Management of Finances of a Small Business - Case Study Example

Running head: Management of Finances Management of Finances of a Small Business Name Institution Date Management of Finances The most vital element that comes into play if one wants to run a successful small business is the keeping of timely and accurate financial information. An average of eight out of ten new small businesses fail mainly because of poor financial planning systems that have been put in place. To avoid similar failure, it is therefore advisable to establish proper financial management policies and systems in ones business even though it may be small in size (Kravitz, 1999). The first of these systems is an efficient system for keeping ones records. A good and updated record-keeping system gives one the information needed to monitor and measure the progress and performance of the business. Tracking the activities of one’s business, transaction after transaction, enables one to keep in touch with the obligations and operations of one’s business and also helps in the spotting of any problem before it occurs (Marshall, 2006). Other systems include the financial control system that ensures that finances are well managed and put into their proper use. It also protects the finances from misuse or theft by personnel in the business. Lastly is the cash management and planning system that helps one to know the source and use of the business resources. This system also gives the overall an annual financial position of the business. As the owner of the hairdressing salon, if one happens to be inexperienced in the field of financial management, outsourcing the task of book-keeping is highly advised. Outsourcing ensures that the accuracy of accounts is maintained and it gives one ample time to focus on other important activities in the salon. An external accountant or book-keeper will prepare financial statements as well as carry out basic and general financial analysis for the salon. Even though the expertise of external sources will help in the setting up of a proper book-keeping system, the responsibility of financial management is not left completely to them. As the owner of the salon, one should be in the position to understand and analyze financial data so that management and financial decisions can be made more effectively. It also allows one to retain control of one’s financial information as well as business operations. Some of the journals that one is required to keep include the cash receipts journal. This journal records the cash that flows into the business by means of cash sales, interest income as well as bank loans given to the business. The second journal is the cash issue or disbursement journal. Cash flowing out of the business through expenses such as wages, rent, electricity, purchases and insurance are recorded in this journal. One should create a separate account for personal transactions to avoid mixing personal cash with business cash. The third journal is the Sales journal that records the sales and services offered to customers on credit. Purchases made on credit are recorded in the purchases journal. Businesses could also have a payroll journal in which all transactions related to paying employees are recorded. The final journal is the general journal that records miscellaneous entries as well as adjustments such as inventory and depreciation. Non-cash transactions, such as purchase of furniture, are also recorded in the general journal. Some of the professionals that could enhance proper financial management in the salon include an internal treasurer or senior cashier who has experience in dealing with financial information. This professional will be in charge of filling journal entries on a day-to-day basis ensuring that the book-keeping records are up-to-date. This ensures that transactions are still recorded even in the absence of the owner or supervisor of the business of the business. Such an employee should also be well conversant with accounting software that will allow easier management of one’s books. Another professional is an external accountant or book-keeper. The role of such a professional will be to use the information gathered by the internal treasurer or accountant to compile financial statements as well as analyze them at the end of each annual financial period. They also help in the calculation of taxes required to be paid to the government. Other professionals include bankers for storage of cash and also because some transactions are made through banks. Advice should be sought from similar small businesses to ensure one does not suffer from high interests and unbearable transaction fees that are characteristic of some banks. Transactions that are dealt with are usually recorded on a daily basis and preferably at the exact time they were transacted to ensure accuracy. These transactions are filled into the journals that were mentioned earlier in the text. A daily or weekly summary of these transactions can be entered into a Chart of Accounts by an internal employee to make the financial information easier to deal with. The summaries are then entered into ledger accounts on a monthly basis. The totals of individual accounts are maintained in a general ledger so as to reduce the work-load when the financial statement is to be compiled. Financial statements such as the income statement and the balance sheet will be compiled by the external experts at the end of a financial period which is usually a 12month year. To ensure effective book-keeping, the entries into each of these documents have to be done duly, that is daily, weekly or monthly, if at all accuracy is to be achieved (Ruegg and Venkatrathnam, 2003). Journals for daily record keeping Transaction No. Account Names & Explanation Debit Credit 1. Cash Income (received payment of $285 for serving customers through hair handling.eg. washing, treatment and styling) 285 285 2. Cash Income (received payment of $55 from extra services such as facials, waxing, pedicures and manicures) 55 55 3. Cash Beauty and hair products ($90 received from the sale of Beauty and hair products) 90 90 