WEB DEVELOPMENT NC III

Basic Competency
UOC9. FACILITATE ENTREPRENEURIAL SKILLS FOR MICRO-SMALL-MEDIUM
ENTERPRISES (MSMEs)
LO3. Apply Budgeting and Financial Management Skills

Information Sheet 9.3-1: Cash flow management

Cash flow is the lifeblood of your business. The more clogged channels, the more it
can affect financial health.

What is cash flow?

In simple terms, cash flow is the money coming into your business, and the money
going out of it. The cash flowing into your business is known as cash inflow and
includes the money you make from selling your products or services. It can also
include money from other sources, such as investing and financing. The cash flowing
out of your business is known as cash outflow. Examples of cash outflow include the
payments you make to suppliers, costs like salaries and bills, dividends paid out to
shareholders and expenses such as tax and business rates.

There are three types of cash flow:

1. Operating cash flow: Cash flow linked to producing and selling your products
and services is known as cash flow from operations (CFO) or operating cash
flow. In other words, your accounts receivable and accounts payable. Your
operating cash flow shows whether or not your business has enough money
coming in to pay operating expenses, such as bills and payments to suppliers.
It can also show whether or not you have money to grow, or if you need external
investment or financing.

2. Investing cash flow: To adapt and grow, every business needs to invest in its
longer-term future. Cash flow from investing (CFI), or investing cash flow, refers
 to the money you invest in areas such as research and development, or on
capital expenditure such as new assets, equipment or premises. It also includes
cash flow linked to buying and selling investment products like stocks and
securities.
While you need more money coming in than going out for a positive operating
cash flow, investing cash flow is different. Fast growing businesses often have
times of negative investing cash flow, which shows stakeholders that they’re
investing in expansion and growth.

3. Financing cash flow: Cash flow from financing (CFF) or financing cash flow is
linked to how your business is funded, such as money coming in from bank
loans and investors, and money going out on loan repayments for example. A
positive financing cash flow can show that you’re investing in your business,
but it can also be a sign that you’re relying on finance to keep your business
going day to day, rather than bringing enough money in from selling your
products or services.

10 tips for managing your cash flow effectively

Below are 10 tips to help to tackle some of the cash flow problems you might
experience.

1. Set a budget
Creating a budget is an important foundation for any business. By forecasting what
you intend to spend and earn, you can determine ahead of time whether you have
enough money for certain projects.

2. Keep records
Of course, creating a budget and setting goals is all well and good, but if you don’t
track your performance then your targets become meaningless. Once you have clear
cash flow targets in place, you will need to keep records and review them regularly to
identify any potential problems that will need addressing. Examples of key data you
should track are:
 Income
 Uncollected cash
 Monies owed
 Regular expenses
 Available cash
 Inventory
 Individual revenue streams – which are making a profit, which are struggling
etc.
 Gross profit
 Net profit
 How are you tracking against the previous year and previous quarter?
 How are you tracking against your competitors?

3. Review your spending regularly

As prices rise, it’s essential to keep a close eye on what you’re spending. It will also
help you to identify which costs are operating cash flow, and which are linked to
investing cash flow and financing cash flow. Remember that your business costs could
increase as you grow, so it’s important to work them out in advance, to make sure
you’ll still have more coming in than going out. On the other hand, investing in things
like technology could lower your operating costs, while increasing revenue streams.

4. Introduce a credit control process

Put a plan to place to make sure you’re paid on time, within your payment terms. A
good credit control process includes:
 Due diligence – to identify clients that are likely to pay on time, and those who
could pose a greater financial risk. Remember to check existing clients, as well
as new ones. In a time of economic uncertainty, usually reliable clients could be
facing their own financial difficulties.
 Clear payment terms – make sure your payment terms support your cash flow
and communicate them clearly with your customers. Set out how much you
expect to be paid, by when, and the consequences of late or missed payments.
Remember, this is also an opportunity to support your customers and build
brand loyalty. For example, by offering flexible payment plans, point of
purchase financing, or early bird discounts for paying early. Always send your
invoices on time and offer a range of simple ways for your customers to pay,
including online.
 Staff training – ensures your team is up to date with your credit control
processes and the importance of payments and cash flow. This isn’t just an
important area for finance staff, it affects your whole business.

