Instructional Area: Financial Analysis (FI) Standard:

Understands tools, strategies, and systems used to maintain, monitor, control, and plan the use of
financial resources

1. Performance Element: Use risk management products to protect a business’s financial

wellbeing. Performance Indicators: Obtain insurance coverage (FI:082) (ON)

The federal government requires every business with employees to

have workers’ compensation, unemployment, and disability insurance.

Some states also require additional insurance. Laws requiring

insurance vary by state, so visit your state’s website to find out the
requirements for your business.
Four steps to buy business insurance
1. Assess your risks. Think about what kind of accidents,
natural disasters, or lawsuits could damage your business. If
you need help, the National Federation of Independent
Businesses (NFIB) provides information for choosing
insurance to help you assess your risks and to make sure
you've insured every aspect of your business.
2. Find a reputable licensed agent. Commercial insurance
agents can help you find policies that match your business
needs. They receive commissions from insurance companies
when they sell policies, so it's important to find a licensed
agent that’s interested in your needs as much as his/her
own.
3. Shop around. Prices and benefits can vary significantly. You
should compare rates, terms, and benefits for insurance
offers from several different agents.
 4. Re-assess every year. As your business grows, so do your
liabilities. If you have purchased or replaced equipment or
expanded operations, you should contact your insurance
agent to discuss changes in your business and how they
affect your coverage.

2. Performance Element: Acquire a foundational knowledge of accounting to understand its nature

and scope. Performance Indicators: Explain the concept of accounting (FI:085) (CS)

Definition of Accounting
Accounting is the recording of financial transactions along with storing, sorting, retrieving,
summarizing, and presenting the results in various reports and analyses. Accounting is
also a field of study and profession dedicated to carrying out those tasks.

Examples of Financial Accounting

One part of accounting focuses on presenting the financial information in the form of
general-purpose financial statements (balance sheet, income statement, etc.) that are
distributed to people outside of the company. These external reports must be prepared in
accordance with generally accepted accounting principles often referred to as GAAP or US
GAAP.

Examples of Management Accounting

Another part of accounting focuses on providing a company's management with the
information needed to keep the business financially healthy. Although some of the
information comes from recorded transactions, many of the analyses and reports include
estimated and projected amounts based on various assumptions. Generally, this
information is not distributed to people outside of the company's management. A few
examples of this information are budgets, standards for controlling operations, and
estimating selling prices when quoting prices for new work.

Other Examples of Accounting

Some of the many other examples of accounting include:

● Advising on accounting systems

● Income tax planning, advising, and reporting
● Auditing the financial statements of companies and other organizations
● Providing general business advice
● Financial planning for individuals
3. Performance Element: Implement accounting procedures to track money flow and to determine
financial status. Performance Indicators: Explain the nature of balance sheets (FI:093) (SP)
Describe the nature of income statements (FI:094) (SP) Prepare cash flow statements (FI:092)
(MN)

- Balance Sheets: Assets - Liabilities

- Liabilities split into current and long term
- Time until its paid off
- Assets split into current and fixed
- Time until liquidation
- Income Statements/Profit Loss Statements:
- Gross Income - Operating Costs
- Gross Income= Revenue - Cost of Production - Discounts, Allowances,
etc.
- Operating Costs = Fixed Expenses + Variable Expenses
- Fixed Expenses do not change on a month to month basis
- Variable Expenses change on a month to month basis
- Can be done in pre & post tax variants
- Cash Flow Statements
- Describes where the cash is at currently, cash being almost instantly
liquefiable.
- Can be positive or negative, but ideally positive
- Cash flow can be broken down to 3 components
- Financial Activities
- Payment on debts, like customers paying the business on
their debts or the company paying its lenders its debts.
- e.g. Interest & Taxes, Cash Exchange & Balance
- Investing Activities
- Loans issued by the business, or to the business’s
purchase/sales of assets
- e.g. Insurance, Stocks, Debts paid & issued
- Operating Activities
- Routine business operations, buying & selling products,
paying bills and employees, purchasing of supplies, etc.
- e.g. Fixed assets purchase, capital expenditures, business
acquisitions.

4. Performance Element: Implement financial skills to obtain business credit and to control its use.
Performance Indicators: Explain the purposes and importance of obtaining business credit
(FI:023) (ON) Analyze critical banking relationships (FI:039) (ON) Make critical decisions
regarding acceptance of bank cards (FI:040) (ON) Determine financing needed for business
operations (FI:043) (ON) Identify risks associated with obtaining business credit (FI:041) (ON)
Explain sources of financial assistance (FI:031) (ON) Explain loan evaluation criteria used by
lending institutions (FI:034) (ON) Complete loan application package (FI:033) (ON)
Business credit is a track record of a business’s financial responsibility that companies, investors, or financial
organizations use to determine whether or not that business is a good candidate to lend money to or do business with.

There are a number of agencies that calculate business credit, and each agency has a different calculation method, but
typically this is a ranking from 0 to 100. The higher the number, the lower your calculated risk. Maintaining a score of
80 or higher is a good rule of thumb.

Common factors that impact your business credit are public records, such as liens or bankruptcies, credit, such as
outstanding balances and payment habits, and demographic information, such as business size and years on file.

Explain the purposes and importance of obtaining business credit (FI:023) (ON)

Strong business credit can help you grow your business. Many banks, investors, and companies rely on your business
creditworthiness when setting loan terms, determining insurance premiums, increasing lines of credit, or considering
you as a viable partner.

According to the Small Business Administration (SBA), insufficient or delayed financing is the second most common
reason for business failure. Because anyone can view your business credit score—it’s not confidential—it’s important
to establish business credit from the start receive better interest rates, loan terms, and negotiation leverage on
payment periods with suppliers.

As a small business owner, separating personal credit and business credit is also important. Think of your business
credit as a wall dividing your business decisions from your personal credit history. Rather than being linked to your
name and Social Security number, business credit is linked to your business entity and separate Tax ID number.

This separation can remove potential funding obstacles that could prevent your business from growing. Likewise, it
limits your personal liability while running a company—in the event your business went under, your personal credit
would be protected.

Analyze critical banking relationships (FI:039) (ON)

What Is Relationship Banking

Relationship banking is a strategy used by banks to strengthen loyalty of customers and provide a single point of
service for a range of products and services.

A customer of a bank may start out with a simple checking or savings account, but relationship banking involves a
personal or business banker offering certificates of deposit, safe deposit boxes, insurance, investments, credit cards, all
types of loans and business services (e.g., credit card or payroll processing). They may also include specialized financial
products designed for specific demographics, such as students, seniors or high net worth individuals.

Understanding Relationship Banking

Banks that practice relationship banking take a consultative approach with customers, getting to know their particular
situation and needs and adapting to changes in their financial or business lives. The relationship banking approach is
easily observable in a small town bank, but it is also practiced in the retail branches of the large money center banks.
Whether for an individual or small business, a relationship bankers will engage in high-touch service to try to make
their banks the 'one-stop shop' for their A-to-Z needs. Cross-selling is the modus operandi of relationship bankers, but
they must be careful. Federal anti-tying laws established by the Bank Holding Company Act Amendments of 1970
prevent banks from making the provision of one product or service contingent on another (with some exceptions).

