement Accounts - which is Net Income. Since Owners Equity is only part of Total Equity, Net Income can also be calculated using a rewrite of the Accounting Equation:

From: Assets = Liabilities + Equity To: Assets - Liabilities = Total Equity (Owners Equity + Net Income)

Move Owners Equity to the other side of the equation as well and the equation becomes:

Assets - Liabilities - Owners Equity = Net Income - or Net Income = Assets - Liabilities - Owners Equity The balance sheet is an accounting statement that summarizes the various assets, liabilities and equities held by a company on a specific date. The equities are usually considered as part of the liabilities. The balance sheet is always drawn up at the close of business day, but is most relevant on the last day of the company's accounting period (the balance sheet date). Balance sheet is an important documents not only for bank managers who sanction loan but is equally important to others who give credits and invest in equity etc. All creditors and investors all need to familiarize themselves with the assets, liabilities, and equity of a company. The balance sheet is the best place to find all information at one place. The reason as to why balance sheet is so called is that it is statement where Assets = Liabilities + Equity Major Heads of Balance Sheet :

Liabilities:Assets :1. Share Capital 1. Fixed Assets 2. Reserve and Surplus 2. Investments 3. Secured Loans 3. Current Assets, Loans of Advances 4. Unsecured Loans 4. Miscellaneous Expenses 5. Current Liabilities and 5. Profit and Loss Account (Debit balance) Provisions

Assets which are likely to be collectible in the short term (usually within 12 months) are considered a "current" asset, while anything owed by the company in the same time frame is considered as a current liability. VARIOUS TYPES OF CAPITALS (OWNED FUNDS) AND RESERVE DEFINED: (a) Share Capital : It is important to understand the difference between the following types of share capitals :(i) Authorised Capital : This is the maximum amount of capital that can be raised by the company. However, it is not compulsory for the company to raise the full authorised capital. (ii) Issued Capital : This is the amount of capital which company intends to raise at a given point of time. This amount is usually mentioned in the Memorandum of Association of a company. (iii) Subscribed Capital : This is the capital which has actually been subscribed. (iv) Paid Up capital : This is the amount of capital that has been called and received against the subscribed capital. For the purpose of Balance Sheet, paid up capital is of utmost importance. (b) Reserves : - There are various types of reserves, some of important types of reserves are :(i) Share Premium Reserve : Whenever a company issues shares on premium, the amount collected by the company above the face value of the share is called "premium". The amount collected as "premium" is known as share premium reserve. On such share premium reserve no dividend is payable. (ii) Revaluation Reserves : Sometimes a company re-values (i.e. revises) its assets. This re-valuation is done to make the asset show the true market value of the asset. Thus asset is shown at a higher value than the previous book value and the corresponding increase is created on liability side by increasing reserves under "revaluation reserves". (iii) Depreciation Reserve : Usually when a depreciation is made in asset, the value of the asset is credited with the depreciation amount and equal amount is debited to profit and loss account. However, sometimes companies companies debit the depreciation amount to profit and loss account, but instead of crediting the same to asset account, they credit the amount to Depreciation Reserve Account. Such an entry is called deprecaition reserve. Therefore, while calculating the networth of a company, it should be excluded from the owned funds by setting it off against the value of the fixed assets. (iv) General Reserves : This kind of reserves consists of the profits which have not been actually distributed among the shareholders. This acts as a cushion for the company for any future loss. VARIOUS TYPES OF ASSETS DEFINED :

Assets: Items that the business owns and on which a value can be placed. Intangible assets: These are 'non-monetary' but 'identifiable' assets that have no physical substance. Current accounting guidelines mean they almost always relate to goodwill, though may include patents, licenses, trademarks and so on. Tangible assets: These are 'long-lived' physical items held for the purpose of earning revenue. Typically these assets include land, property, plant, machinery, fixtures, fittings and motor vehicles. Fixed asset investments: These are long-term investments, including 'ownership interests' held in other companies. For joint ventures and associates, the company's share of the entity's assets is shown. Other long-term 'minority' investments held can be shown at historical cost or current valuation, though the accounting notes must declare These are asset, the benefit of which is usually available to the entity over several accounting periods. Example of fixed assets include, land, building, Plant & Machinery. Furniture & Fittings, Vehicles, etc. In case of fixed assets, usually a part of its life is 'being utilised in a particular accounting year, and thus a certain portion of its cost (depending upon the total expected economic life of the asset), is appropriated in the shape of "depreciation" in each accounting year The value of fixed assets at original cost is called "Gross Fixed Assets" and the value of the asset arrived after deducting depreciation is called "Net Fixed Assets". Current assets: Cash in the bank and 'temporary' assets that the company expects to turn into cash. Stocks (at the lower of either cost or net realisable value), any goods held for resale, raw materials to be used in manufacture and work in progress.are examples of such assets. Accounts Receivable: When credit sale is made, but no bill of exchange/promissory note duly accepted/signed is held, the amount of such credit sale is known as "Accounts Receivable". Inventory: Stock of raw material, stock-in-process (also called as semi-finished goods), finished goods and consumable stores are known as inventory. Usually one of the following two methods is used for valuation of inventory:(a) FIFO = FIRST - IN FIRST OUT: In this method, it is assumed that inventory first purchased is first consumed/sold out and hence the valuation is done as per purchase price of those items purchased earlier. (b) LIFO = LAST IN FIRST OUT: In this method, the valuation of item sold first is done as per purchase price of the last one, assuming that the items purchased in the last are consumed / sold. Investments: A firm may invest its surplus fund in Government Securities or debt instruments or equities of the corporate sector. VARIOUS TYPES OF LIABILITIES DEFINED :

