Managing Your Money:
Accounting, Budgeting & Cash Flow
Session 7
Date:
Due:	Section IV: Part D
Class Opener (10 min.)
Articles of interest, best news / worst news, brainteasers, or see Eating Out.
Instructor Topics (65 min.)
(20 min.)	1.	Accounting and Recordkeeping
Accounting Systems and Internal Controls
Recordkeeping and Tax Requirements
(45 min.)	2.	Budgeting
Performance Reports and Variance Analysis
Budget Worksheets
—No guest speaker this session—
Break (20 min.)
Refreshments
Networking activity
Instructor Topics—continued (45 min.)
(30 min.)	3.	Preparing Cash Flow Projections
(15 min.)	4.	Managing the Cash Flow Cycle
Work Period (40 min.)
Exercise: Retail, Manufacturing and Services Pricing
Homework Review—Session 6
Workbook Preview—Session 7
Assignment for Session 8
WORKBOOK 	Complete the worksheets in Workbook Session 7. WRITE	After completing the Session 7 worksheets, follow the instructions on the Writing Your Business Plan page at the end of the worksheets to write Section III. Business Organization and Operations: C. Managing Books and Records; and Section V. Financial Plan: A. Capital Requirements (Startup Costs), B. Sales Forecasts, and C. Cash Flow Projections. TEXT	Read Chapters 20 and 21 (Overview of Financial Statements and Financing Your Business).
Additional Instructor Notes
Session 7
NOTE: The financial sessions are usually the most challenging for students. Review this material with an eye toward your class makeup, determine what issues will be of most importance to them, and concentrate on those topics and skills. Remind them that the TEXT has detailed financial chapters, which they may need to read more than once. Also, note that you have scheduled an extended work period in Session 9 to help them with this material.
Class Opener—Eating Out
Before class starts, write the following question on the board: How much do you spend each month on eating out? Then, list each student’s name below so they have a place to answer.
After all students have arrived, review the answers and start asking pertinent questions like:
Have you ever checked to see how much money you spend eating out?
Do you know how much you can spend, or do you quit going when you’re out of money?
Do you know how much money comes into your household spending budget? If so, why don’t you know how much goes out for this category of expense?
Keep the mood light! We’re not looking to embarrass anyone. The goal is simply to make a point about how little thought sometimes goes into our personal spending decisions, and encourage the class to think about what would happen if you ran a business that way.
Accounting and Recordkeeping
Accounting means tracking, recording and analyzing financial data. Many first-time business owners are intimidated by it, so they put off learning about it. However, you must have a system for creating and maintaining business records if you hope to succeed.
As we’ve seen, the IRS requires business owners to track income and expenses for tax purposes. But you also need this information to run your business from day to day. Use OHD 7-1 to explain the financial, legal and management purposes of recordkeeping.
Accounting Systems
Ask the question: What is the most important component of an accounting system? The answer: An involved owner! The more involved you are, the better your system will function. If possible, give real-life examples of embezzlement and other problems that could have been prevented by owner supervision.
A good accounting system gathers information by budget item, so you can easily compare projections to reality. It also provides detailed data on cost centers and revenue centers. This is important if you plan to expand your business or terminate an unprofitable product line.
Cash or accrual?
Discuss the difference between these two accounting methods. Accrual accounting reports revenues and expenses as they occur, even if no money has changed hands yet. In other words, if you do a job in January and get paid in March, you report that income for January.
Cash accounting reports revenues when cash comes in and expenses when cash goes out. If you do a job in January and get paid in March, you report the income for March.
Accountants usually prefer the accrual method because it provides a more realistic picture of a business’s performance over time. That said, knowing when, where and how your cash is flowing is a primary management tool, as we’ll see later in this discussion.
Calendar year or fiscal year?
You must also select an accounting year. Sole proprietorships must use a calendar year (January 1 to December 31), because they report business taxes on their personal income tax return.
A fiscal year is an accounting year that ends on a date other than December 31. Businesses often choose a fiscal year when their business is seasonal. Example: if you run a food cart that sells milkshakes, you will probably do most of your business in summer. If you plan to use a fiscal year, discuss this decision with your tax advisor and be prepared to explain it to the IRS.
Double-entry bookkeeping
Briefly explain debits and credits, the basics of double-entry bookkeeping, and the chart of accounts. Base this discussion on Chapter 17, and tailor it to the knowledge level of your class.
Use OHD 7-2 to introduce basic accounting journals. Then, use OHD 7-3 to present common accounting modules. Note that each module deals with a certain type of financial information, and point out that large businesses often assign each type to a separate department. This separation of responsibility will tie in nicely with your upcoming discussion of internal controls.
Accounting software
The type of software you need depends on your business. At the very least, you’ll need a system that handles sales revenues, taxes, invoicing, purchasing and basic accounting. If you sell products, you need to track inventory and shipping. If you run a service business, you may need a client or project management system. If you have employees, you’ll need a payroll module. Some firms may require industry-specific software in order to capture necessary data while complying with legal requirements.
Remember: Accounting software can’t think for you. You must understand what you’re entering and why. It’s like a calculator: It can speed up tasks, but it can’t run your business!
Choosing accounting software
The main factors in choosing software are your resources and growth plans. At the high end of the cost spectrum, you could get an enterprise resource planning (ERP) system that integrates accounting with almost every other business activity. The scope and cost of such systems may be prohibitive for a small or growing business.
In the midrange, you could look for a flexible system that provides core functions but also allows you to add specific modules as you grow (e.g., a cloud-based system with multiple service tiers). As long as the core system works well, this can be a good way to scale up your system gradually.
At the lower end are programs that handle basic tasks well, but lack flexibility and scalability. If you opt for one of these programs, you will almost certainly need to replace it when you grow. This can be disruptive! Also, there’s a risk of losing data when migrating to a new accounting system. Always weigh the lower sticker price against the potential costs of upgrading!
Use OHD 7-4 to explain other important criteria for accounting software. Emphasize that free trials and online tutorials are the best way to get a feel for a system’s pros and cons. You’ll also want to read lots of software reviews, and get recommendations from fellow entrepreneurs. But that’s no substitute for hands-on experience.
Before you buy a system, consider how long it will take to get your team members truly proficient, and set a realistic rollout date that will allow a smooth transition. Problems with your accounting system can be fatal to your business. Don’t deploy a new system until you’re sure it will work, and don’t get rid of your old system until the new one is running smoothly.