Make critical decisions regarding acceptance of bank cards (FI:040) (ON)

- Benefits of having a bank card:

- Speed of transaction is significantly faster, as normally it’d take 1-2 days to have the funds transferred
- Allows for the possibility of e-commerce
- Drawbacks:
- The cumulative fees of debit card processing
- More time spent reconciling their bank account information, especially if inexperienced

Determine financing needed for business operations (FI:043) (ON)

Add up costs
One-time costs may include such items as legal and professional costs for incorporating or registering your business;
starting inventory; licence and permit fees; office supplies and equipment; long-term assets, such as machinery, a
vehicle or real estate; consulting services; and website design.

Recurring expenses will include such items as salaries, rent or lease payments, raw materials, marketing costs, office
and plant overhead, financing costs, maintenance and professional fees.

Once you’ve determined your initial and follow-on expenses, you will need to estimate how much money you will have
at your disposal.

Calculate your financial resources

Estimate how much starting capital you will have and the amount of revenue you’ll be able to generate each month
during the start-up period. To calculate the latter, research your potential market and industry averages to come up
with realistic numbers.

Now, plug your estimated financial resources and your estimated expenses into a set of financial projections for your
business. A quick examination of your projections will show if you’ll have a financial shortfall.

To meet any gap in funds, here are sources you can tap:

1. Personal investment
Most start-ups require some personal investment by the entrepreneur—either cash or personal assets used as
collateral to secure financing. If you foresee a cash shortfall, you may need to dig deeper into your personal assets.

2. Friends and family

Many new entrepreneurs rely on capital from family and friends (sometimes known as “love money”). Family and
friends often don’t mind waiting to be repaid until profits start rolling in, but it can be challenging to mix business with
personal relationships.
3. Debt financing
Lenders offer various types of debt financing including term loans and lines of credit. Some lenders offer loans
specifically designed for new business ventures that come with flexible repayment terms.

4. Outside equity financing

Businesses with high growth potential may be able to secure start-up money from angel investors, business incubators
(also known as accelerators) or venture capital funds. Funds from these sources are usually given in exchange for an
equity position in the company.

5. Grants and subsidies

Some companies may be eligible for government grants and subsidies to help with start-up costs.

Identify risks associated with obtaining business credit (FI:041) (ON)

1. Personal Liability
You might be surprised at how fast and easy it is to get approved for a card. That is because most credit card issuers
are not underwriting the business. They are underwriting you. Most underwriting models rely very heavily upon the
credit score and credit history of the individual rather than the business. And there is good reason for that: most small
business credit cards come with a personal liability. If the business fails and is unable to pay its debts, you will likely still
be personally liable for any charges that are made on your card.

If you are an employee of a small business and your boss gives you a supplementary card on his or her account, you do
not need to worry about the risk. But in most other cases, you will be personally liable.

Tip: Check your contract to understand the liability. During the normal course of business, this should not be a big
concern. However, if your business is struggling - do not use the card for purchases thinking that you can escape the
liability if the business goes bankrupt. If you sign on the dotted line, you are most likely personally responsible.

2. Credit Bureau Reporting

Most small business credit cards (but not all) will not report the balance on your small business credit card to credit
reporting agencies so long as the account is current. That is an excellent benefit: you do not want business expenses
impacting your personal debt burden calculation when you apply for a mortgage. However, once you default on a
small business credit card, most credit card issuers will report the balance and derogatory information on your credit
report. Your credit score could rapidly and dramatically drop if a new trade-line is added that has a big balance and
missed payments.

Even worse, if your debt remains unpaid it will likely be passed along to a collection agency. Collection agencies can
also register negative "collection items" on your personal credit report for small business debt, because of the
personal guarantee.

Tip: Only put money on your small business credit card that you are confident of paying back. If your business is in
trouble, remember that borrowing your way out of trouble will catch up with you in a very negative way.

3. CARD Act Protections Are Limited

The CARD Act added a number of important consumer protections for credit cards. Unfortunately, small business
credit cards did not benefit from most of these new protections. The biggest and most important protection relates to
risk-based repricing.

Before the CARD Act, credit card issuers could increase the interest rate on existing balances if the borrower appeared
riskier. For example, if you missed a payment on one credit card, the interest rates on all of your cards could be
increased. That practice is now banned on consumer cards. Banks can only increase the interest rates on an existing
balances if the borrower misses two or more consecutive payments.

Legally, it is still relatively easy for banks that issue small business credit cards to increase the interest rate on an
existing balance. Fortunately, as a recent study reveals, many leading banks have voluntarily decided to extend CARD
Act protections to small business cards. But just be warned that this is a decision made by the bank, rather than a
regulatory requirement.

Tip: If you are not using your credit card to borrow, this is not a very important consideration. If you do need to borrow
on your credit card, do some homework first. Check to see if risk-based re-pricing of existing balances is possible, and
avoid cards that do it.

4. Still Liable For Employee Cards (In Some Circumstances)

Most small business credit cards give you the opportunity to offer cards to your employees using your existing account.
Just be careful. By adding employees to your existing small business account, you are effectively creating an authorized
user. It is no different from adding your spouse or child to your personal credit card. The same credit limit will be used.
But, ultimately, the liability remains with the owner of the account.

The benefit of adding an authorized user is that you can earn points, miles or cash back on all the spending done by
your employees. You will also be able to see, in real-time, their activity. However, by giving the card to your authorized
employees, you are also taking personal liability for their spending activity. If an angry employee decides to go
shopping on his last day, you will get stuck with the bill.

Tip: If you want to avoid taking personal liability for your employee's purchases, set up a reimbursement policy but
have your employee use his or her own card for the transaction.

5. APRs Are Not Low

Small business credit cards are great tools for short-term borrowing. If you are able to pay your balance in full and on
time every month, you pay no interest and have a free line of credit with 30-day repayment terms. But if you decide to
pay the balance over time, the interest rates on business cards are not low. For example, the Capital One Spark credit
card targets small businesses with the ability to earn unlimited 2% cash back. That is a great deal. However, the APR on
the card is 17.74% variable regardless of your credit score. Even if you have an 850 FICO, you would still be paying
17.74% and have a personal liability.

If you need to borrow money longer term, consider an SBA loan program. Some marketplace lenders have tried to
offer cheaper ways to borrow. One of the leaders, FundingCircle, has loans that start at 5.49% APR. With both SBA and
Funding Circle, you will need to take the time, energy and effort to apply. If you treat your business and your personal
accounts as one and the same, you will find approval difficult. But if you have a strong business with good financial
records and need to invest in growth, consider looking for better longer term borrowing options than a credit card.

Tip: Small business credit cards are great options for short term borrowing, especially if you can pay the balance in full
and on time every billing cycle. If you need a bigger loan for a longer period of time, shop around for a better deal to
avoid the high interest rates.

Explain sources of financial assistance (FI:031) (ON)

Sources of Finance: Personal Savings

One of the common sources of finance is personal savings. If you've been saving money for your small business or have
some money in an old 401(k), you may contribute that cash to your startup costs, but you may still need to seek
additional financing options. For example, an internet-only business might require expenses for only a laptop and
website, but you may find it much more difficult to have enough cash to start a local bakery

When using personal funds as a source of finance, be aware of the risk of not leaving enough cash aside for
emergencies. It's also important to avoid wiping out your entire savings to start your business. If you also take money
from a 401(k), consult with a financial professional to learn about the impacts on your taxes and future retirement.