5. Diversify your revenue streams

Offering a broader range of products and services could help increase your cash inflow
and make you more resilient as customer needs change. It’s also important to make
sure you’re not over-reliant on a particular client or supplier, especially in uncertain
economic times. Carry out research to spot potential gaps in the market and benefit
from new trends.
6. Make use of technology
There’s a growing range of apps and software available to help small businesses
manage their cash flow. Using technology will give you a real-time view of your cash
flow and help you automate time-consuming tasks such as sending and chasing
invoices.

These will enable you to plan ahead, by seeing how different scenarios are likely to
affect your business, including price rises, late payments and fluctuating trading
conditions. Helping you to spot potential challenges and opportunities early, and make
better business decisions, such as whether or not to pass rising costs onto your
customers.

7. Make use of the help available when you need it

Your accountant, bank, or financial advisor can give you advice on cash flow
management as well as your overall business finances and accounting. There is also a
wealth of free and affordable business and accounting support out there for small
businesses and start-ups, including accelerator programs to help you grow.

8. Maintain good business relationships

Being on good terms with suppliers, lenders and clients is essential for small
businesses, especially in uncertain economic times. Communicating clearly around
finance and working collaboratively will help to strengthen these relationships. For
example, offering flexible payment plans for clients could help you avoid the challenge
of late or missed payments, and improve your customer service offering.

9. Know the warning signs

Keeping an eye on business credit scores could help you spot that a key client or
supplier may be in financial difficulty. Enabling you to take action, avoid unpaid
invoices or supply issues, and protect your own business credit score. The earlier you
address potential cash flow problems, the easier it will be to stay on track.

10. Seek help before things go too far

Look at what you can do internally, in terms of cutting costs, tightening your credit
control processes and diversifying your revenue streams. If that’s not enough, then
don’t be tempted to bury your head in the sand. Stay in close contact with your bank,
your accountant and your financial advisers and make sure you get the support you
need straight away.

The benefits of effective cash flow management

Understanding and managing your business cash flow can help you stay resilient in
uncertain times and adapt quickly to changes such as rising prices and supply chain
issues. From mitigating financial risks such as late and missed payments, to helping
you spot investment opportunities. It can also help you set clear financial goals
underpinned by a real time forecast of your cash flow, enabling you to stay on track
and flex when you need to and avoid any cash flow issues.

Sources:
https://www.experian.co.uk/blogs/latest-thinking/small-business/why-is-cash-flow-
management-important/#:~:text=Cash%20flow%20management%20means
%20tracking,whilst%20also%20making%20a%20profit.
https://tipalti.com/accounting-hub/cash-flow-management/

Information Sheet 9.3-2: Basic financial management

Financial Management means planning, organizing, directing and controlling the

financial activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the
enterprise.

Scope/Elements of Financial Management

1. Investment decisions includes investment in fixed assets (called as capital
budgeting). Investments in current assets are also a part of investment
decisions called as working capital decisions.
 2. Financial decisions- They relate to the raising of finance from various
resources which will depend upon decision on type of source, period of
financing, cost of financing and the returns thereby.
3. Dividend decision- The finance manager has to take decision with regards to
the net profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will
depend upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and
control of financial resources of a concern. The objectives can be-
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should
be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e., funds should be invested in safe ventures
so that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition
of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make
estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programs and policies of a
concern.

Estimations have to be made in an adequate manner which increases earning

capacity of enterprise.
2. Determination of capital composition: Once the estimation has been made,
the capital structure have to be decided.

This involves short-term and long-term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and additional
funds which have to be raised from outside parties.

3. Choice of sources of funds: For additional funds to be procured, a company

has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source
and period of financing.
 4. Investment of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investment and regular returns is
possible.

5. Disposal of surplus: The net profits decision has to be made by the finance
manager. This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and
other benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansion, innovational, diversification plans of the company.

6. Management of cash: Finance manager has to make decisions with regards to

cash management.
Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current
liabilities, maintenance of enough stock, purchase of raw materials, etc.

7. Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances.