You should also consult your accountant and bookkeeper when choosing software. If you decide to hire an accountant to help design your accounting system, be very clear about the information you need. Some accountants focus on income taxes and will design a system that responds primarily to those requirements. Your accounting system should balance your need to meet tax requirements with your need for everyday management information.
Internal Controls
A good accounting system includes internal controls. Use OHD 7-5 to discuss the internal controls necessary in a typical business.
Discuss how to set up controls for various business functions without hiring additional personnel. Example: Have an accountant monitor income tax and payroll recordkeeping. Ask the question: What are the possible consequences of having one person control everything?
Segregation of duties
Use OHD 7-6 to illustrate segregation of duties in a business with enough employees to have 12 different people handle cash functions. Then, discuss the practicality of segregating all of these duties in a small business with very few employees, and which of these functions most need to be segregated for optimal cash control and efficient operation.
Recordkeeping and Tax Requirements
No matter how small your business is, keeping accurate records is a must. Studies show that business failures often result from inadequate recordkeeping.
Records retention
Which records you must keep depends on your business. At a minimum, your system must document your business transactions—including your income—as well as your deductions.
Discuss record retention times using OHD 7-7. Note that the IRS generally requires you to keep records for three to seven years. Other agencies may have different requirements, most of which will relate to employee issues or environmental protection.
Also, discuss where records should be kept (fireproof filing cabinets, safety deposit boxes, etc.).
Creating a records management plan
Use OHD 7-8 to discuss creation of a records management plan. Topics to address:
Requirements. Again, different agencies have different requirements. It’s not all about the IRS! Records dealing with employees—such as those required by OSHA, the Department of Labor or U.S. Citizenship and Immigration Services—may have special requirements and restrictions. Check with the relevant agencies to make sure your system is in compliance.
Format. Some records must be on paper. Others can be digital—but again, specific agencies have their own rules for the legibility, integrity and accessibility of digital records.
Access. Which employees should have access to which records? Your sales team will need access to customer data, but they probably don’t need access to your payroll records. Also, regulations may require you to restrict access to employee and customer data. Example: OSHA requires you to limit access to employee injury and illness records.
Disposal. Disposing of outdated paper documents makes it easier to store and search your records. Also, the size of your archive can add to your legal costs if you’re involved in legal proceedings—lawyers may have to sift through these documents one by one during the discovery process. What can go in the trash vs. a shredder? Is ordinary deletion good enough for electronic records, or is secure deletion required?
Security. This goes beyond maintaining privacy. As we noted in our section on continuity planning, you must have a backup system in place for all vital records, so you can get back on your feet quickly in the event of fire and other disasters. Also, records stored on site should be kept under good environmental conditions (e.g., away from moisture).
Your plan should explain how, where and for how long required records are stored. Also, detail any management tasks the files require, ranging from weekly or monthly backup to disposal. If a certain person is in charge of a certain type of record, that information should appear as well.
Taxation and tax forms
Obviously, we can’t cover all the intricacies of taxes and tax law in detail in this class. The important thing to emphasize is that accounting and recordkeeping are crucial.
Use OHD 7-9 to show some of the main business tax forms required by the IRS. Emphasize again that money withheld from employees must not be spent on business expenses. Suggest creating a separate bank account for these funds or hiring a payroll service. Note that if you outsource payroll, you are legally responsible if the contractor fails to comply with regulations.
Briefly discuss the consequences of failure to file and incorrect reporting. Students looking for specific details can be referred to IRS (Circular E), Employer’s Tax Guide.
Budgeting
Budgeting means forecasting how much money you will spend on expenses in an upcoming period, and how much money you will receive from income-producing activities over that period.
Determining specific categories of expenses and revenues, assigning projected dollar amounts, and documenting assumptions are basic elements of the budgeting process.
In Session 2, you talked about the planning cycle using OHD 2-2. This is a good time for a review, because it demonstrates the importance of budgeting to that process. Budgeting provides benchmarks, enabling you to measure actual results against expected results.
Use OHD 7-10 to explain the features of a good budgeting system:
Employee involvement. Budgets that come from the top, with no input from employees, are likely to meet resistance and to be inaccurate. An inclusive process increases acceptance, while also leveraging the expertise and knowledge of your employees.
Relevance. A budget should fit the needs of your business and be no more complicated than necessary. A single budget may be adequate during startup. But as you grow, you will need to create individual budgets for crucial areas like marketing and sales.
Regularity. Employees get frustrated when they put lots of time and energy into the budgeting process, only to see the completed budget gather dust on a shelf. Also, failing to budget regularly makes it much harder to evaluate budgeted and actual cash flows.
Consistency. Your budgets should use standard forms and terminology and follow standard practices. This will make it easier for outside users—such as lenders—to understand and evaluate them. Using budgeting software will help to ensure that you follow best practices.
Documenting assumptions. Budgeting involves making assumptions about the future. Your budget documents these assumptions and explains the dollar amounts you assigned to them. This allows you to go back later and analyze your decisions.
Ease of use. Budgeting should entail a minimum of disruption to everyday business processes. Otherwise, employees may see it as an obstacle to getting other work done.
Flexibility. Budgets need to adapt to changing conditions, both good and bad. A new opportunity might require an increase in the budget, while a downturn in sales may require cuts. Good budgeters understand the art of compromise!
Performance Reports and Variance Analysis
Emphasize the importance of using budgets after they are prepared! Comparison to actual results provides vital information for managing the business.
Discuss the danger of jumping to conclusions when reviewing variances. Sometimes, seemingly unrelated variances may come from a single incident or management decision. Caution students to look below the surface and investigate the causes of positive and negative variances.
Comparison to industry standards
Discuss comparing forecasted budgets with industry standards. Suggest that trade associations be contacted for their “Cost of Doing Business Surveys,” which give percentage-based comparisons of expense items relating to sales levels, sales per square foot, and so forth.
Robert Morris studies could also serve as a resource for comparison. Discuss the need to adjust for cost of living in specific areas vs. national averages, particularly in rural markets.
Other performance measures
Tracking performance measures can be very helpful for management. What performance measures (benchmarks) do students currently track, and what measures would be useful for them? What performance measures do others in their industry track? What do these measures tell management? How can students find out more about measures in their industry?