Asking Your Family and Friends

Friends, family members and acquaintances in your neighborhood are all potential sources of business funds. If they
support your business idea, they may give you cash toward your startup costs as a gift, or they might offer a private
loan.

Gifted funds help save you interest charges and are especially appealing if you can finance the rest of your business
using cash. If you do opt for a loan from a personal contact, though, it's recommended to write up a contract with a
payback term and any interest rate desired to avoid later disagreements.

Taking Out Loans

Business loans and personal loans are both sources of finance for new businesses. These are widely available through
traditional banks as well as online lenders.

If you're needing to borrow a large amount of cash, a business loan can be ideal as long as you can meet the strict
application requirements and find a lender willing to work with you. Depending on the lender, you may need to show
your business plan, proof of a specific amount of revenue, a business license and information about your other debts
and assets. This means it can be harder for a startup to obtain a business loan than for a small business that's been
operating for a few years already.

Personal loans are an alternative that tend to offer lower limits than business loans. However, they tend to be easier to
qualify for than a business loan and also allow you to get your funds faster. If you choose this business financing
option, do be warned that your interest rate may be high and your personal credit is at stake if you default on the loan.

Seeking Funds Through Venture Capitalists

If you have a business idea in a hot industry like technology and expect to be very profitable, you may get attention
from venture capital firms. Although harder to get, especially for small businesses, this form of financing can provide
you with a very large amount of money in the hundreds of thousands or even millions of dollars.

Seeking to profit from your business growth, venture capitalists provide equity financing for businesses, meaning they
offer you money in exchange for a share of ownership in your business. For example, they may receive stock from your
company or otherwise be paid an agreed-upon part of your profits. In addition, they gain some control over how you
run your business for a period of time. After the investors have received their return – perhaps three to five years later
– you can get back full ownership.

You can research venture capital firms online to learn about their application processes and the types of companies
they have worked with. You can expect to submit a detailed proposal explaining your business idea, needs and
intended results as well as undergo a thorough evaluation from the venture capital firm. Consider choosing a few firms
to which you'd like to apply and introduce yourself in person if possible rather than using email.

Finding Angel Investors

Angel investors are similar to venture capitalists in that they offer financial support in exchange for some ownership in
your company. However, they are different in that their reason for investment isn't primarily focused on the profits
they might receive. Rather, they may want to help a startup get built for reasons such as being interested in the
product or service, the individuals managing the company or the potential of economic growth in the community.

While venture capitalists are often part of a firm, angel investors tend to be private individuals with significant income
and a high net worth. You might find such individuals willing to invest in your business in your community, online or at
local business organizations.

In addition to visiting business meetups in your community, check out websites like Gust, the BC Angel Forum and the
Angel Capital Association to find potential investors. You might even find that you already have some acquaintances
willing to serve as angel investors, so it pays to share your business idea.

Looking Into Business Incubators

With more people wanting to start their own businesses, small business incubators have become more popular. These
organizations provide support in the form of coaching, expert knowledge, networking and free or cheap office space.
They commonly offer training programs for entrepreneurs as well.

Many business incubators also offer financing in the forms of loans, investors and grants, although amounts and
conditions vary widely. For example, one incubator might give you a $1,000 grant if you finish a business course, while
another might give a short-term loan for a few months to pay for your startup expenses. You may also get to share
your business idea with investors who may help finance you in exchange for a portion of your equity.

Applying for Small Business Grants

The Small Business Administration offers numerous grant programs that can provide years of financial and professional
support to your business. Some options are targeted toward women, veterans or entrepreneurs in a specific location
or industry, while others are general business-funding opportunities.

You can apply on the SBA's website and also read the conditions for each grant. Typically, you'll be expected to meet
the SBA's performance guidelines and use funds for approved activities.

You can also find grant programs through governmental organizations, nonprofits, professional organizations and
business centers. Checking your state's department of development can show you potential government grants in your
location. When comparing your options, know that some grants are one-time only, while others offer monthly or
quarterly business funds.

Using Credit Lines and Cards

If you need to borrow money to pay for ongoing expenses, then consider using business credit cards or lines of credit.
Both options give you some credit readily available for emergencies or large purchases.

One of the benefits of business credit cards is that they often come with potential rewards for purchases like cash back
or airline miles. Furthermore, qualifying is possible even if you've not yet generated business income. The bank will
simply use your personal income and credit score. However, be aware that this type of credit tends to have high
interest rates and annual fees and that a business credit card isn't typically intended to fully pay your startup costs.

A business line of credit is an alternative to a business credit card that can come with a higher credit limit, but it can be
much more difficult for a new small business. Not only do lenders look for two years of successful operations, but they
also demand collateral and solid financial ratios and require you to follow a covenant of rules. Therefore, you might
consider a business line of credit after you've achieved a good cash flow for a few years.

Taking Advantage of Crowdfunding

With the rising popularity of sites like Kickstarter and Indiegogo, it's become easy to share your business idea and get
funds from people around the world. These sites allow you to set an amount of money you need to obtain and share
updates and videos about yourself and your business. In exchange for donations, you might offer your donors rewards
like discounts on future service, an early product release or recognition.

When the campaign ends, you can easily transfer the money to a bank account or PayPal account. When using
crowdfunding, though, be aware that the site will take a small piece of your funds, often between 5 and 10 percent.
You'll also want to check your chosen site's payment terms since some will return all funds to the donors unless you
reach or exceed a set goal.

Selling Your Company Stock Privately

As a small business, you likely can't make your stock available to sell to the public, but offering stock privately is
possible. By offering private stock, you give up some ownership to your shareholders, but you also gain some cash that
you can use to buy equipment, pay debts or otherwise finance operations.

This option is more common for established small businesses that have demonstrated the financial success that
encourages shareholders to invest. However, that doesn't mean a brand-new company can't find investors to purchase
stock, such as personal contacts, employees, angel investors and venture capitalists.

The process for being allowed to issue private stock will depend on state and federal laws. While you probably won't
have to deal with the Securities and Exchange Commission like larger public companies, you will probably have to
make a private securities filing with your state, provide a disclosure document and come up with an agreement for
stock sales.

Considering Leasing as an Alternative

If you need funds to purchase a piece of equipment or a building, an alternative to seeking financing for the purchase
is to consider leasing. Not only will this allow you to get what your business needs without tying up a lot of money, but
you can often find flexible payment options. Also, this can be a good solution if you only need short-term usage of the
item.

While some lease agreements might require a large lump-sum payment each year, others allow more affordable
monthly payments. You can choose to renew the lease when the term expires, or you can simply return the equipment
or vacate the building per the lease agreement. In some cases, you may even be able to purchase what you leased,
which can be helpful if your financial situation has changed.