Source:
https://www.managementstudyguide.com/financial-management.htm

Information Sheet 9.3-3: Basic financial accounting

What are the Basics of Financial Accounting?

This refers to the recordation of information about money. Thus, we will talk about
issuing an invoice to someone, as well as their payment of that invoice, but we will not
address any change in the value of a company's overall business, since the latter
situation does not involve a specific transaction involving money.

Transactions
A "transaction" is a business event that has a monetary impact, such as selling goods
to a customer or buying supplies from a supplier. In financial accounting, a
transaction triggers the recording of information about the money involved in the
event. For example, we would record in the accounting records such events
(transactions) as:
 Incurring debt from a lender
 The receipt of an expense report from an employee
 The receipt of an invoice from a supplier
 Selling goods to a customer
 Remitting sales taxes to the government
 Paying wages to employees
 Remitting payroll taxes to the government
Accounts
An account is a separate, detailed record about a specific item, such as expenditures
for office supplies, or accounts receivable, or accounts payable. There can be many
accounts, of which the most common are:
 Cash. This is the current balance of cash held by a business, usually in
checking or savings accounts.
 Accounts receivable. These are sales on credit, which customers must pay for at
a later date.
 Inventory. This is items held in stock, for eventual sale to customers.
 Fixed assets. These are more expensive assets that the business plans to use
for multiple years.
 Accounts payable. These are liabilities payable to suppliers that have not yet
been paid.
 Accrued expenses. These are liabilities for which the business has not yet been
billed, but for which it will eventually have to pay.
 Debt. This is cash loaned to the business by another party.
 Equity. This is the ownership interest in the business, which is the founding
capital and any subsequent profits that have been retained in the business.
 Revenue. This is sales made to customers (both on credit and in cash).
 Cost of goods sold. This is the cost of goods or services sold to customers.
 Administrative expenses. These are a variety of expenses required to run a
business, such as salaries, rent, utilities, and office supplies.
 Income taxes. These are the taxes paid to the government on any profits earned
by the business.

Transaction Data Entry

Software Module Entries
If you use accounting software to record financial accounting transactions, there will
probably be online forms that you can fill out for each of the major transactions, such
as creating a customer or invoice or recording a supplier invoice. Every time you fill
out one of these forms, the software automatically populates the accounts for you.

Journal Entries
You can access a journal entry form in your accounting software, or create a journal
entry by hand. There is a great deal to journal entries. In brief, a journal entry must
always impact a minimum of two accounts, with a debit entry being recorded against
one account and a credit entry against the other. There can be many more than just
two accounts, but the total dollar amount of debits must equal the total dollar amount
of credits.

The General Ledger

The accounts are stored in the general ledger. This is the master set of all accounts, in
which are stored all of the business transactions that have been entered into the
accounts with journal entries or software module entries. Thus, the general ledger is
your go-to document for all of the detailed financial accounting information about a
business.

If you want to understand the detail for a particular account, such as the current
amount of accounts receivable outstanding, you would access the general ledger for
this information. In addition, most accounting software packages provide a number of
reports that give you better insights into the business than just reading through the
accounts. In particular, there are aged accounts receivable and aged accounts payable
reports that are useful for determining the current list of uncollected accounts
receivable and unpaid accounts payable, respectively.

The Financial Statements

The general ledger is also the source document for the financial statements. There are
several financial statements, which are noted below. Other less-used elements of the
financial statements are the statement of retained earnings and a large number of
accompanying disclosures.

Balance Sheet
The balance sheet lists the assets, liabilities, and equity of the business as of the
report date. This report shows the financial position of a business as of the final day of
the reporting period. The information on it can be used to derive a variety of ratios that
reveal the liquidity of the business, and which can provide a view of its financial
structure.

Income Statement
The income statement lists the revenues, expenses, and profit or loss of the business
for a specific period of time. This report shows the efficiency of an organization in
selling goods at a reasonable margin, and how well it controls its administrative costs.
This report can be structured to present results for multiple periods, so that you can
spot trendlines in sales and expenses - which may trigger management actions to
improve the situation.

Statement of Cash Flows

The statement of cash flows lists the cash inflows and outflows generated by the
business for a specific period of time. It may be formatted using the direct method or
the indirect method. This is a useful report for obtaining an understanding of the cash
flow health of a business. This is especially important when a business is operating
with very little cash on hand, and you want to better understand whether it can
continue to operate in this manner.