Budget Worksheets
Sales Forecasts (see OHD 7-11)
In Session 4, we discussed Annual Sales Projections from the marketing perspective. Now, we’ll look at them from the financial perspective.
Emphasize that the sales forecast is the foundation upon which all other budgets are built.
For many smaller businesses, an average total sales forecast is sufficient. However, the business may wish to budget for individual products or product lines, so that the budgeted amounts will allow for later comparison to actual results with enough detail to be meaningful. If the business prepares budgets by product line, but fails to capture actual sales by product line, much of the value of the budget process will be lost.
Ask students to look at the Sales Forecast Worksheet on page 7-122 of the WORKBOOK while you show and discuss OHD 7-11.
Existing businesses that plan to grow by increasing market share have some history on which to build when trying to prepare this budget. By contrast, businesses that are expanding may find it difficult to gather the information they need to begin forecasting.
One solution is to ask local media reps for industry-specific sales cycle information. They may have information that breaks annual sales down into the percentage of sales per month, listed by specific business or product types. Students could then use their Projected Annual Sales Volume from Session 4 and apply these monthly percentages to begin their sales forecasting.
NOTE: Some of your students may have made pricing decisions they can use to forecast sales. Others may not have dealt with pricing or may need to reexamine their pricing structure. Accordingly, part of the Work Period can be spent completing the pricing worksheets at the end of these notes. Because some pricing concepts rely on information from other expense budgets, it’s usually best to delay the detailed pricing discussion until after the lecture.
Cost of Projected Product Units Sold Budget (see OHD 7-12)
NOTE: Although service businesses don’t have to complete a Cost of Projected Product Units Sold Worksheet, they should understand this discussion in case they add products later.
Ask students to look at the Cost of Projected Product Units Sold Worksheet on page 7-124 while you show and discuss OHD 7-12. Point out that forecasting sales of product units begins the budgeting process for purchases of that product.
Ask the questions: How many of you have guessed at quantities when buying your inventory? What was the result? Discuss how often guessing leads to buying too much or too little.
Existing businesses may be able to use historic data to determine the relationship between last year’s sales and cost of product units sold by looking at the Cost of Goods Sold entry on their Income Statement.
Explain that the term Cost of Projected Product Units Sold is being used here to associate the direct costs of the product units with the projected units sold on the Sales Forecast Worksheet.
Explain that Cost of Goods Sold (COGS) is an accounting term that refers to your beginning inventory, plus your purchases during the year (including related costs like freight), less your ending inventory. The result is the cost of the inventory you actually sold.
What percentage of Annual Sales is COGS, on that same Income Statement? This figure can be compared to the Cost of Projected Product Units Sold and related to the Annual Total Sales Forecast from this session to see how closely they match.
Using the COGS percentage as a planning tool for purchases related to sales can work well if you have many total products in your product group, where it would be tedious to project sales and cost projections for each item. It also works well if you have accurate historical data or reliable industry information that will produce an accurate COGS percentage.
The WORKBOOK shows students how to calculate the Cost of Projected Product Units Sold to Annual Total Sales Forecast percentage, and compare it to the historic COGS percentage.
Fixed Assets Budget
It’s as important to plan for the purchase of fixed assets as for any other expense. In fact, it may be more important if the purchases are large or if cash flow will be greatly affected by principal and interest payments.
Define fixed assets (assets with a useful life of longer than one year).
Define useful life. Discuss the IRS definition of useful life. Consider bringing in an IRS depreciation booklet to discuss the useful lives of various asset groups.
Define depreciation. For this discussion, explain that the original purpose of depreciation was to let a business set aside money for replacement of assets, by creating a non-cash expense that reduces taxable business income.
Note that purchasing new vs. used assets, leasing instead of purchasing, and not purchasing can all affect cash flow.
Have students look at the Fixed Assets Worksheets on page 7-126. They need to project the fixed assets they will purchase and calculate depreciation on both new and existing assets. Remind them they will have to research the cost of fixed assets, not guess! Develop a simple scenario to show how depreciation is calculated. Have the IRS rules on straight-line depreciation available, and be prepared to discuss other methods if asked.
Growth or Startup Expenses Budget (see OHD 7-13)
Have students look at the Growth or Startup Expenses Worksheet on page 7-128. Use OHD 7-13 to discuss typical expenses. Have students brainstorm other expenses they might incur. Stress that these are one-time expenses and are not to be confused with normal, ongoing expense budgets. Isolating these expenses prepares you for higher costs during startup or early growth without distorting other budgets.
Example: Item 6—Legal Fees represents the one-time legal fees associated with this phase, not ongoing legal expenses.
Ask the question: How will these expenses be funded?
Existing Debt Payment Budget
Have students look at the Existing Debt Payment Worksheet on page 7-130. Emphasize the importance of including all outstanding debts, even if they’re from friends or family. Briefly explain how to break payments down by principal and interest amount, and stress the need to allocate payment amounts accurately throughout the year.
Miscellaneous Expenses Budget
Have students look at the Miscellaneous Expenses Worksheet on page 7-132. Although this worksheet covers typical business expenses, students will need to customize this budget. Instruct them to go back through their worksheets and action plans, so that they can note expenses for which they will need to budget (e.g., intellectual property fees or website upgrades).
Ask the question: What other expenses will your business incur? Log answers on the board. Emphasize that a budget has to include all the little expenses, because little expenses add up!
Break-Even Analysis
Now, it’s time to start pulling all the pieces together to see if your plan really works. Use OHD 7-14 to review the primary financial worksheets presented since the start of the class. The numbers from these worksheets can now be used to prepare a financial plan.
You already introduced the break-even point while using the pricing worksheets in Session 5, so this will be a continuation of that discussion.
Again, break-even analysis is a way to identify the minimum level of sales (in units and dollars) that is required to cover all budgeted expenses. In other words, your business’s break-even point is the volume of sales at which revenues and expenses are equal.
Point out that owner salaries are paid out of profits. Therefore, revenue earned at the break-even point is not enough to cover expenses and pay owner salaries.
Similarly, in a sole proprietorship or partnership, the Salaries/Wages Budget does not include money taken out for the owner or partners. Because the break-even point is based on budgeted expenses, it will not cover owner withdrawals unless that expense is added into the calculations from the start.
Also, growth or startup expenses are not considered an operating expense, and are therefore not normally included when calculating break-even.