Explain loan evaluation criteria used by lending institutions (FI:034) (ON)

1. PERSONAL CREDIT
The personal credit, such as the beacon FICO scores, is the number one criteria by importance. The
personal credit is the payment habit of the consumer with their past and current creditors. The
report represents, to the company lender, a projection of the applicant's behaviour on their future loan.
 “History is bunk” Henry Ford would say, but those who proved to be good payers to their old lenders will
have better chances of being accepted for new loans. On the other side, applicants with bad credit that
include collections, severe late payments or bankruptcies will have their files dismissed from further
evaluation; these types of applicants often mean future problems for banks.
2. STABILITY
This is the time an individual takes to be established in society.
1. Time at their job
The first aspect of stability is the time at their job. The longer the time someone spends at
their current job, the stronger they will be settled professionally and the lower their chances
of becoming unemployed. In the world of credit, employment guarantees income, the main
source for debt payment. The loss of a job often leads to problem executing payments and
increases the risk of defaulting. Regular payments made on time are more assured when
a person has job stability.
2. Time at present address
The time at present address is one of the most neglected and unknown aspect by applicants.
However, many statistics and analysis showed that someone who has lived only for a short
period of time at their current address has more chances of moving away and leave their
debt behind. On the other hand, having lived at the same address for a long time
improves the chances of obtaining credit. This is weighted considerably in the final
decision.
3. Homeowner / Tenant
The status of homeowner and tenant plays a definite role in stability. For obvious reasons, a
homeowner has more responsibilities and their risk of moving away is smaller, as opposed to
tenants, known to be less predictable. Being a homeowner is a positive in term of
stability.
3. DEBT RATIO
The debt ratio is the ratio between monthly payments of the debt, including the new loan, and monthly
gross income. The limit of an acceptable debt ratio differs from banks to banks and the type of credit
requested, but normally ranges between 35% and 50%. The level of acceptability also depends on the
first two criteria (personal credit and stability), but a debt ratio too high can stop a loan from being
accepted, no matter how good the credit or stable the applicant is.
4. NET VALUE
The net value is the financial equity of an individual, which is the personal asset minus the personal
debt. The assets taken in consideration by banks are the verified real estate market value of their home
and a portion of personal investments, where 50% to 80% of their value is considered based on risk
level. On very rare occasions cars and other vehicles are considered assets, as they constantly
devaluate.
The biggest asset is normally the real estate. However, these assets are the least liquid; selling the
house to pay some debt is really the last resort. Therefore, a decision cannot be based on the net value
before the first three criteria. It is more of an indicator of how deep pocketed the applicant is.
If the person has a good equity on their property, it will weight considerably in the credit
application. Not necessarily because the property can be included as a guarantee, but great equity
always gives someone the possibility of obtaining additional indebtedness on the mortgage, which will
help face financial obligations.
5. OCCUPATION AND PERSONAL STATUS
1. Professional Status
The occupation is taken into consideration in a credit application. Doctors, lawyers,
 engineers and other professionals will be more valued than self employed workers, the
nature of their work being more unpredictable, and blue collar workers, because it is more
difficult to turnaround in case of job loss.
2. Personal Status
The age of the applicant is the main issue, even though it is considered discriminatory, the
lenders will still take it into consideration. The chances of default are much higher under 30
years old than 50 years old and up, considered the most desirable age bracket. Less than 20
years old is the highest risk.

Complete loan application package (FI:033) (ON)

1. Performance Element: Manage financial resources to ensure solvency. Performance Indicators:
Describe the nature of cost/benefit analysis (FI:357) (MN) Determine relationships among total
revenue, marginal revenue, output, and profit (FI:358) (MN) Develop company's/department's
budget (FI:099) (MN) Forecast sales (FI:096) (MN) Calculate financial ratios (FI:097) (MN)
Interpret financial statements (FI:102) (MN) File business tax returns (FI:652) (ON) Verify the
accuracy of business financial records (FI:653) (ON)

Describe the nature of cost/benefit analysis (FI:357) (MN)

Cost benefit analysis: What is it?

A cost benefit analysis (also known as a benefit cost analysis) is a process by which
organizations can analyze decisions, systems or projects, or determine a value for
intangibles. The model is built by identifying the benefits of an action as well as
the associated costs, and subtracting the costs from benefits. When completed, a
cost benefit analysis will yield concrete results that can be used to develop
reasonable conclusions around the feasibility and/or advisability of a decision or
situation.

Scenarios Utilizing Cost Benefit Analysis

As mentioned previously, cost benefit analysis is the foundation of the decision-

making process across a wide variety of disciplines. In business, government,
finance, and even the nonprofit world, cost benefit analysis offers unique and
valuable insight when:

● Developing benchmarks for comparing projects

● Deciding whether to pursue a proposed project
● Evaluating new hires
● Weighing investment opportunities
● Measuring social benefits
● Appraising the desirability of suggested policies
● Assessing change initiatives
● Quantifying effects on stakeholders and participants

Identify and Categorize Costs and Benefits

It’s time to sort your costs and benefits into buckets by type. The primary categories
that costs and benefits fall into are direct/indirect, tangible/intangible, and real:

● Direct costs are often associated with production of a cost object (product,
service, customer, project, or activity)
● Indirect costs are usually fixed in nature, and may come from overhead of
a department or cost center
● Tangible costs are easy to measure and quantify, and are usually related to
an identifiable source or asset, like payroll, rent, and purchasing tools
● Intangible costs are difficult to identify and measure, like shifts in
customer satisfaction, and productivity levels
● Real costs are expenses associated with producing an offering, such as
 labor costs and raw materials

Determine relationships among total revenue, marginal revenue, output, and profit (FI:358)

Total revenue is the amount of total sales of goods and services. It is calculated by
multiplying the amount of goods and services sold by the price of the goods and
services. Marginal revenue is directly related to total revenue because it measures
the change in the total revenue with respect to the change in another variable.

In addition, the calculation of total revenue frequently takes timetables into account.
A restaurateur, for example, might tabulate the number of hamburgers sold in an
hour, or the number of orders of medium-sized french fries sold throughout the
business day. In the latter case, the total daily revenue would be the quantity (Q) of
fries sold—say 300, multiplied by the price (P) per unit—say $2, per day. Therefore,
the simple formula for this calculation would be:

With the values plugged in to the equation, Total revenue is $600—figured by the
simple arithmetic of 300 X $2.

Marginal revenue measures the change in revenue that results from a change in the
amount of goods or services sold. It indicates how much revenue increases for selling
an additional unit of a good or service. To calculate marginal revenue, divide the
change in total revenue by the change in the quantity sold. Therefore, the marginal
revenue is the slope of the total revenue curve. Use the total revenue to calculate
marginal revenue.

For example, suppose a company that produces toys sells one unit of product for a
price of $10 for each of its first 100 units. If it sells 100 toys, its total revenue would be
$1,000 (100 x 10). The company sells the next 100 toys for $8 a unit. Its total revenue
would be $1,800 (1,000 + 100 x 8).

Suppose the company wanted to find its marginal revenue gained from selling its
101st unit. The total revenue is directly related to this calculation. First, the company
must find the change in total revenue. The change in total revenue is $8 ($1,008 -
$1,000). Next, it must find the change in the toys sold, which is 1 (101-100). Thus, the
marginal revenue gained by producing the 101st toy is $8.

Develop company's/department's budget (FI:099) (MN)

New small business owners may run their businesses in a relaxed way and may not
see the need to budget. However, if you are planning for your business' future, you
will need to fund your plans. Budgeting is the most effective way to control your
cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every
part of it. You may have to split your budget up between different areas such as sales,
production, marketing etc. You'll find that money starts to move in many different
directions through your organisation - budgets are a vital tool in ensuring that you
stay in control of expenditure.