Liabilities: All claims of outsiders against the entity are called liability. It represents all the things of value, which one owes to others. Current liabilities: The liabilities which are to be met out of the current assets within one year or within one operating cycle (whichever is longer). It includes acceptances, sundry creditors, advance payments, unclaimed dividends, expenses accrued. Thus, in nutshell, we can say liabilities the company expects to meet within twelve months of the balance sheet date are called current liabilities. Long Term or Term Liabilities : These are the liabilities which-are usually for more than one year and include all the liabilities other than current liabilities and provisions . Secured Loans: It represents loans and advances from banks/subsidiaries/others raised by a company, after creation of charge on its assets. It includes 'Debentures'. Unsecured Loans: These are loans and advances (including short term) from Banks/ Subsidiaries/others obtained without creating any charge on the assets of the Firm. It includes fixed deposits received from public. Acceptances: These are bills of exchange accepted by the firms and generally known as," Bills Payable". In case of promissory notes it is referred to as "Notes Payable". Accounts Payable: These represents the debts of the creditors for purchase which is not evidenced by any formal acceptance as defined above. These are. also referred to as "Sundry Creditors". Accrued Liabilities: These represent the obligations accrued but not paid and shall be paid in the next accounting period. Provisions: When a liability cannot be precisely determined, it is estimated and provided for. Examples are provisions for dividends/taxation/PF/contingencies/Debts etc. Some other Terms relating to analysis of Balance Sheet defined : Net Sales: Whenever goods are supplied to the customers, these are recorded as sales in the company's account books. The sum total of such sales during a period is referred as 'gross sales'. However, some of goods thus supplied may be subsequently returned by the customers due to various reasons, e.g. the goods may not be strictly as per specification demanded by the customer, or these got damaged during transit etc. Such returns and allowances are separately accounted for and at the time of preparation of P&L Statement, the value of such goods are set off against gross sales. This is known as 'net sales' or "Sales". Cash Discount / Sales Discount / Trade Discounts: Some companies, with a view to" boost early" realisation of receivables, allow some discount, e.g. an entity may specify that if their bills are paid within 15 days, 5% discount will be allowed. This is called "Cash Discount" or "Sales Discount". Some companies agree to sell the goods at a price lower than the normal price provided the customer agrees to buy the goods in bulk. Such a discount is known as trade "discount" and is generally not shown in the P&L A/C separately, rather taken into account in the value of Sales.

