Complete Idiot's Guide to Finance for Small Business Owners

by Little, Kenneth E.

• ISBN13: 9781592574797
• ISBN10: 1592574793
• Format: Paperback
• Copyright: 2006-04-04
• Publisher: DK Publishing, Inc.

Summary

You're no idiot, of course. You know running your own business takes commitment, hard work, and a savvy knowledge of your chosen market. And although you don't have to be a CPA to keep your customers happy, it can only benefit you to increase your understanding of business economics.

Author Biography

Ken Little is an author and financial expert specializing in small business and personal investing. A former vice president of marketing for USAA-'s financial services branch, Little is a small business owner, consultant, and financial expert. He is the editor of stocks for About.com, editor, writer and manager of Investing for Beginners at About.com, and chief financial writer for the Strong Capital Management-'s website. He has written seven books on personal finance, investing, and small business strategies.

Table of Contents

Part 1: Numbers Are Your Friends	1	(60)
The Payoff	3	(12)
Ignorance Is Not Bliss	3	(2)
Work Smart	4	(1)
If You Don't	4	(1)
Start from the Beginning	5	(1)
Down the Wrong Road	5	(1)
Plan for Success	6	(1)
Knowledge Is Power	6	(1)
Vagueness vs. Clarity	6	(1)
Planning vs. Guessing	7	(1)
Measure It---Manage It	7	(4)
The Real Cost of Anything	8	(1)
The Real Price of Anything	9	(1)
Hidden Assets and Liabilities	10	(1)
Feel the Power	11	(4)
Manage Your Business; Don't Let It Run Your Life	11	(1)
Get the Loans/Financing You Need	11	(1)
Sleep Well at Night	12	(3)
The Big Three	15	(8)
The Big Picture	15	(2)
Drop Your Financial Drawers	16	(1)
Your Best Tools	16	(1)
The Balance Sheet	17	(2)
Balancing Act	17	(1)
Timing	18	(1)
The Income Statement	19	(1)
Same and Different	19	(1)
Timing and Format	19	(1)
The Statement of Cash Flows	20	(2)
By Another Name	20	(1)
Parts	21	(1)
Timing	22	(1)
Wrapping It Up	22	(1)
The Balancing Act	23	(12)
A Financial Checkup	23	(1)
The Preliminaries	24	(2)
Format	24	(1)
Dates	25	(1)
Breaking It Down	26	(2)
The Formula	26	(1)
What Are Assets and Liabilities?	27	(1)
Covering Your Assets	28	(3)
Current Assets	29	(1)
Property and Equipment	30	(1)
Other Assets	30	(1)
Limiting Your Liabilities	31	(1)
Current Liabilities	31	(1)
Long-Term Liabilities	32	(1)
What You Own	32	(1)
Retained Earnings	32	(1)
How It Balances	33	(2)
The Income Statement	35	(16)
Measuring Revenue and Expenses	36	(1)
What Flavor of Accounting?	36	(1)
Cash Accounting	36	(1)
Accrual Accounting	37	(1)
The Formula	37	(1)
Income Statement Formats	38	(1)
Single Stage Income Statement	38	(1)
Multistage Income Statement	39	(1)
The Reality	39	(7)
Revenues	41	(1)
Cost of Goods Sold	42	(1)
Gross Profit	42	(1)
Expenses	42	(2)
Total Expenses	44	(1)
Other Expenses	44	(1)
Net Income Before Taxes	45	(1)
Income Taxes	45	(1)
Net Income	45	(1)
Reporting vs. Operational Reports	46	(1)
Frequency of Reports	46	(1)
Format of Report	46	(1)
Sample Income Statement	47	(1)
Sample Focus	47	(1)
Statement Detail	48	(1)
Working Document	48	(3)
Show Me the Cash	51	(10)
Use of the Report	51	(2)
Where You Find the Numbers	52	(1)
Questions Answered	52	(1)
Timing	53	(1)
Three Parts	53	(1)
Operations	53	(1)
Investments	54	(1)
Financing	54	(1)
Formats	54	(1)
Sources and Uses of Funds	54	(1)
Categories	55	(1)
Sample Report	55	(4)
Start at the Beginning	56	(1)
Cash Goes Out	57	(1)
Net Cash from Operations	58	(1)
Cash Flow from Investments	58	(1)
Cash Flow from Financing	58	(1)
Summing It Up	58	(1)
Change in Cash Position	58	(1)