A budget is a plan to:

● control your finances

● ensure you can continue to fund your current commitments
● enable you to make confident financial decisions and meet your objectives
● ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be
financed. However, it is not a forecast. A forecast is a prediction of the future whereas
a budget is a planned outcome of the future - defined by your plan that your business
wants to achieve.

Key steps in drawing up a budget

There are a number of key steps you should follow to make sure your budgets and
plans are as realistic and useful as possible.

● Make time for budgeting

● If you invest some time in creating a comprehensive and realistic budget, it will
be easier to manage and ultimately more effective.
● Use last year's figures - but only as a guide
● Collect historical information on sales and costs if they are available - these
could give you a good indication of likely sales and costs. But it's also essential
to consider what your sales plans are, how your sales resources will be used
and any changes in the competitive environment.
● Create realistic budgets
● Use historical information, your business plan and any changes in operations
or priorities to budget for overheads and other fixed costs.
 ● It's useful to work out the relationship between variable costs and sales and
then use your sales forecast to project variable costs. For example, if your unit
costs reduce by 10 per cent for each additional 20 per cent of sales, how much
will your unit costs decrease if you have a 33 per cent rise in sales?
● Make sure your budgets contain enough information for you to easily monitor
the key drivers of your business such as sales, costs and working capital.
Accounting software can help you manage your accounts.
● Involve the right people

It's best to ask staff with financial responsibilities to provide you with estimates of
figures for your budget - for example, sales targets, production costs or specific
project control. If you balance their estimates against your own, you will achieve a
more realistic budget. This involvement will also give them greater commitment to
meeting the budget.

What your budget should cover

Decide how many budgets you really need. Many small businesses have one overall
operating budget which sets out how much money is needed to run the business over
the coming period - usually a year. As your business grows, your total operating
budget is likely to be made up of several individual budgets such as your marketing or
sales budgets.

What your budget will need to include

Projected cash flow -your cash budget projects your future cash position on a month-
by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint
any difficulties you might be having. It should be reviewed at least monthly.

● Costs - typically, your business will have three kinds of costs:

● fixed costs - items such as rent, salaries and financing costs
● variable costs - including raw materials and overtime
● one-off capital costs - purchases of computer equipment or premises, for
example

To forecast your costs, it can help to look at last year's records and contact your
suppliers for quotes.

Revenues - sales or revenue forecasts are typically based on a combination of your

sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the
next 12 months. This will enable you to analyse your margins and other key ratios
such as your return on investment.

Use your budget to measure performance

If you base your budget on your business plan, you will be creating a financial action
plan. This can serve several useful functions, particularly if you review your budgets
regularly as part of your annual planning cycle.

Your budget can serve as:

● an indicator of the costs and revenues linked to each of your activities

● a way of providing information and supporting management decisions
throughout the year
● a means of monitoring and controlling your business, particularly if you
analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your
business' performance - you can compare your projected figures, for example, with
previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of
other companies in the same sector, or across different parts of your business.

Key performance indicators

To boost your business' performance you need to understand and monitor the key
"drivers" of your business - a driver is something that has a major impact on your
business. There are many factors affecting every business' performance, so it is vital
to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

● sales
● costs
● working capital

Any trends towards cash flow problems or falling profitability will show up in these
figures when measured against your budgets and forecasts. They can help you spot
problems early on if they are calculated on a consistent basis.

Review your budget regularly

To use your budgets effectively, you will need to review and revise them frequently.
This is particularly true if your business is growing and you are planning to move into
new areas.

Using up to date budgets enables you to be flexible and also lets you manage your
cash flow and identify what needs to be achieved in the next budgeting period.

Two main areas to consider

● Your actual income - each month compare your actual income with your sales
budget, by:
● analysing the reasons for any shortfall - for example lower sales volumes, flat
markets, underperforming products

considering the reasons for a particularly high turnover - for example whether your
targets were too low

comparing the timing of your income with your projections and checking that they fit

Analysing these variations will help you to set future budgets more accurately and
also allow you to take action where needed.

Your actual expenditure - regularly review your actual expenditure against your
budget. This will help you to predict future costs with better reliability. You should:

look at how your fixed costs differed from your budget

check that your variable costs were in line with your budget - normally variable costs
adjust in line with your sales volume

analyse any reasons for changes in the relationship between costs and turnover

analyse any differences in the timing of your expenditure, for example by checking
suppliers' payment terms

Forecast sales (FI:096)

Sales Forecasting is the process of estimating what your business’s sales are going to
be in the future. A sales forecast period can be monthly, quarterly, half-annually, or
annually.

How to Create a Sales Forecast

A sales forecast is an estimate of the quantity of goods and services you can
realistically sell over the forecast period, the cost of the goods and services, and the
estimated profit.

Typically this is done by:

● Making a list of the goods and services to be sold

● Estimating of the number of each to be sold
● Multiplying the unit price by the estimated number of goods or services to be
sold
● Determining the cost of each good or service
● Multiplying the cost of each good or service by the estimated number to be
sold
● Subtracting total cost from the total sales 

Sales Forecasting for New Businesses

Sales forecasting for a new business is more problematical as there is no baseline of

past sales. The process of preparing a sales forecast for a new business involves
researching your target market, your trading area and your competition and analyzing
your research to guesstimate your future sales.

Calculate financial ratios (FI:097)

Evaluating the key financial indicators is something every business owner should
become well versed in. By understanding what each key financial ratio is assessing,
you can more easily derive the ratios with a quick look at the financial statements.

● Liquidity Measurement Ratios: These ratios define if a company is able to

meet short-term financial obligations. It takes into consideration liquid assets
to short-term liabilities. 
● Profitability Indicator Ratios: These ratios consider the amount of profit
derived from the cost of goods sold or the operating expenses. There are both
gross and net profit margin ratios. 
● Debt Ratios: Debt ratios are like the debt-to-equity ratio described above that
consider how much debt a company has and the assets it possesses to pay
debts off. 
● Operating Performance Ratios: These ratios look at numbers like the fixed
asset turnover or sales-to-revenue per employee numbers to determine
efficiency. An efficient company generally improves profitability. 
● Cash Flow Indicator Ratios: Companies need to generate enough cash flow to
pay operating expenses, grow the business and create a safety net of retained
earnings. Operating cash flow divided by sales ratio determines how much it
costs to acquire new clients. 
● Investment Valuation Ratios: These ratios help investors determine the
 viability of existing or new investment into a company. For example, the price-
to-earnings ratio provides the amount a company is paying per $1 of earnings
to shareholders. 

Companies large and small use ratios to evaluate internal trends in the company and
define growth over time. While a publicly traded company may have much larger
numbers, every business owner can use the same data to strategically plan for the
next company fiscal cycle.

Interpret financial statements (FI:102)

Analyzing and interpreting financial ratios is logical when you stop to think about
what the numbers tell you. When it comes to debt, a company is financially stronger
when there is less debt and more assets. Thus a ratio less than one is stronger than a
ratio of 5. However, it may be strategically advantageous to take on debt during
growth periods as long as it is controlled.