4. Lunch allowances Cash ($4paid to each employee for their lunch at midday) 24 24 5. Wages Cash (35% commission paid to 4hairdressers according to the customers they have served) 108 108 Journals for weekly record keeping Transaction No. Account Names & Explanation Debit Credit 1. Cash Income (received payment of $1995 for serving customers through hair handling.eg. washing, treatment and styling) 1995 1995 2. Cash Income (received payment of $385 from extra services such as facials, waxing, pedicures and manicures) 385 385 3. Cash Beauty and hair products ($630 received from the sale of Beauty and hair products) 630 630 4. Lunch allowances Cash ($28paid to each employee for their lunch at midday) 168 168 5. Wages Cash (35% commission paid to 4hairdressers according to the customers they have served) 756 756 6. Cleaning and maintenance expenses Cash (cleaning and maintenance expenses of $21 paid towards outsourced services on a weekly basis) 21 21 Journals for monthly record keeping Transaction No. Account Names & Explanation Debit Credit 1. Cash Income (received payment of $9520 for serving customers) 9520 9520 2. Purchase of Beauty and hair products Cash ($650 spent on the purchase of supplies for use and products for resale) 650 650 3. Cash Beauty and hair products ($2520 received from the sale of Beauty and hair products) 2520 2520 4. Gross wages and allowances (payroll) Cash (35% commission paid to 4hairdressers, their allowances and outside cleaning services) 756 756 5. Fixed salaries Bank ($1024 paid to internal employee who handles books and external accountant/book-keeper) 1024 1024 6. Rent and property tax expenses Bank ($1300 paid for the rent and property tax accrued on a monthly basis) 1300 1300 7. Electricity and water Bank (paid $726 as monthly rent expenses) 726 726 8. Advertising and marketing Bank (paid $478 as monthly marketing expenses) 478 478 9. Insurance Bank (paid $722 as monthly insurance expenses) 722 722 10. Miscellaneous Cash ($250 is put aside for other expenses and unforeseen costs) 250 250 Projected estimation of the salon expenses EXPENSES JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL      (a) Purchases (Merchandise) 350 350 345 350 342 350 350 360 350 350 355 360 4212        (b) Gross Wages (Excludes Withdrawals) 756 756 760 760 760 760 760 760 760 760 760 825 9177        (c) Payroll Expenses (Taxes etc.) 156 156 182 182 182 182 182 182 182 182 182 182 2132        (d) Outside Services (cleaning and garbage collection) 21 21 21 21 21 21 21 21 21 21 21 21 252        (e) Supplies (Office and operating) 300 315 300 300 320 320 320 300 300 290 320 340 3725        (f) Repairs and Maintenance 75 75 45 47 59 67 76 75 75 88 34 34 750        (g) Advertising (brochures, posters, newspaper ads) 478 500 500 460 500 500 480 480 480 430 560 560 5928        (h) Car, Delivery, and Travel 0 0 0 0 0 0 0 0 0 0 0 0 0        (i) Accounting and Legal (external expertise) 89 89 89 89 89 89 95 89 89 89 89 95 1080        (j) Rent 1100 1100 1100 1100 1100 1100 1150 1150 1150 1150 1150 1150 13500        (k) Telephone 21 24 24 34 14 19 23 24 22 24 22 35 286        (l) Utilities (water, etc.) 34 36 36 42 34 34 23 42 34 34 24 42 415       (m) Insurance 722 722 722 722 722 722 722 722 722 722 722 722 8664       (n) Taxes (property tax, etc.) 200 200 200 200 200 200 200 200 200 200 200 200 2400      (o) Other Expenses (depreciation etc.) 65 65 56 53 45 45 68 76 47 92 34 67 713 (p) Miscellaneous 250 234 245 267 150 175 250 257 245 249 250 260 2832 TOTAL $4,617 4643 4625 4627 4538 4584 4720 4738 4677 4681 4723 4893 56,066 The estimated cash flow projection is used by the saloon owner to estimate the amount of cash that is required to keep the salon running in the next year. It is useful and important because it shows where cash required to run the business will be got from. Seasonal variations are also reflected in the cash flow and it is such variations that enable the salon owner to prepare and plan for on-peak and off-peak seasons. The cash flow also enables the salon owner to estimate the borrowing requirements each year and plan adequately for how they will be repaid in time. This relieves the business from penalties and fines incurred as a result of delayed payments that were probably forgotten. The cash flow projection is of utmost significance when it comes to seeking investors as well as when applying for loans from the bank (Ruegg, 2002). This is because it gives an overview of how money in business will be spent and whether the business will generate profits in the future. An estimation of the salon expenses is used by the owner of the salon in planning for the future operations of the business. Such planning allows the owner to ensure that money is spent reasonably and not in a wasteful manner. This allows the owner to know where money is going to and when it will be spent, enhancing control over the outward cash flow of finances in the business. The estimation of expenses also enhances proper allocation of the resources in the business and it enables the owner to identify areas where expenses can be minimized so as to increase profitability of the salon. The expenses projection plays a major role in decision making as the owner can make informed choices on how money in the business ought to be spent when future expenses are put into consideration. The projection also enables the calculation of estimated profits at the end of a financial period. It is only after the calculation of this estimated profit that the owner can determine whether the hairdressing salon is profitable or not. A profitable entity shows that goals have been met and that the entity can indeed continue in its existence. References Kravitz W., (1999) Bookkeeping: The Easy Way. New York: Barron’s Educational Series, Inc. Marshall D., (2006) So, You Want to Learn Bookkeeping! (http://www.dwmbeancounter.com/tutorial/Tutorial.html) Ruegg L. and Venkatrathnam M., (2003) Bookkeeping Basics: What Every Nonprofit Bookkeeper Needs to Know. Amherst H. Wilder Foundation. Ruegg L., (2002) Budgeting Your Way to Financial Stability. LarsonAllen Service Group. Read More