Other Items	59	(2)
Sources of Cash	59	(1)
Uses of Cash	60	(1)
Others	60	(1)
Part 2: Make the Numbers Work	61	(44)
How Are Your Assets Working?	63	(12)
Using Your Balance Sheet	64	(1)
Working With Ratios	65	(1)
Key Financial Ratios and Returns	66	(1)
Liquidity Ratios	66	(1)
Current Ratio	66	(1)
Quick Ratio or Acid Test	67	(1)
Using Liquidity Ratios	67	(3)
Value of Current Ratio	68	(1)
What Is the Best Current Ratio?	68	(1)
Establishing Targets	69	(1)
Return on Assets	70	(2)
High or Low	71	(1)
What It Means	71	(1)
Other Uses	71	(1)
Other Ratios	72	(3)
Debt to Shareholders' Equity	72	(1)
Return On Equity	73	(2)
Inside the Income Statement	75	(10)
Using Your Income Statement	75	(1)
Working With the Numbers	76	(1)
Income Statement Numbers	76	(2)
Sales Numbers	78	(1)
Return on Sales	78	(1)
Cash Return on Sales Ratio	79	(1)
Margins	79	(6)
Gross Margin	80	(1)
Operating Margin	81	(1)
Net Profit Margin	81	(1)
Interest Coverage Ratio	82	(3)
Measuring Cash Flow	85	(6)
Using the Statement of Cash Flows	85	(1)
Working With Numbers	86	(5)
Calculating Free Cash Flow	86	(2)
Calculating Cash Flow Coverage	88	(1)
Cash Flow to Assets	88	(1)
Current Cash Debt Coverage Ratio	89	(1)
Cash Debt Coverage Ratio	90	(1)
Operational Analysis	91	(14)
Operational Analysis Defined	91	(1)
Working With Numbers	92	(1)
Measuring Profit Centers	92	(3)
The DuPont Formula	92	(1)
Using the Formula as a Management Tool	93	(1)
Making Decisions with the Formula	94	(1)
Other Benchmarks	95	(10)
Calculating Inventory Turnover	95	(2)
Calculating Accounts Receivable Turnover	97	(1)
Aging Schedule	98	(1)
Accounts Payable Turnover Ratio	99	(1)
Discount Interest Rate	100	(2)
Calculating Fixed Assets Turnover	102	(1)
Calculating Total Assets Turnover	102	(1)
Recap of Operational Ratios	103	(2)
Part 3: Strategic Planning/Budgeting	105	(82)
The Strategic Planning Process	107	(14)
Plan with a Purpose	107	(1)
Setting Goals	108	(1)
Profitability Goals	108	(2)
New Thinking	109	(1)
Choosing a Target	110	(1)
Revenue Goals	110	(4)
The Buck Starts Here	111	(1)
Expense Goals	112	(1)
Set Specific Sales Numbers	113	(1)
Marketing Goals	114	(4)
The Buzz	114	(1)
Advertising Dollars	115	(1)
Get a Website	115	(1)
Other Opportunities	116	(1)
Generating New Customers	116	(1)
Be Specific	117	(1)
Budget to Goals	118	(3)
Work Together	118	(1)
The Goal Standard	118	(3)
Shooting for Profit	121	(10)
Work Your Plan	122	(1)
Setting Your Goal	122	(2)
The Minimum Goal	122	(1)
The Risk Factor	123	(1)
The Caveats	123	(1)
What Is Reasonable?	124	(3)
Where Are You?	124	(1)
Where You Want to Be	125	(1)
Where Are Opportunities?	125	(1)
What Are the Threats?	126	(1)
Putting It Together	127	(4)
The Pieces	127	(1)
What Has to Change	128	(1)
Share with the Company	129	(1)
Standards When Considering Projects	129	(1)
Real World	130	(1)
Holding Down Expenses	131	(12)
The Hole in the Bucket	131	(1)
Setting Expense Goals	132	(2)
At the Top	132	(1)
The Operating Unit	132	(1)
The Nitty Gritty	133	(1)
Operational Expenses	134	(1)
Start from Zero	134	(1)
Clear Policies	135	(1)
Marketing Expenses	135	(2)
Advertising Expenses	135	(1)
Other Marketing Expenses	136	(1)
Sales Expenses	137	(1)
Direct Sales Expenses	137	(1)
Indirect Sales Expenses	138	(1)
Administrative Expenses	138	(2)
Equipment and Services	138	(1)
Supplies	139	(1)
Personnel	140	(1)
Share with Employees	140	(3)
Sales Targets	143	(12)
A Moving Target	143	(1)
Setting Your Goal	144	(5)
Existing Customers---Worth Their Weight in Gold	144	(1)
Asking for New Business	145	(1)
What If You Just Don't Know?	146	(1)
Which Customers Are Not Worth Keeping?	146	(2)