A cash flow margin ratio calculates how well a company can translate sales into actual
cash. It is calculated by taking the operating cash flow and dividing it by net sales
found on the income statement. The higher the operating cash flow ratio or
percentage, the better.

The same is true with profit margin ratios. If it costs $20 to make a product and it is
sold for $45, the gross profit margin is calculated by subtracting the cost of goods sold
from revenue and dividing this result by the revenue [0.55 = ($45- $20) / $45]. The
higher this ratio is, the more profit there is per product.

File business tax returns (FI:652) (ON)

First off, be aware that every corporation operating in Canada has to file a T2
corporate tax return every year even if the corporation has been inactive and/or has
no income tax payable that particular tax year.

When Corporate Tax Has to Be Filed

So your corporation will need to file a T2 corporate tax return every year within six
months of the end of its fiscal year.

How to File Corporate Income Tax

Most corporations can file their returns electronically using the Internet. If this is your
choice, be aware that you have to use tax preparation software and/or applications
that have been certified by the Canada Revenue Agency (CRA) as suitable for
Corporation Internet Filing.

Whichever way you choose to file your T2 corporate return, remember that you need
to keep all your related receipts and documents for six years, as the Canada Revenue
Agency may want to see them at some point.

Verify the accuracy of business financial records (FI:653) (ON)

Accurate financial statements are important because management, investors,

creditors and external auditors depend on reliable and complete information to
assess the financial health and performance of companies. Accuracy starts with
journal entries and ends with the chief executive certifying the reliability of the
information.

Ensure the accuracy of the data entry process, which involves journal entries of
financial transactions and the posting of journal entries to the ledger. If your data
entry professionals are making math errors or entering the data in the wrong
accounts, even a sophisticated accounting package will not detect it. Training and
random monitoring are two ways to ensure quality control in the data-entry process.
In a November 2010 "Northern Nevada Business Weekly" article, certified public
accountant Mike Bosma recommends that you provide the data entry clerks with a
printed chart of the company's accounts to use as reference so they enter the data in
the correct accounts.

Reconcile your accounting records with external records, such as bank statements,
supplier invoices, credit card statements and other documents. The numbers should
match. For example, the cash balance on your balance sheet should match the ending
balance on your bank statement. Similarly, the long-term liability balance should
match the total balances on mortgage and other long-term loan documents.

Check for obvious balance-sheet errors. In a guidance note published on its website,
the Illinois Small Business Development Center at Illinois State University
recommends that small-business owners look for obvious errors on the balance sheet,
such as a negative cash balance.

Review the income statement for possible errors. Cost of goods sold should not be
the same each month, because your sales composition is likely to vary each month. If
you have fixed assets, there should be an entry for depreciation expenses. Verify that
you have made the adjusting entries for accrued but unpaid expenses, such as
interest expense and salaries expense.

Verify that you have made adjustments for non-cash expenses in the statement of
cash flows. The difference in the net cash balance between the previous and current
periods should match the change in your bank statements, assuming that loan
 proceeds go through your business's bank accounts.

Follow up with your bookkeeper, store manager or the warehouse supervisor if you
spot anomalies. For example, a higher-than-normal inventory balance might be the
result of too many obsolete or discontinued items in stock. A high sales return
amount may indicate a quality control problem in your manufacturing facility or in
your supplier's facility.

2. Performance Element: Manage financial resources to ensure solvency. Performance Indicators:

Monitor business's profitability (FI:542) (MN)

In strategic planning, profitability ratios tell you how well you create financial value for
your company. Although net profit is your bottom line, profitability is what you’re aiming
for year after year. This activity looks at the profitability of your company as a whole,
which includes net profit margin and return on equity (ROE):
● Net profit margin: Net profit margin is calculated by dividing gross sales into net
profit. If your net profit margin is low compared to your industry, that means your
prices are lower and your costs are too high. You aren’t efficient. Lower margins are
acceptable if they lead to greater sales, more market share, or future investments,
but make sure that they don’t go too low. High margins are typically never a bad
thing. Watch this ratio each year and use your industry average as a gauge to monitor
your performance.
● Return on equity (ROE): ROE measures how much profit comes back to the owners
for their investment. This ratio is calculated by dividing net profit by the owner’s
equity investment.
The fictional Konas Corp. has a net profit of $65,000 and gross sales of $778,000 for a pre-
tax profit margin of 8.3 percent. In other words, the company is making 8.3 cents on
every dollar. The owners of Konas have an equity investment of $294,000 in the
company, so with a net profit of $65,000, their ROE is 22 percent. This percentage means
that the owners make almost 22 cents on every dollar invested in the company as equity.
A 20 percent ROE is a reasonable return for risking $294,000.

3. Performance Element: Manage financial resources to ensure solvency. Performance Indicators:

Describe types of financial statement analysis (e.g., ratio analysis, trend analysis, etc.) (FI:334)
(MN) Discuss limitations of using financial statements to assess business performance (FI:655)
(MN) Spot problems in/issues with financial statements (FI:335) (MN)

Describe types of financial statement analysis (e.g., ratio analysis, trend analysis, etc.)
(FI:334)

Horizontal Analysis

A horizontal analysis compares two or more years of a company's financial

statements. The analyst can find the same information from different years by
reading across the page. In comparing dollar figures and percentages in this way,
differences from year to year are easy to find. A variation of the horizontal
analysis is called the trend analysis. The trend analysis starts with the first year a
company is in business, also known as the base year. The base year percentages
are shown as 100 percent, and the increase or decline in percentages can be easily
shown.

Vertical Analysis

Vertical analysis is called such because the corporation's financial figures are listed
vertically on the financial statement. This type of analysis involves the calculation
of percentages of a single financial statement. The figures on this financial
statement are taken from the company's income statement and balance sheet.
Vertical financial statement analysis is also known as component percentages.

Ratio Analysis

There are several types of ratio analysis that can be used in interpreting financial
statements. Ratios may be computed for each year's financial data and the analyst
examines the relationship between the findings, finding the business trends over a
number of years.

Balance sheet ratio analysis determines a company's ability to pay its debts and
how much the company relies on creditors to pay its bills. This is an important
indicator of the financial health of the corporation.

Liquidity ratios show how well the company is able to turn assets into cash. When
evaluating the liquidity ratio, an analyst looks at the working capital, current ratio
and quick ratio.