Other Income: Income obtained from the Business operations of an entity is called Operating Income and Income arising out of an activity which is not the business activity of the firm, are referred as 'non-operating income' or 'other Income'. For example, on sale of fixed assets an entity may be able to realise more than the book value of such an asset. This is called other income. Manufacturing Expenses: The expenses which are directly incurred on the production / manufacturing process (such as freight, factory rent, electric charges at the factory site, wages of labour in the factory etc.) are called manufacturing expenses. These are direct input costs incurred towards the product manufacturing. Cost of goods sold: It refers to the direct input costs of goods sold, and comprises of cost of the raw material and manufacturing expenses. It can be calculated as follows: Opening Stock + Purchases + Manufacturing Expenses - Closing Stock Gross Profit: It is the difference between sales and cost of goods sold. This represents the margin of profit at the point of production of goods. Operating Expenses: All the expenses which are not directly incurred on production, but are necessary to run the business, are grouped as "operating expenses". It covers all expenses relating to selling & distribution as well as general administration expenses (including personnel expenses) and indirect costs, such as depreciation. Depreciation: In case of fixed assets, usually a part of its life is 'being utilised in a particular accounting year, and thus a certain portion of its cost (depending upon the total expected economic life of the asset), is appropriated in the shape of "depreciation" in each accounting year The value of fixed assets at original cost is called "Gross Fixed Assets" and the value of the asset arrived after deducting depreciation is called "Net Fixed Assets". The two methods mostly used for calculating this expense are known as (a) Straight Line Method and (b) Written down value method or diminishing value method. In the straight line method, the depreciation is arrived at by dividing the original cost of a fixed asset by its expected economic life. On the other hand, in case of the "written down value" method, the expiration is calculated every year at a pre-determined rate on the amount of the depreciated value (i.e. original cost - earlier depreciation charged) at the end of the previous year. Amorstisation: Depreciation and amortisation are almost identical. However, the expiration of the cost of intangible assets is referred as' 'amortisation, whereas that of a fixed tangible asset is called 'Depreciation'. Contingent liability is a liability which may arise as a liability in future on the happening of some event. This is not an actual liability at present and therefore does not occur in the main body of the balance Sheet. Contingent Liability is shown as a footnote to the balance sheet. Some of the examples of Contingent liability are:-

a) Claims against a company not acknowledged as debt. b) Arrears of fixed cumulative dividend on cumulative preference shares. c) Uncalled liability on account of partly paid shares in the investment portfolio

Current Assets Current Liabilities Cash in Hand Cash at Bank Marketable securities Bills Receivable Stock and Trade Accrued Income Prepaid Expenses Advances to Others Non-Current Assets Building Land Plant and Machinery Furniture and Fixtures Patent Rights Trademarks Profit and loss Account (DR) Discount on Issue of Shares and Debentures Preliminary Expenses Other Deferred Expenditure Long-Term Investments Goodwill

Creditors Bills Payable Bank Overdraft Outstanding expenses Income Tax payable Advances from customers

Non-Current Liabilities Equity Share Capital Preference Share Capital Debentures Long Term Loans Profit & Loss (Cr.) Share Premium Account Share Forfeited Account Capital Reserve Provisions Like Provision for Tax, Dep. Proposed Dividend Appropriation of Profit E.g. transfer to General Reserve, Workman Compensation Fund, Debentures Sinking Fund, Capital Redemption Reserve etc.

AN EXAMPLE TO UNDERSTAND BALANCE SHEET, CASH FLOW ETC.

Based on the following Balance Sheets of ABC company prepare a schedule depicting (a) changes in Working Capital and (b) Funds Flow Statement:-

Balance Sheet Liabilities 2004 2003 Assets 2004 2003 Rs. Rs. Rs. Rs. Share 4,50,000 4,00,000 Fixed 7,20,000 6,10,000 Capital 3,50,000 2,40,000 Assets 1,30,000 50,000 Debentures 1,50,000 1,20,000 Investments 3,75,000 2,40,000 Current 2,10,000 2,00,000 Current 5,000 10,000 Liabilities 70,000 9,60,000 Assets 50,000 General 12,30,000 Discount 12,30,000 9,60,000 Reserve on shares PandL PandL Account Account

Additional information available to you is : (a) During the year depreciation charged on Fixed Assets was Rs. 60,000/-. (b) Machinery with a book value of Rs. 40,000/- was sold for Rs. 30,000/-. Solution : Schedule of changes in Working Capital Particulars Current Current 2003 2004 Inc. A 240000 375000 135000 B 120000 150000 B 120000 225000 105000 225000 225000 Dec. 30000 liabilities

Assets

Working Capital A Increase in working capital

135000 105000 135000

Funds flow Statement for the year ended Particulars Amt. Funds from operation 205000 Issue of Shares 50000 Issue of Debentures 110000 Sale of machine 30000 395000 Particulars Amt. Purchase of Investment 80000 Purchase of Fixed Assets 210000 Increase in working 105000 capital 395000

Fixed Assets A/C

To balance To Cash (bal (Purchases)

b/d 610000 A/C fig) 210000

820000

By P/L 60000 A/C (Depreciation) 30000 By cash A/C (Sale) By P/L A/C 10000 (Loss on Sale) 720000 By balance c/d 820000

Adjusted P/L A/C To balance b/d 50000 To Fixed Assets 60000 (Depreciation) To Fixed Assets 10000 (loss on sale) 10000 To tfr to General 5000 Reserve 70000 To Discount on share 205000 To balance c/d By funds operation from 205000