Fixed and variable expenses
Use OHD 7-15 and OHD 7-16 to review fixed and variable expenses. Also, discuss costs that are mixed.
Calculating the break-even point in units and dollars
Have students turn to the Break-Even Analysis Worksheet on page 7-134. Using the Sales Forecast Worksheet, and fixed and variable expenses, show how to calculate the break-even point using a simple example.
Ask the question: Once break-even is reached, where does the contribution margin go? Answer: To profit! Use OHD 7-17 to remind students where the break-even point is and what happens as sales rise over that point (profitability).
Reality check: Is your break-even point realistic?
Can you sell enough units, or earn enough dollars in service sales, to break even? If the answer is no, you must revise your budgets to identify a more realistic break-even point. Are your costs too high? Are your prices too low? Is your sales forecast too pessimistic?
Offer an example where the break-even point would not be realistic (e.g., a bed and breakfast where every room would have to be rented 320 days out of the year).
Ask the question: How can you make your break-even point more realistic? Discuss some of the ways to get the break-even point to a more realistic level. Include suggestions on both the revenue and expense side (e.g., raising the price of the rooms at the bed and breakfast, or reducing cleaning expenses by doing some of the work yourself).
Preparing Cash Flow Projections
NOTE: The process of preparing a cash flow projection can be confusing to first-timers! Most of this segment should be devoted to showing how to post numbers to the worksheet.
After working on the budgets, and forecasting sales and expenses, you are ready to put the information together in a cash flow projection.
Cash flow projections are often confused with the income statement. However, the income statement may reflect the accrual basis of accounting, whereas cash flow projections reflect cash coming in and going out.
It’s also important to understand the difference between the cash flow statement (an accounting statement) and cash flow projections. The cash flow statement looks at past cash flows, while cash flow projections look at the future.
Monthly Cash Flow Projections
Discuss why monthly cash flow projections are so important to lenders (ability to service debt), and how they can be used to better manage your business.
Have students turn to the Cash Flow Projections Worksheets on page 7-136. Summarize the introductory paragraphs. Then, go over Steps 2 through 10, explaining where the information will come from—i.e., the worksheets prepared to this point—and answering general questions.
NOTE: Remind students that the Beginning Cash Balance in Month 1 comes from Line C of the Growth or Startup Expenses Worksheet (or if that worksheet is not applicable, from the cash balance at the end of the last accounting period).
Sample cash flow problem
NOTE: A transparency of the blank cash flow worksheet is easy to erase and revise, and will help students to follow this discussion. Alternatively, you could put the worksheet in a spreadsheet.
First, we’ll work through some basic facts and post the numbers on the Monthly Cash Flow Projection Worksheet. Then, we’ll change the assumptions to show how this affects cash flow. This example is only for three months, but the same principles apply to longer projections.
Distribute the Sample Cash Flow Posting Problem–Scenario 1 Fact Sheet and a blank Cash Flow Projection Worksheet. (Both handouts appear at the end of these notes.)
Have students complete as much of the worksheets as they can, preferably in small groups. Tell them to use a pencil, as there will be a lot of erasing! When they’ve gone as far as they can, walk them through each assumption and show them how to post the numbers. There is some flexibility as to where items can be posted. Make sure students understand that the category of expense decisions comes from them, but that consistency is what creates useful reports.
When you are finished as a group, give them the Sample Cash Flow Posting Problem—Scenario 1 Answer Sheet and the Cash Flow Projection Worksheet—1st Run handout (both found at the end of these notes), so they can compare them to their own worksheets.
Next, hand out the Sample Cash Flow Posting Problem—Scenario 2 Fact Sheet. Explain that we are now going to change our original plan through management decisions, which will create a new Projected Cash Flow Statement.
Go through each new fact, and discuss how the changes affect the numbers on the Projected Cash Flow Statement. Then, give them the Cash Flow Projection Worksheet—2nd Run handout so they can compare the numbers to the first scenario.
NOTE: Emphasize that this exercise accomplishes many things. It shows students how numbers are posted to a worksheet; how management decisions affect the numbers; and how the manager/owner must make decisions about categorizing line-items of expense. Above all, it demonstrates how useful this process is for small-business owners.
Notes to the Cash Flow Projection
This is a critical part of the statement and must accompany it. Stress how important assumptions are to lending institutions, and note that the reason you have been emphasizing assumptions on all of the worksheets is because they must provide proper backup for cash flow information.
Managing the Cash Flow Cycle
Use OHD 7-18 to illustrate the cash flow cycle. Discuss how managing various components of the cycle can lead to better cash flow, using the notes below. Remind your students about the high number of business failures due to poor cash flow management.
Managing Inventory
Go over an example of inventory turnover, and note that quicker turnover increases the flow of cash into the business. If you have students whose businesses involve inventory, discuss specific steps they could take to increase inventory turnover.
Putting inventory on sale
Discuss how putting inventory on sale affects the cash flow (positively from the standpoint of getting more cash, but negatively in terms of not getting the full price). Discuss how marking inventory down needs to be built into the sales forecast. Develop a simple scenario to illustrate what happens to the break-even point when a 20-percent price reduction is offered.
Ratio analysis and benchmarking
Use OHD 7-19 to introduce the inventory turnover ratio and average days in inventory ratio. Discuss what these ratios tell the business owner. Emphasize that ratios must be compared to something to be meaningful (a benchmark). Meaningful benchmarks include:
Results in prior years
Actual results this year
Budgeted amounts
Industry averages
Managing Accounts Receivable
Use OHD 7-20 to go over an example of the receivables turnover ratio. Emphasize how careful management of receivables can increase cash flow into the business.
Exercise: Ask students what credit terms they intend to offer or what terms are typically offered in their industry. Do customers generally take advantage of those terms? How do those terms affect cash flow? What will you do if customers abuse the terms?
Show the example of an aging report on OHD 7-21, and explain its use. Discuss answers to the questions on the overhead as a group.
Managing Accounts Payable
Discuss the importance of paying bills on time, and the possible effects on cash flow of paying bills early or not taking early-payment discounts.
Managing Excess Cash
What if you have excess cash? Short-term investments that are safe and leave your cash accessible can become an income-producing activity that makes a difference in your cash flow.
Work Period
Exercise: Retail, Manufacturing and Services Pricing (20 mins.)