Discuss limitations of using financial statements to assess business performance (FI:655)

The limitations of financial statements are those factors that a user should be
aware of before relying on them to an excessive extent. Knowledge of these
factors could result in a reduction of invested funds in a business, or actions taken
to investigate further. The following are all limitations of financial statements:
● Dependence on historical costs. Transactions are initially recorded at their
cost. This is a concern when reviewing the balance sheet, where the values
of assets and liabilities may change over time. Some items, such as
marketable securities, are altered to match changes in their market values,
but other items, such as fixed assets, do not change. Thus, the balance
sheet could be misleading if a large part of the amount presented is based
 on historical costs.
● Inflationary effects. If the inflation rate is relatively high, the amounts
associated with assets and liabilities in the balance sheet will appear
inordinately low, since they are not being adjusted for inflation. This
mostly applies to long-term assets.
● Intangible assets not recorded. Many intangible assets are not recorded as
assets. Instead, any expenditures made to create an intangible asset are
immediately charged to expense. This policy can drastically underestimate
the value of a business, especially one that has spent a large amount to
build up a brand image or to develop new products. It is a particular
problem for startup companies that have created intellectual property, but
which have so far generated minimal sales.
● Based on specific time period. A user of financial statements can gain an
incorrect view of the financial results or cash flows of a business by only
looking at one reporting period. Any one period may vary from the normal
operating results of a business, perhaps due to a sudden spike in sales or
seasonality effects. It is better to view a large number of consecutive
financial statements to gain a better view of ongoing results.
● Not always comparable across companies. If a user wants to compare the
results of different companies, their financial statements are not always
comparable, because the entities use different accounting practices. These
issues can be located by examining the disclosures that accompany the
financial statements.
● Subject to fraud. The management team of a company may deliberately
skew the results presented. This situation can arise when there is undue
pressure to report excellent results, such as when a bonus plan calls for
payouts only if the reported sales level increases. One might suspect the
presence of this issue when the reported results spike to a level exceeding
the industry norm.
● No discussion of non-financial issues. The financial statements do not
address non-financial issues, such as the environmental attentiveness of a
company's operations, or how well it works with the local community. A
business reporting excellent financial results might be a failure in these
other areas.
● Not verified. If the financial statements have not been audited, this means
that no one has examined the accounting policies, practices, and controls
of the issuer to ensure that it has created accurate financial statements. An
audit opinion that accompanies the financial statements is evidence of
such a review.
● No predictive value. The information in a set of financial statements
provides information about either historical results or the financial status
of a business as of a specific date. The statements do not necessarily
provide any value in predicting what will happen in the future. For
 example, a business could report excellent results in one month, and no
sales at all in the next month, because a contract on which it was relying
has ended.

Spot problems in/issues with financial statements (FI:335) (MN)

Red Flags to Look For

Now that you have an idea of how to read financial statements, here are eight red
flags that can indicate trouble for a business.

1. Rising debt-to-equity ratio: This indicates that the company is absorbing more
debt than it can handle. A red flag should be raised if the debt-to-equity ratio
is over 100%. You can also take a look at the falling interest coverage ratio,
which is calculated by dividing net interest payments by operating earnings. If
the ratio is less than five, there is cause for concern.
1. Several years of revenue trending down: If a company has three or more
years of declining revenues, it is probably not a good investment. While cost-
cutting measures—such as wasteful spending and reduction in headcount—
can help to offset a revenue downturn, it probably won’t if the company has
not rebounded in three years.
1. Large “other” expenses on the balance sheet: Many organizations have “other
expenses” that are inconsistent or too small to really quantify, which is normal across
income statements and balance sheets. If these “other” line items have high values,
then you should find out what they are specifically, if you can. You’ll also want to
know if these expenses are likely to recur.
1. Unsteady cash flow: Cash flow is a good sign of a healthy organization but it should
be a flow, back and forth, up and down. A stockpile of cash can indicate that accounts
are being settled, but there isn’t much new work coming in. Conversely, a shortage of
cash could be indicative of under-billing for work by the company.
1. Rising accounts receivable or inventory in relation to sales: Money that is tied up in
accounts receivable or has already been used to produce inventory is money that
cannot generate a return. While it’s important to have enough inventory to fulfill
orders, a company doesn’t want to have a significant portion of its revenue sitting
unsold in a warehouse.
1. Rising outstanding share count: The more shares that are available for purchase in
the stock market, the more diluted shareholders’ stake in the company becomes. If a
company’s share count is rising by two or three percent per year, this indicates they
are selling more shares and diluting the organization’s value.
1. Consistently higher liabilities than assets: Some organizations experience a steady
stream of assets and liabilities as their business does not hinge on seasonal shifts or is
less affected by market pressure. For companies that are more cyclical (i.e.
construction companies during the winter months), however, it’s possible that its
liabilities will outweigh its assets. Technically, this should be something the company
 can plan around, thereby decreasing the discrepancy. If a company is consistently
assuming more liability without a proportionate increase in assets, however, it could
be a sign it is over-leveraged.
1. Decreasing gross profit margin: As this measures a company’s ratio of profits earned
to costs over a set period of time, a declining profit margin is cause for alarm. The
profit margin must account not only for the costs to produce the product or service,
but the additional money needed to cover operating expenses, such as costs of debt.
Analyzing a company’s financial statements, whether you own shares or might invest
in it later, is a valuable skill. Take the time to really delve into financial reports and see
what types of red flags you identify. Being able to understand the intricacies of a
company’s finances is just one more way to ensure success.

4. Performance Element: Use debt and equity capital to raise funds for business growth.
Performance Indicators: Describe the financial needs of a business at different stages of its
development (FI:339) (MN) Discuss factors to consider in choosing between debt and equity
capital (FI:340) (MN)

Describe the financial needs of a business at different stages of its development (FI:339)

Different firms at different stages of the business life cycle might require a different
approach to solicit investment capital.
Stages of financing
• Seed capital: the seed

capital stage or the pre-commercialisation stage is the phase at which the product or
service is analysed and tested for long-term viability. During this phase, the
entrepreneur requires capital to develop their prototype, conduct feasibility study,
evaluate the business idea thoroughly, and also protect their intellectual property,
which is a stage often overlooked by Jamaican product developers. The entrepreneur
should know whether or not the business is worthwhile at the end of the seed phase.

n Pre-launch phase: If the research indicates that the product or business is

worthwhile, then pre-launch creates the necessary foundation for the business. A
detailed business plan must indicate the overall plan and structure that the business
will follow. It is time to register the business and properly outline its legal structure.
• Start-up phase: The product is launched in the start-up phase. The firm hires
employees and production begins. Sufficient financing is needed to ensure the
smooth transitioning of the business from the pre-launch to the start-up phase.
Financing is necessary to bridge the gap between the time of production and the time
of making profit.
 • Early stage: First-stage capital is needed to expand production to satisfy market
demand. At this phase, the firm ramps up production and sales. Venture capitalists
are more willing to lend to firms that display the ability to break even or earn a profit
at this phase.
• Expansion stage: Sometimes a company might be expanding but it is not yet
profitable. The second stage of funding is required at this stage to further expand
production, offset shipping and other distributional cost and satisfy accounts
receivables and payables.
• Third-stage capital: As the sales volume increases and the company becomes
profitable, it will need third-stage financing to facilitate plant expansion, increase
advertising and marketing, product improvement and further research and
development.

Discuss factors to consider in choosing between debt and equity capital (FI:340)

Both debt and equity financing have pros and cons for all new business owners. The
choice that is right for you will be very specific to your business. In this article, we will
briefly discuss seven factors to consider when choosing between debt and equity
financing options.
 
1. Long-Term Goals
As the owner of your new business, it will be critical for you to think about what you
actually hope to achieve in the long-run. What is the purpose of starting your
business? Where do you hope for your business to be in ten years? Twenty years? By
answering these questions, it will be easier for you to decide how financially
entrenched in your business you will actually be. Though you don’t need to come up
with a future “exit strategy” this very minute, it is certainly a good thing to think
about.
 