205000

PART I FORM OF BALANCE SHEET [The balance sheet of a company shall be either in horizontal form or vertical form: A. HORIZONTAL FORM BALANCE SHEET OF............................................................................................................................................. (Name of the company) ................................... AS AT........................................................ (Date as at which it is made out) Figures LIABILITIES for the P.Y. (Rs.) SHARE CAPITAL (Refer Note A) Authorised/Shares Of ...................... Rs.... each Issued/Shares Of ...................... Rs.... each Subscribed/Shares Of ...................... Rs.... each Called up ............ Rs.... per Share Of the above shares shares are allotted as fully paid-up pursuant to a contract without payments being Figures for the C.Y. (Rs.) Figures ASSETS for the P.Y. (Rs.) FIXED ASSETS (Refer Note G) Distinguishing as far as possible between expenditure upon 1. Goodwill 2. Land 3. Buildings 4. Leaseholds 5. Railway Sidings 6. Plant Machinery 7. Furniture Fittings and and Figures for the C.Y. (Rs.)

8. Development of Property 9. Patents, trademarks and

received in cash, Less: Unpaid calls 1. By directors. 2. By others. 3. By Managing agent or secretaries and treasurers and where the managing agent or secretaries and treasurers are a firm, by the partners thereof, and the managing agent or secretaries and treasures are a private company, by the directors members of that company. Add: Forfeited shares (amount originally paid up) RESERVES & SURPLUS (Refer Note B) 1. Capital Reserves. 2. Capital Redemption Reserve. 3. Share Premium Account 4. Other Reserves specifying the nature of each reserve and the amount in respect thereof.

designs 10. Livestock 11. Vehicles, etc. INVESTMENTS (Refer to Note No. H) Showing nature of investment and the mode of valuation for example at cost or market value and distinguishing between: 1. Investments in Govt. or Trust Securities 2. Investments in shares, debentures or bonds 3. Immovable properties 4. Investments in the capital of partnership firms 5. Balance of unutilized monies raised by Issue CURRENT ASSETS, LOANS & ADVANCES (Refer Note I) A. Current Assets 1. Interest accrued on investments 2. Stores and spare

Less: Debit balance in profit and loss account, if any 5. Balance in the profit and loss accounts after providing for proposed allocation namely Dividend, Bonus or Reserves 6. additions Reserves Proposed to

parts 3. Loose tools 4. Stock-in-trade 5. Works-inprogress 6. Sundry debtors: a. Debts outstanding for a period exceeding 6 months b. Other debts Less: Provision 7. a. Cash balance on hand b. Bank balances: i. With Scheduled Banks ii. With Others. B. Loans Advances 8. Advances Loans and and

7. Sinking Funds SECURED LOANS (Refer Note C) 1. Debentures 2. Loans Advances Banks 3. Loans Advances Subsidiaries and from and from

4. Other Loans and Advances UNSECURED LOANS (Refer Note D) 1. Fixed Deposits 2. Loans Advances Subsidiaries and from

a. To subsidiaries b. To partnership firms in which the co./its subsidiary is a partner 9. Bills of Exchange 10. Advances recoverable in cash or in kind or for value to be received; e.g., Rates, Taxes, Insurance, etc.

3. Short-term Loans and Advances: a. From Banks

b. From others 4. Other Loans and Advances c. From Banks d. From others CURRENT LIABILITIES PROVISIONS (Refer Note E) A. Liabilities Current &

11. Balances with Customs, Port Trust, etc. (where payable on demand). MISCELLANEOUS EXPENDITURE (to the extent not written off or adjusted) 1. Preliminary Expenses 2. Expenses including commission/ brokerage on underwriting or subscription of shares or debentures 3. Discount allowed on issue of shares or debentures 4. Interest paid out of capital during construction (also stating the rate of interest) 5. Development expenditure not adjusted 6. Other items (Specifying nature) PROFIT AND LOSS ACCOUNT

1. Acceptances 2. Sundry Creditors 3. Subsidiary companies 4. Advance payments and unexpired discounts for the portion for which value has still to be given e.g. in the case of the following classes of companies: Newspaper, Fire Insurance, theatres, clubs, banking, steamship, companies, etc. 5. Unclaimed Dividends 6. Other Liabilities 7. Interest Accrued but not due on loans

B. Provisions 8. Provision Taxation for

9. Proposed Dividends 10. contingencies For

11. For Provident Fund Scheme 12. For Insurance, pension and similar staff benefit schemes 13. Other provisions (A foot note to the balance-sheet may be added to show separately: CONTINGENT LIABILITIES (Refer Note F) 1. Claims against the company not acknowledged as debts 2. Uncalled liability on shares partly paid 3. Arrears of fixed cumulative dividends 4. Estimated amount of contracts remaining to be executed on capital account and not

provided for 5. Other money for which the company is contingently liable Total Total