There are three pricing worksheets at the end of this section: Retail Product Pricing, Manufacturing Pricing, and Services Pricing. Make copies for your students and yourself. Before class, develop a simple scenario and work through the numbers. The worksheets will lead students through logging budgeted costs and determining desired profit margins. Pricing is a problem for small businesses, so emphasize the importance of learning this skill.
Refer to your pricing notes from Session 5, and review pricing strategies. These strategies are important to consider, but the bottom line is: Can I produce the product in the time allotted (hours available to work), at a price that customers will pay, and still earn my desired profit?
Retail Product Pricing Worksheet
Wholesale and retail products tend to have identifiable variable costs, and these costs tend to guide pricing decisions.
Step 1 asks that variable costs be identified as a base point.
Step 2 provides a place to enter competitors’ prices for comparison purposes (combining marketing and financial information is crucial in determining appropriate pricing). It also asks for a Proposed Price for the product.
Step 3 asks for operating costs, broken down by expense line items. Students should have this information on their completed worksheets.
Step 4 revisits the contribution margin and break-even analysis. Questions to consider: Is this a realistic break-even point? Can you sell this number of units?
Manufacturing Pricing Worksheet
This entails the same steps, but students also need to look at the question in Step 5: Does my proposed wholesale price allow for a realistic retail price?
Related questions include: What do you consider optimal pricing, and why? How much of a profit margin do retailers normally expect to earn? How many intermediaries will the product go through before reaching the end user (i.e., how many times will it be marked up)?
Services Pricing Worksheet
Step 1 calculates how many billable hours are available to the service provider in a year. First, calculate how many hours you want to work per week, then subtract the hours dedicated to non-billable activities. (This will be an eye-opening exercise for any students who have not previously analyzed their available time in this way.)
Step 2 identifies labor and non-labor costs. Labor costs should be separated from non-labor fixed operating costs so that students can clearly see how labor related to the service affects pricing. There is also a line for other direct project costs (e.g., renting a machine in order to provide the service). Although this would not be an ongoing operating cost, it does need to be included in these calculations.
Step 3 calculates a Rate per Hour based on total billable hours available, and reminds students to compare it with current market rates.
Step 4 asks for a recalculation based on a realistic estimate of how many hours can actually be sold (as opposed to hours that are available to sell). Somewhere in between the rates calculated in Steps 3 and 4 may be a more realistic rate. Again, comparing current rates in similar markets will be helpful. Costs to reexamine if pricing is too high include owner’s salary, other labor costs, and discretionary items like advertising and travel.
OPTIONAL EXERCISE: After discussing these worksheets, have students divide into separate groups of retail, service, and manufacturing businesses. Using the worksheets as guides, have each group spend about 10 minutes discussing pricing challenges and whether the worksheets might help them identify the cause of pricing dilemmas. Have each group report on their pricing challenges, and answer any questions that come up regarding how to use the worksheets.
Homework Review—Session 6
After completing Session 6, students should have thought about what to revise or update in their business plan. Ask the questions: How did what you learned about the Internet, e-commerce, direct sales or customer management affect your business plan and marketing strategies? What parts of your business plan did you change, and what changes did you make? Did these changes affect your costs? How about your revenues? Do you need to update your numbers?
Workbook Preview—Session 7
You should have covered most of this session’s worksheets in class. Remind participants to look over the worksheets they prepared in earlier sessions (Occupancy Expenses, Salaries/Wages, etc.) to make sure all their assumptions are current and valid. Be prepared for some questions and frustration, as this is one of the most difficult sections of the business plan.
Have students look again at Step 12 of the Monthly Cash Flow Projections Worksheet. Discuss how the cash flow projection will be analyzed. (Encourage use of a spreadsheet program. Changes are inevitable, and letting the computer do the math will save lots of time.)
Look at the Annual Cash Flow Projections—Years 2 and 3 Worksheet. Discuss how to complete those worksheets (e.g., month-to-month analysis vs. projecting a yearly total by applying percentage increases). Remind students to document assumptions for Years 2 and 3.
Assignment Review—Session 8
Have students look at the Assignment for Session 8 at the bottom of the Session 7 Student Outline. Stress the importance of reading the Session 8 text before the next class.
The Writing Your Business Plan assignment is primarily to complete and review the worksheets. Inform students that they will not be able to begin the workbook assignment for the next session until these financial worksheets are completed!
Use OHDs 1-13 and 1-14 to show the NxLeveL® Business Plan Outline, so that students understand how this assignment fits into Section III, Part C and Section V, Parts A, B and C. Use the NxLeveL® sample business plans to show how these sections can be written.
Overheads for Session 7
OHD	7-1	Why Do You Need Records?
OHD	7-2	Accounting Journals
OHD	7-3	Common Accounting Modules
OHD	7-4	Choosing Accounting Software
OHD	7-5	Internal Controls
OHD	7-6	Segregation of Duties
OHD	7-7	Record Retention Guidelines
OHD	7-8	Creating a Records Management Plan
OHD	7-9	Common Tax Reporting Forms
OHD	7-10	What Makes a Good Budgeting System?
OHD	7-11	Sales Forecast Example
OHD	7-12	Cost of Projected Product Units Sold Budget
OHD	7-13	Growth or Startup Expenses Budget
OHD	7-14	Review of Financial Worksheets
OHD	7-15	Fixed Expenses
OHD	7-16	Variable Expenses
OHD	7-17	The Break-Even Point
OHD	7-18	The Cash Flow Cycle
OHD	7-19	Inventory Management and Cash Flow
OHD	7-20	Managing Accounts Receivable
OHD	7-21	Accounts Receivable Aging Report
Suggested Supplemental Materials for Session 7
SBA handouts on budgeting and cash flow management
Sample cash flow projections
Articles about budgeting and cash flow management
Sample performance reports
Sample budgets
IRS depreciation publications
You have the option of finding reputable articles and publications for use in class, or suggesting that students search them out on their own and share what they find with the rest of the class. Keep track of supplemental materials you used by making notes below. (This will be helpful if you choose to teach this course again.)
Supplemental materials used for Session 7
Notes

Learning Objectives
Understand the purpose and importance of accounting, recordkeeping and internal controls. Explore how budgets provide performance feedback. Understand how to prepare common budgets, including Sales Forecast and Cost of Projected Product Units Sold. Understand how to prepare cash flow projections. Understand ways of managing the cash flow cycle.