2. Available Interest Rates
Naturally, the opportunity cost of choosing equity over debt finance will be largely
determined by how much you will actually need to pay to borrow money. If your
business has access to low-interest rates or specialty loans (such as an SBA loan), the
total cost of borrowing will be relatively lower. In order to make sure you are getting
competitive quotes from potential lenders, it will be a good idea to compare multiple
options before making any final decisions. Working to improve your business’ current
credit score can also make a major difference.
 
3. The Need for Control
By surrendering partial ownership of your business you are, to a certain extent, giving
up control. In order to make sure they can still outvote all other stakeholders, many
business owners will maintain 51 percent ownership of the business while selling the
remaining 49 percent. If having total or significant control of your business is
something that’s important to you, be sure to limit the amount of equity you end up
distributing.
 
4. Borrowing Requirements
There are many different things lenders will look at when deciding whether to issue a
loan. In addition to a general financial background check, lenders will also want to see
some hard numbers on paper. The factors they may look at include things such as
your debt-to-equity ratios, your fixed monthly expenses, your overall business plan,
and various others. These requirements can often be rather rigid, which is why your
business needs to plan its financing strategy in advance.
 
5. Current Business Structure
Another variable that will impact the opportunity cost of borrowing (or issuing equity)
is your business structure. If your business is already formally structured as a
partnership, for example, this may complicate the process of selling equity.
Additionally, if you hope to secure your equity finance via public means—such as
selling stocks on the open market—you will need to formally declare your business to
be a public corporation. Though your business structure is something that can (and
likely should) be changed in the future, there is no doubt that the preexisting
structure will have a major impact on your short-term financing decisions.
 
6. Future Repayment Terms
While many business loans are simple, flat loans with a fixed interest rate, there are
many loans with repayment terms that are notably more complicated. For example,
some loans will not require any repayment for several years down the loan. When this
is the case, you will need to calculate both the average total interest rate as well as
the time value of money. If you are hoping to borrow from a single venture capitalist
or angel investor, they may be able to dictate additional terms that are not found in
traditional bank loans. Sometimes, these investors will offer a complex mix of debt
and equity financing for new businesses.
 
7. Access to Equity Markets
If you do hope to finance your business via equity, it will be crucial that you have
access to people who are actually interested in buying. Contrary to what some
entrepreneurs initially assume, there isn’t a readily available “counsel” of venture
capitalists, ready to give fund new businesses without scrutiny. If you do hope to
finance via equity, you will need to significantly develop your business plan, meet with
a wide range of individuals, and also be willing to make compromises. For some
business owners, the time it takes to do this is justified by the lack of debt that only
equity financing can provide. For others, traditional lending is a more appealing
option.
 
Conclusion
With equity financing, you lose some control over your business, but you are able to
 continue operating without debt. With debt financing, you will increase your future
liabilities, but the future of your business will remain in your hands. As you can see,
both decisions have clear appeals and trade-offs. Many business owners also use a
mixed financing model that is better tailored to their specific needs. Regardless, be
sure to remember these seven factors before making any permanent decisions.

5. Performance Element: Understand the fundamentals of managerial accounting to aid in financial

decision-making. Performance Indicators: Explain the nature of managerial cost accounting (e.g.,
activities, costs, cost drivers, etc.) (FI:657) (SP)

Explain the nature of managerial cost accounting (e.g., activities, costs, cost drivers, etc.) (FI:657)

What Is Managerial Accounting?

Managerial accounting is the practice of identifying, measuring, analyzing,
interpreting, and communicating financial information to managers for the pursuit of
an organization's goals. It varies from financial accounting because the intended
purpose of managerial accounting is to assist users internal to the company in making
well-informed business decisions.

● Managerial accounting involves the presentation of financial information for

internal purposes to be used by management in making key business
decisions.
● Techniques used by managerial accountants are not dictated by accounting
standards, unlike financial accounting.
● The presentation of managerial accounting data can be modified to meet the
specific needs of its end-user.
● Managerial accounting encompasses many facets of accounting, including
product costing, budgeting, forecasting, and various financial analysis.

Product Costing and Valuation

Product costing deals with determining the total costs involved in the production of a
good or service. Costs may be broken down into subcategories, such as variable, fixed,
direct, or indirect costs. Cost accounting is used to measure and identify those costs,
in addition to assigning overhead to each type of product created by the company.
Managerial accountants calculate and allocate overhead charges to assess the full
expense related to the production of a good.

The overhead expenses may be allocated based on the quantity of goods produced or
other activity drivers related to production, such as the square footage of the facility.
In conjunction with overhead costs, managerial accountants use direct costs to
properly value the cost of goods sold and inventory that may be in different stages of
production. Marginal costing is the impact on the cost of a product by adding one
additional unit into production. Margin analysis flows into break-even analysis, which
involves calculating the contribution margin on the sales mix to determine the unit
volume at which the business’s gross sales equal total expenses.

Break-even point analysis is useful for determining price points for products and
services. Although accrual accounting provides a more accurate picture of a
company's true financial position, it also makes it harder to see the true cash impact
of a single financial transaction. A managerial accountant may implement working
capital management strategies in order to optimize cash flow and ensure the
company has enough liquid assets to cover short-term obligations. When a
managerial accountant performs cash flow analysis, he will consider the cash inflow
or outflow generated as a result of a specific business decision.

For example, if a department manager is considering purchasing a company vehicle,

he may have the option to either buy the vehicle outright or get a loan. A managerial
accountant may run different scenarios by the department manager depicting the
cash outlay required to purchase outright upfront versus the cash outlay over time
with a loan at various interest rates.

Inventory Turnover Analysis

A managerial accountant may identify the carrying cost of inventory, which is the
amount of expense a company incurs to store unsold items. If the company is carrying
an excessive amount of inventory, there could be efficiency improvements made to
reduce storage costs. Managerial accountants help determine where bottlenecks
occur and calculate the impact of these constraints on revenue, profit, and cash flow.
Managers can then use this information to implement changes and improve
efficiencies in the production or sales process.

Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order to acquire

assets and increase its return on investments. Through balance sheet analysis,
managerial accountants can provide management with the tools they need to study
the company's debt and equity mix in order to put leverage to its most optimal use.
Performance measures such as return on equity, debt to equity, and return on
invested capital help management identify key information about borrowed capital,
prior to relaying these statistics to outside sources. It is important for management to
review ratios and statistics regularly to be able to appropriately answer questions
from its board of directors, investors, and creditors.

Accounts Receivable Management

Appropriately managing accounts receivable can have positive effects on a company's
bottom line. An accounts receivable aging report categorizes AR invoices by the length
of time they have been outstanding. For example, an AR aging report may list all
outstanding receivables less than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days.
Through a review of outstanding receivables, managerial accountants can indicate to
appropriate department managers if certain customers are becoming credit risks.

If a customer routinely pays late, management may reconsider doing any future
business on credit with that customer.

[...]

Budgets are extensively used as a quantitative expression of the company's plan of

operation. Managerial accountants utilize performance reports to note deviations of
actual results from budgets. Managerial accounting involves examining proposals,
deciding if the products or services are needed, and finding the appropriate way to
finance the purchase. It also outlines payback periods so management is able to
anticipate future economic benefits.

Managerial accounting also involves reviewing the trendline for certain expenses and
investigating unusual variances or deviations. This may include the use of historical
pricing, sales volumes, geographical locations, customer tendencies, or financial
information.