Finding New Customers	148	(1)
What About Retail Businesses?	148	(1)
Setting Specific Goals	149	(3)
A Sales Goal Worksheet	149	(2)
What to Do with the Numbers	151	(1)
Your Goal	151	(1)
Making It Happen	152	(3)
Getting from Here to There	152	(1)
Small Bites	152	(3)
Expanding Market Share	155	(12)
Moving Markets	155	(2)
Expanding Markets	156	(1)
Flat or Declining Markets	156	(1)
The Market Size	156	(1)
Why Set a Goal	157	(1)
Product or Service Share	157	(1)
What It Takes	158	(1)
Big Fish, Little Fish	158	(3)
Big Fish	159	(1)
Little Fish	160	(1)
Competition	161	(1)
Gathering Information	161	(1)
Be Defensive	161	(1)
The Economics of Market Share	162	(5)
The Combo or Meal Deal	163	(1)
The Upsell or Loss Leader	163	(1)
Your Costs	164	(3)
The Strategic Planning Budget	167	(10)
Change Your Perceptions	167	(1)
The Budgeting Process	168	(1)
Starting from Scratch	168	(2)
Your Goals Decide	168	(1)
Conflicts	169	(1)
Building a Budget	170	(1)
Departments Work Under Established Goals	170	(1)
Timing	170	(1)
New Products or Services	171	(2)
Starting on the Right Foot	171	(1)
Right Foot	172	(1)
Stuff Happens	172	(1)
Building Your Budget	173	(2)
The Formula	173	(1)
Entering Expenses, Income	173	(1)
Departmental or Profit Center Budgets	174	(1)
Stingy with Cash	175	(2)
The Filter	175	(1)
Revise with Caution	175	(1)
Eye on the Prize	176	(1)
Financing for Growth: Debt vs. Equity	177	(10)
Two Flavors of Money	178	(1)
Debt Financing	178	(1)
Equity Financing	178	(1)
Benefits and Drawbacks of Debt	179	(2)
Using Leverage	179	(1)
Preserves Stockholder Equity	179	(1)
Leverage Can Work Against You	180	(1)
Poorly Structured Debt Stifles Growth	181	(1)
Benefits and Drawbacks of Equity	181	(3)
You Don't Have to Pay It Back	182	(1)
Using Equity Financing	182	(1)
Start-Up Equity Financing	183	(1)
Adds to Net Worth of Company	183	(1)
Reduces Your Stake in Company	183	(1)
Stockholders to Answer To	184	(1)
Make Mine a Combo	184	(3)
It Takes Money to Borrow Money	185	(1)
Don't Try This at Home	185	(2)
Part 4: Financing Your Business with Debt	187	(50)
Preparing Your Loan Package	189	(12)
Loan Package Objective	189	(1)
The Big Questions	190	(1)
Major Components	190	(1)
Who You Are	190	(1)
Company History	191	(1)
The Beginning	191	(1)
How You Got Here	191	(1)
Company Financials	192	(2)
History	192	(1)
Financial Projections	193	(1)
How You Use Your Loan	194	(1)
How You Repay Your Loan	194	(1)
How You Secure Your Loan	195	(1)
Company Assets	195	(1)
Personal Assets	195	(1)
Other Material to Include	196	(1)
Professional Look	196	(1)
Looking Good	196	(1)
Use Your Accountant	197	(1)
Organization	197	(1)
Presentation	198	(3)
Traditional Debt Financing	201	(10)
Sources of Traditional Debt Financing	201	(1)
Not for Start-ups	202	(1)
Banks	202	(1)
How Bankers Think	202	(1)
Five Cs of Credit	203	(1)
Finding a Good Banker	203	(2)
Characteristics of a Good Banker	204	(1)
Know Your Banker Before You Need a Loan	204	(1)
Where Are They Hiding?	204	(1)
Don't Put All Your Bankers in One Basket	205	(1)
Working With Your Banker	205	(2)
The First Step	205	(1)
Next Step	206	(1)
The Final Step	206	(1)
What If the Bank Says No?	206	(1)
The Bank Says Yes	207	(1)
Progress Reports	207	(1)
When Things Get Rough	207	(1)
What Bankers Want	208	(3)
What Bankers Want to See	208	(1)
What Bankers Want to Know	209	(2)
SBA Loan Programs	211	(10)
What Is the SBA?	211	(1)
What Is Small?	212	(1)
SBA Programs	212	(1)
Nonloan Programs	212	(1)
Loan Programs	213	(1)
SBA Loan Programs	213	(1)
SBA Loan Guarantees	213	(1)
How It Works	213	(1)
Types of Loans	214	(1)