Sample Cash Flow Posting Problem Scenario 1 Fact Sheet
Line #
| The business is a corporation. There is $5,000 cash in the corporate checking account.
| Equipment will be purchased in Month 2 for $5,000.
| A new sign is being made that costs $1,500. It will be paid for in equal installments in Months 2 and 3.
| Stationery and business cards have been ordered in the amount of $200. They will be delivered in Month 1, but will not be paid for until Month 2.
| Sales anticipated are: $1,000 in Month 1; $2,000 in Month 2; $3,000 in Month 3. Terms are 50 percent down in cash, and 50 percent due in 30 days.
| Merchandise in the amount of $3,000 will be purchased in Month 1. Terms have been negotiated for: 1/3 due in Month 1; 1/3 due in Month 2; 1/3 due in Month 3. Another $3,000 of merchandise will be purchased in Month 3 with the same terms.
| Salaries are $1,000 per month for the president and $500/month for a helper. (Use 20 percent estimated benefits and payroll taxes for convenience.)
| $250 per month will be spent on advertising.
| Additional office supplies will be needed in Month 2 for a total of $250.
| Rent is $500 per month, with the first and last months due in Month 1 as a deposit.
| An accountant will do the books for $150 per month.
| There will be 3 phones. Hookup fees in Month 1 are $150. Anticipated charge will be $75 per month.
| Gas and lights in this building should run an average of $100/month ($200 in winter months, $50 in summer months).
| Insurance is $2,000 per year, billed quarterly.
Cash Flow Projection Worksheet (Blank)
|  | 1         Jan | 2         Feb | 3         Mar | Quarter Subtotal | 4       Apr | Comments
1. | (A) Beginning Cash Balance
Cash Receipts
2. | Cash Sales
3. | Collections from Receivables
4. | Loan or Other Injection
(B) Total Cash Receipts
Cash Disbursements
5. | Purchases (Merchandise)
6. | Gross Wages
7. | Payroll Exp. (Taxes, etc.)
8. | Outside Services (Accounting)
9. | Supplies (Office and Operation)
10. | Repairs and Maintenance
11. | Advertising
12. | Car, Delivery, Travel (mileage)
13. | Occupancy Expenses
| a. Rent
| b. Telephone
| c. Utilities
14. | Insurance
15. | Miscellaneous
16. | Purchase of Fixed Assets
(C) Total Cash Disbursements
Net Cash Flow (B-C)
Adjustments to Net Cash Flow
17. | (+) New Debt
18. | (+) New Owner Investment
19. | (+ or-) Other:
(D) Adjusted Net Cash Flow
Ending Cash Balance (A+D)

Sample Cash Flow Posting Problem
Scenario 1 Answer Sheet
Line #
1 | The business is a corporation. There is $5,000 cash in the corporate checking account.
16 | Equipment will be purchased in Month 2 for $5,000.
16 | A new sign is being made that costs $1,500. It will be paid for in equal installments in Months 2 and 3.
9 | Stationery and business cards have been ordered in the amount of $200. They will be delivered in Month 1, but will not be paid for until Month 2.
2 & 3 | Sales anticipated are: $1,000 in Month 1; $2,000 in Month 2; $3,000 in Month 3. Terms are 50 percent down in cash, and 50 percent due in 30 days.
5 | Merchandise in the amount of $3,000 will be purchased in Month 1. Terms have been negotiated for: 1/3 due in Month 1; 1/3 due in Month 2; 1/3 due in Month 3. Another $3,000 of merchandise will be purchased in Month 3 with the same terms.
6 & 7 | Salaries are $1,000 per month for the president and $500/month for a helper. (Use 20 percent estimated benefits and payroll taxes for convenience.)
11 | $250 per month will be spent on advertising.
9 | Additional office supplies will be needed in Month 2 for a total of $250.
13a | Rent is $500 per month, with the first and last months due in Month 1 as a deposit.
8 | An accountant will do the books for $150 per month.
13b | There will be 3 phones. Hookup fees in Month 1 are $150. Anticipated charge will be $75 per month.
13c | Gas and lights in this building should run an average of $100/month ($200 in winter months, $50 in summer months).
14 | Insurance is $2,000 per year, billed quarterly.
NOTE: Cost of merchandise is doubled to get the sales price.
Question: Do you need that information to complete this worksheet?
Answer: Not yet. But you will need it for the Income Statement.
Cash Flow Projection Worksheet—1st Run
|  | 1 Jan | 2 Feb | 3  Mar | Quarter Subtotal | 4  Apr | Comments
1. | (A) Beginning Cash Balance | 5,000 | 375 | (8,300) | 5,000 | (11,375)
Cash Receipts
2. | Cash Sales | 500 | 1,000 | 1,500 | 3,000
3. | Collections from Receivables | 0 | 500 | 1,000 | 1,500 | 1,500
4. | Loan or Other Injection | 0 | 0 | 0 | 0
(B) Total Cash Receipts |  | 500 | 1,500 | 2,500 | 4,500
Cash Disbursements
5. | Purchases (Merchandise) | 1,000 | 1,000 | 2,000 | 4,000 | 1,000 | This account has multiple postings
6. | Gross Wages | 1,500 | 1,500 | 1,500 | 4,500
7. | Payroll Exp. (Taxes, etc.) | 300 | 300 | 300 | 900
8. | Outside Services (Accounting) | 150 | 150 | 150 | 450
9. | Supplies (Office and Operation) | 0 | 450 | 0 | 450 |  | This account has multiple postings
10. | Repairs and Maintenance | 0 | 0 | 0 | 0
11. | Advertising | 250 | 250 | 250 | 750
12. | Car, Delivery, Travel (mileage) | 0 | 0 | 0 | 0
13. | Occupancy Expenses
| a.  Rent | 1,000 | 500 | 500 | 2,000
| b.  Telephone | 225 | 75 | 75 | 375
| c.  Utilities | 200 | 200 | 50 | 450 |  | This account could vary depending on geographic location
14. | Insurance | 500 | 0 | 0 | 500 | 500
15. | Miscellaneous | 0 | 0 | 0 | 0
16. | Purchase of Fixed Assets | 0 | 5,750 | 750 | 6,500
(C) Total Cash Disbursements |  | 5,125 | 10,175 | 5,575 | 20,875
Net Cash Flow (B-C) |  | (4,625) | (8,675) | (3,075) | (16,375)
Adjustments to Net Cash Flow
17. | (+) New Debt
18. | (+) New Owner Investment
19. | (+ or -) Other:
(D) Adjusted Net Cash Flow |  | (4,625) | (8,675) | (3,075) | (16,375)
Ending Cash Balance (A+D) |  | 375 | (8,300) | (11,375) | (11,375)
Sample Cash Flow Posting Problem Scenario 2 FACT Sheet
Line #
1 | The business is a corporation. There is $5,000 cash in the corporate checking account.