B. VERTICAL FORM Name of the Company Balance Sheet as at Sch. No. Figures as at the end of the current financial year (Rupees) 4 Figures as at the end of the previous financial year (Rupees) 5

1 I. Sources funds (a) Shareholders Funds: (i) Capital (ii) Reserves and surplus (b) Loan funds (i) loans Secured of

(ii) Unsecured loan

TOTAL II. Application of funds (a) Fixed assets: (i) Gross block (ii) Less: Depreciation (iii) Net block (iv) Capital work-inprogress (b) Investments: (c) Current assets, loans and advances (i) Inventories (ii) Sundry debtors (iii) Cash and bank balances (iv) Other current assets (v) Loans and advances Less: Current liabilities and provisions (i) Liabilities (ii) Provisions Net assets current

(d) (i) Miscellaneous expenditure to

the extent not written off or adjusted (ii) Profit and loss account TOTAL

Break-even analysis Introduction Break-even analysis is a technique widely used by production management and management accountants. It is based on categorizing production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production). Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). The Break-Even Chart In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "breakeven point" and is represented on the chart below by the intersection of the two lines:

Break-Even Chart Low Fixed Costs,

High Variable Costs

Break-Even Chart High Fixed Costs, Low Variable Costs

Contribution Break-Even Chart

Profit Volume (PV) Chart

In the diagram above, the line R represents the variation of income at varying levels of production activity ("output"). TC represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made. Fixed Costs Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads required to support a larger, more complex business. Examples of Rent Research Marketing costs - Administration costs fixed and and (noncosts: rates Depreciation development related)

revenue

Variable Costs Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission. A distinction is often made between "Direct" variable costs and "Indirect" variable costs. Direct variable costs are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre. Raw materials and the wages those working on the production line are good examples. Indirect variable costs cannot be directly attributable to production but they do vary with output. These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labor costs. Semi-Variable Costs Whilst the distinction between fixed and variable costs is a convenient way of categorizing business costs, in reality there are some costs which are fixed in nature but which increase when output reaches certain levels. These are largely related to the overall "scale" and/or complexity of the business. For example, when a business has relatively low levels of output or sales, it may not require costs associated with functions such as human resource management or a fullyresourced finance department. However, as the scale of the business grows (e.g. output, number people employed, number and complexity of transactions) then more resources are required. If production rises suddenly then some short-term increase in warehousing and/or transport may be required. In these circumstances, we say that part of the cost is variable and part fixed. FORMULA: Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation: [Break even sales = fixed cost + variable cost] The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent.

Equation Method: The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows: Profit = (Sales Variable expenses) Fixed expenses Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis: Sales = Variable expenses + Fixed expenses + Profit According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero. Example: For example we can use the following data to calculate break even point.

Sales price per unit = Rs.250 variable cost per unit = Rs.150 Total fixed expenses = Rs.35,000

Calculate break even point Calculation: Sales = Variable expenses + Fixed expenses + Profit Rs.250Q* = Rs.150Q* + Rs.35,000 + Rs.0** Rs.100Q = Rs.35000 Q = Rs.35,000 /Rs.100 Q = 350 Units Q* = Number (Quantity) of units **The break even point can be computed by finding that point where profit is zero sold.

The break even point in sales dollars can be computed by multiplying the break even level of unit sales by the selling price per unit.

350 Units Rs.250 Per unit = Rs.87,500 Contribution Margin Method: The contribution margin method is actually just a short cut conversion of the equation method already described. The approach centers on the idea discussed earlier that each unit sold provides a certain amount of contribution margin that goes toward covering fixed cost. To find out how many units must be sold to break even, divide the total fixed cost by the unit contribution margin. Break even point in units = Fixed expenses / Unit contribution margin Rs.35,000 / Rs.100* per unit 350 Units *Rs.250 (Sales) Rs.150 (Variable exp.) A variation of this method uses the Contribution Margin ratio (CM ratio) instead of the unit contribution margin. The result is the break even in total sales rupees rather than in total units sold. Break even point in total sales Rupees = Fixed expenses / CM ratio Rs.35,000 / 0.40 = Rs.87,500 This approach is particularly suitable in situations where a company has multiple products lines and wishes to compute a single break even point for the company as a whole. The following formula is also used to calculate break even point Break Even Sales in Rupees = [Fixed Cost / 1 (Variable Cost / Sales)] This formula can produce the same answer: Break Even Point = [Rs.35,000 / 1 (150 / 250)] = Rs.35,000 / 1 0.6

= Rs. 35,000 / 0.4 = Rs.87,500