Basic 7(a) Loan Guaranty	214	(1)
Most Popular Loan Program	214	(1)
SBA Lenders	215	(1)
What Is Guaranteed	215	(1)
Criteria for a 7(a) Loan Guarantee	215	(4)
Company Size	216	(1)
Qualifying Companies	216	(1)
Use of Proceeds	217	(1)
Availability of Funds	217	(1)
Maximum Loan Amounts, Guarantees, Interest Rates	217	(1)
Fees and Pre-Payment Penalties	218	(1)
CDC/504 Loan Program	219	(1)
The CDC/504 Program	219	(1)
How Loans Are Structured	219	(1)
MicroLoans	219	(2)
The Loan	220	(1)
Collateral and Training	220	(1)
Other Government Programs	221	(8)
Found Money	221	(1)
Local Programs	222	(2)
Growing Their Own	222	(1)
Cities Want Businesses	223	(1)
State Offerings	224	(3)
Labor Shortage Training Programs	224	(1)
Community Development Block Grant	224	(1)
Industry Specific Programs	225	(1)
Ownership Loan Programs	225	(1)
Enterprise Development Zone	225	(1)
Industrial Revenue Bonds	226	(1)
Rural Development Programs	226	(1)
Environmental Clean Up Funds	226	(1)
Low Interest Loans and Grants	226	(1)
Federal Government	227	(2)
Beyond the SBA	227	(1)
Where to Find Help	227	(2)
Sources of Alternative Debt Financing	229	(8)
Expensive Found Money	229	(1)
Using Alternatives	230	(1)
Other Methods	230	(1)
Financing Cash Flow	231	(4)
Accounts Receivable Financing	231	(1)
Factoring	232	(1)
Purchase Order Financing	233	(1)
Asset-Based Financing	233	(1)
Inventory Financing	234	(1)
Floor Planning	234	(1)
Conclusion	235	(2)
Part 5: Financing Your Business with Equity	237	(38)
Do You Want Partners?	239	(10)
Equity Financing Explained	239	(1)
What Investors Expect	240	(2)
A Reasonable Return	240	(1)
An Exit Strategy	241	(1)
An Emphasis on Growth	242	(1)
Preparing an Investor Package	242	(4)
Financial Projections	243	(1)
Market Projections	244	(1)
Selling Your Vision and Yourself	245	(1)
Different Types of Investors	245	(1)
Investors: Good News---Bad News	246	(1)
The Good News	246	(1)
The Bad News	247	(1)
Types of Investors	247	(2)
Angel Investors	249	(10)
Angels Defined	249	(1)
Amateur Angels	250	(2)
Usually Friendly Investors	250	(1)
The Strain on Family	251	(1)
The Relative Effect	251	(1)
Don't Be Casual	251	(1)
Semi-Pro Angels	252	(2)
Involved and Not So Involved	252	(1)
What They Expect	252	(1)
How To Find Them	253	(1)
Professional Angels	254	(1)
Very Involved	254	(1)
What They Expect	254	(1)
How to Find Them	255	(1)
Go Online	255	(1)
Close to Home	255	(1)
Advantages and Disadvantages	256	(3)
Disadvantages	256	(1)
Advantages	256	(3)
Investment Groups	259	(8)
Types of Investment Groups	259	(1)
Formal or Not	260	(1)
Member Screening	260	(1)
Due Diligence	261	(1)
Funding and Administration	261	(1)
The Biggest Investment Groups	261	(3)
What Type of Angels?	262	(1)
Filling the Gap	262	(1)
Networked Angels	263	(1)
The Trends	263	(1)
Other Investment Groups	264	(1)
Small Business Investment Companies	264	(1)
Regional Investment Companies	264	(1)
Strategic Investors	265	(1)
Specialized Investment Groups	265	(1)
By Industry	265	(1)
By Other Factors	265	(1)
By Geography	266	(1)
Caution	266	(1)
Venture Capitalists	267	(8)
Venture Capitalist Defined	267	(1)
How VCs Are Organized	268	(1)
What the Venture Capitalist Wants	268	(3)
Size and Speed	268	(1)
Significant Ownership	269	(1)
An Exit Strategy	270	(1)
What They Expect	271	(1)
Getting to Know Them	271	(1)
Know Your Target	271	(1)
Know Your Stuff	271	(1)
A Team Player	272	(1)
An A Team	272	(1)
Advantages and Disadvantages	272	(3)
Disadvantages	273	(1)
Advantages	273	(2)
Afterword	275	(30)
Appendixes
A. Glossary	279	(6)
B. Resources	285	(2)
C. Different Legal Structures	287	(18)
Index	305