16 | Equipment will be purchased in Month 2 for $5,000. Change to 120 days, no interest.
16 | A new sign is being made that costs $1,500. It will be paid for in equal installments in Months 2 and 3.
9 | Stationery and business cards have been ordered in the amount of $200. They will be delivered in Month 1, but will not be paid for until Month 2.
2 & 3 | Sales anticipated are: $1,000 in Month 1; $2,000 in Month 2; $3,000 in Month 3. Terms are 50 percent down in cash, and 50 percent due in 30 days. No charge sales. Use MC & VISA.
5 | Merchandise in the amount of $3,000 will be purchased in Month 1. Terms have been negotiated for: 1/3 due in Month 1; 1/3 due in Month 2; 1/3 due in Month 3. Another $3,000 of merchandise will be purchased in Month 3 with the same terms.
6 & 7 | Salaries are $1,000 per month for the president and $500/month for a helper. (Use 20 percent estimated benefits and payroll taxes for convenience.) Reduce president to $750. (Note that payroll taxes change!)
11 | $250 per month will be spent on advertising.
9 | Additional office supplies will be needed in Month 2 for a total of $250.
13a | Rent is $500 per month, with the first and last months due in Month 1 as a deposit. Negotiate deposit.
8 | An accountant will do the books for $150 per month.
13b | There will be 3 phones. Hookup fees in Month 1 are $150. Anticipated charge will be $75 per month.
13c | Gas and lights in this building should run an average of $100/month ($200 in winter months, $50 in summer months). Negotiate budget billing.
14 | Insurance is $2,000 per year, billed quarterly.
Post these adjustments to the Cash Flow Projection Worksheet, and see how net cash flow is affected by the changes.

Cash Flow Projection Worksheet—2nd Run
|  | 1 Jan | 2 Feb | 3 Mar | Quarter Subtotal | 4 Apr | Comments
1. | (A) Beginning Cash Balance | 5,000 | 1,745 | (1,090) | 5,000 | (3,505)
Cash Receipts
2. | Cash Sales | 1,000 | 2,000 | 3,000 | 6,000 |  | Required MC and VISA (see bank fee in Misc. of 3%)
3. | Collections from Receivables | 0 | 0 | 0 | 0 |  | Changed as a result of #2
4. | Loan or Other Injection | 0 | 0 | 0 | 0
(B) Total Cash Receipts |  | 1,000 | 2,000 | 3,000 | 6,000
Cash Disbursements
5. | Purchases (Merchandise) | 1,000 | 1,000 | 2,000 | 4,000 | 1,000 | This account has multiple postings
6. | Gross Wages | 1,250 | 1,250 | 1,250 | 3,750 |  | Boss earns $750, helper $500
7. | Payroll Exp. (Taxes, etc.) | 250 | 250 | 250 | 750 |  | Changed as a result of #6
8. | Outside Services (Accounting) | 150 | 150 | 150 | 450
9. | Supplies (Office and Operation) | 0 | 450 | 0 | 450 |  | This account has multiple postings
10. | Repairs and Maintenance | 0 | 0 | 0 | 0
11. | Advertising | 250 | 250 | 250 | 750
12. | Car, Delivery, Travel (mileage) | 0 | 0 | 0 | 0
13. | Occupancy Expenses
| a.  Rent | 500 | 500 | 500 | 1,500 |  | Negotiate deposit
| b.  Telephone | 225 | 75 | 75 | 375
| c.  Utilities | 100 | 100 | 100 | 300 |  | Negotiate budget billing
14. | Insurance | 500 | 0 | 0 | 500 | 500
15. | Miscellaneous-Bank Fee 3% | 30 | 60 | 90 | 180 |  | 3% from using MC/VISA
16. | Purchase of Fixed Assets | 0 | 750 | 750 | 1,500 |  | Equipment purchase terms negotiated to 120 days, no interest
(C) Total Cash Disbursements |  | 4,255 | 4,835 | 5,415 | 14,505
Net Cash Flow (B-C) |  | (3,255) | (2,835) | (2,415) | (8,505)
Adjustments to Net Cash Flow
17. | (+) New Debt
18. | (+) New Owner Investment
19. | (+ or -) Other:
(D) Adjusted Net Cash Flow |  | (3,255) | (2,835) | (2,415) | (8,505)
Ending Cash Balance (A+D) |  | 1745 | (1,090) | (3,505) | (3,505)
Retail Product Pricing Worksheet
1. Variable Costs (per unit) |  | Description
Inventory Cost _____________________________________________________________________ |  |  |  |  | $ __________
Freight ____________________________________________________________________________ |  |  |  |  | __________
Sales Costs ________________________________________________________________________ |  |  |  |  | __________
Other _____________________________________________________________________________ |  |  |  |  | __________
|  | TOTAL VARIABLE COSTS PER UNIT |  |  | $ __________
2. Competitors’ Prices (per unit) for comparison
Competitor A: _____________________________________________________________________ |  |  |  |  | $ __________
Unique features and benefits:
Competitor B: _____________________________________________________________________ |  |  |  |  | $ __________
Unique features and benefits:
Competitor C: _____________________________________________________________________ |  |  |  |  | $ __________
Unique features and benefits:
|  | PROPOSED RETAIL PRICE FOR MY PRODUCT |  |  | $ __________
3. Operating Costs (including loan repayment) |  |  | Monthly |  | Annual
Salaries and wages (employees) |  |  | $ __________ |  | $ __________
Owner’s salary or draw |  |  | __________ |  | __________
Payroll-related taxes |  |  | __________ |  | __________
Other fringe benefits (Health Ins/Retirement) |  |  | __________ |  | __________
Outside services:
Legal |  |  | __________ |  | __________
Accounting |  |  | __________ |  | __________
Other: ______________ |  |  | __________ |  | __________
Insurance |  |  | __________ |  | __________
Marketing / Promotion |  |  | __________ |  | __________
Occupancy Expenses:
Rent |  |  | __________ |  | __________
Utilities (gas / electric) |  |  | __________ |  | __________
Phone |  |  | __________ |  | __________
Miscellaneous:
Office supplies and postage |  |  | __________ |  | __________
Dues, fees, subscriptions |  |  | __________ |  | __________
Travel and entertainment |  |  | __________ |  | __________
Other: ______________ |  |  | __________ |  | __________
Interest expense |  |  | __________ |  | __________
Principal payments (loan) |  |  | __________ |  | __________
Other: _________________ |  |  | __________ |  | __________
| TOTAL OPERATING COSTS |  |  | $ __________ | $ __________
4. Break-Even Point
Retail Price per unit _______________ minus Variable Costs per unit _______________  =
|  |  |  |  | contribution margin
Operating Costs _______________  divided by CM =
|  |  |  | # of units to break even | $ to break even
|  |  |  | (Units x Selling Price)
If the break-even point is beyond your capacity to produce or sell, you must raise your price, lower variable costs, or decrease operating costs. Remember: Break-even only covers costs! You will have to sell more to make a profit.
Manufacturing Pricing Worksheet
1. Variable Costs (per unit) |  | Description
Raw Materials Inventory Cost ________________________________________________________ |  |  |  |  | $ __________
Production Labor _____________________________________________________________________ |  |  |  |  | __________
Packaging __________________________________________________________________________ |  |  |  |  | __________
Sales Costs ________________________________________________________________________ |  |  |  |  | __________
Other _____________________________________________________________________________ |  |  |  |  | __________
|  | TOTAL VARIABLE COSTS PER UNIT |  |  | $ __________
2. Competitors’ Prices (per unit) for comparison
Competitor A: _____________________________________________________________________ |  |  |  |  | $ __________
Unique features and benefits:
Competitor B: _____________________________________________________________________ |  |  |  |  | $ __________
Unique features and benefits:
Competitor C: _____________________________________________________________________ |  |  |  |  | $ __________
Unique features and benefits:
|  | PROPOSED WHOLESALE PRICE FOR MY PRODUCT |  |  | $ __________
3. Operating Costs (including loan repayment) |  |  | Monthly |  | Annual
Non-production wages (employees) |  |  | $ __________ |  | $ __________
Owner’s salary or draw |  |  | __________ |  | __________
Payroll-related taxes |  |  | __________ |  | __________
Other fringe benefits (Health Ins/Retirement) |  |  | __________ |  | __________
Outside services:
Legal |  |  | __________ |  | __________
Accounting |  |  | __________ |  | __________
Other: ______________ |  |  | __________ |  | __________
Insurance |  |  | __________ |  | __________
Marketing / Promotion |  |  | __________ |  | __________
Occupancy Expenses:
Rent |  |  | __________ |  | __________
Utilities (gas / electric) |  |  | __________ |  | __________
Phone |  |  | __________ |  | __________
Miscellaneous:
Office supplies and postage |  |  | __________ |  | __________
Dues, fees, subscriptions |  |  | __________ |  | __________
Travel and entertainment |  |  | __________ |  | __________
Other: ______________ |  |  | __________ |  | __________
Interest expense |  |  | __________ |  | __________
Principal payments (loan) |  |  | __________ |  | __________
Other: _________________ |  |  | __________ |  | __________
| TOTAL OPERATING COSTS |  |  | $ __________ | $ __________
4. Break-Even Point
Wholesale Price per unit _________ minus Variable Costs per unit _________ =
|  |  |  |  | contribution margin
Operating Costs __________ divided by CM =
|  |  |  | # of units to break even | $ to break even
|  |  |  | (Units x Selling Price)
5. Does my proposed wholesale price allow for a realistic retail price? ______
Services Pricing Worksheet
1. Billable Hours | Total Hours (Annual)
Potential hours available to work: _______ weeks @ _______ hours per week | ______________
Less holidays: _______ days @ _______ hours per day | ______________
Less vacation: _______ days @ _______hours per day | ______________
Less estimated sick time: _______ days @ _______ hours per day | ______________
Less non-billable work hours (e.g., billing, ordering, phone calls, training): | ______________
Less marketing and administration: _______ weeks @ _______ hours per week | ______________
TOTAL BILLABLE HOURS | ______________
2. Operating Costs
Labor Costs and Other Direct Project Costs | Annual
Owner’s salary or draw | $ _______________
Other hired labor | _______________
Payroll-related taxes | _______________
Other fringe benefits (Health Ins/Retirement) | _______________
Other direct project costs | _______________
Total Annual Labor and Other Direct Project Costs | $ _______________
Non-Labor Operating Costs | Monthly | Annual
Outside services:
Legal | $ _______________ | $ _______________
Accounting | _______________ | _______________
Other: ______________ | _______________ | _______________
Insurance | _______________ | _______________
Marketing / Promotion | _______________ | _______________
Occupancy Expenses:
Rent | _______________ | _______________
Utilities (gas / electric) | _______________ | _______________
Phone | _______________ | _______________
Miscellaneous:
Office supplies and postage | _______________ | _______________
Dues, fees, subscriptions | _______________ | _______________
Travel and entertainment | _______________ | _______________
Other: ______________ | _______________ | _______________
Interest expense | _______________ | _______________
Principal payments (loan) | _______________ | _______________
Other: _________________ | _______________ | _______________
Total Annual Non-Labor Costs |  | $ _______________
TOTAL LABOR AND NON-LABOR COSTS |  | $ _______________
3. Hourly Rate
| Total Costs | $ _______________ | Compare your rate per hour with the going rate charged by competitors. If it’s too high, you must lower costs, increase your billable hours, or lower your desired profit level.
÷ | Total Billable Hours | _______________
x | Desired Profit | 1._______________
= | Rate Per Hour | $ _______________
4. Billable Hours Available vs. Hours Realistically Billable
Total billable hours (from Question 1): ______ Total hours you think you can realistically sell: _______
Total Costs | ÷ | Realistic Hours | = | Break-Even Hourly Rate | x | Desired Profit | = | Realistic Hourly Rate with Profit
$ |  |  |  | $ |  | 1. |  | $