In summary, we have shown that financial accounting involves the recording of

business transactions in accounts, which in turn are summarized in the general
ledger, which in turn is used to create financial statements.

Source:
https://www.accountingtools.com/articles/financial-accounting-basics
 Information Sheet 9.3-4: Business internal controls

Internal controls are accounting and auditing processes used in a company's finance
department that ensure the integrity of financial reporting and regulatory compliance.

Internal controls help companies to comply with laws and regulations, and prevent
fraud. They also can help improve operational efficiency by ensuring that budgets are
adhered to, policies are followed, capital shortages are identified, and accurate reports
are generated for leadership.

Importance of Internal Controls

Internal controls are the mechanisms, rules, and procedures implemented by a
company to ensure the integrity of financial and accounting information, promote
accountability, and prevent fraud. Besides complying with laws and regulations and
preventing employees from stealing assets or committing fraud, internal controls can
help improve operational efficiency by improving the accuracy and timeliness of
financial reporting.

Components of Internal Controls

A company's internal controls system should include the following components:
 Control environment: A control environment establishes for all employees the
importance of integrity and a commitment to revealing and rooting out
improprieties, including fraud. A board of directors and management create this
environment and lead by example. Management must put into place the
internal systems and personnel to facilitate the goals of internal controls.
 Risk Assessment: A company must regularly assess and identify the potential
for, or existence of, risk or loss. Based on the findings of such assessments,
added focus and levels of control might be implemented to ensure the
containment of risk or to watch for risk in related areas.
  Monitor: A company must monitor its system of internal controls for ongoing
viability. By doing so, it can ensure, whether through system updates, adding
employees, or necessary employee training, the continued ability of internal
controls to function as needed.
 Information/Communication: Solid information and consistent
communication are important on two fronts. First, clarity of purpose and roles
can set the stage for successful internal controls. Second, facilitating the
understanding of and commitment to steps to take can help employees do their
job most effectively.
 Control Activities: These pertain to the processes, policies, and other courses
of action that maintain the integrity of internal controls and regulatory
compliance. They involve preventative and detective activities.

Preventative vs. Detective Controls

Internal controls are typically comprised of control activities such as authorization,
documentation, reconciliation, security, and the separation of duties. They are broadly
divided into preventative and detective activities.

Preventative control activities aim to deter errors or fraud from happening in the
first place and include thorough documentation and authorization practices.
Separation of duties, a key part of this process, ensures that no single individual is in
a position to authorize, record, and be in the custody of a financial transaction and
the resulting asset. Authorization of invoices and verification of expenses are internal
controls.

In addition, preventative internal controls include limiting physical access to

equipment, inventory, cash, and other assets.

Detective controls are backup procedures that are designed to catch items or events
that have been missed by the first line of defense. Here, the most important activity is
reconciliation, which is used to compare data sets. Corrective action is taken upon
finding material differences. Other detective controls include external audits from
accounting firms and internal audits of assets such as inventory.

Source:
https://www.investopedia.com/terms/i/internalcontrols.asp#:~:text=Internal
%20controls%20are%20accounting%20and,and%20regulations%2C%20and
%20prevent%20fraud.

SELF-CHECK 9.3-1

1. Creating a budget is an important foundation for any business. By forecasting

what you intend to spend and earn, you can determine ahead of time whether
you have enough money for certain projects.
 a. Set a budget
b. Keep records
c. Review your spending regularly
d. Introduce a credit control process
e. Diversify your revenue streams

2. Business costs could increase as you grow, so it’s important to work them out
in advance, to make sure you’ll still have more coming in than going out.
a. Set a budget
b. Keep records
c. Review your spending regularly
d. Introduce a credit control process
e. Diversify your revenue streams

3. Offering a broader range of products and services could help increase your cash
inflow and make you more resilient as customer needs change.
a. Set a budget
b. Keep records
c. Review your spending regularly
d. Introduce a credit control process
e. Diversify your revenue streams

4. Once you have clear cash flow targets in place, you will need to keep records
and review them regularly to identify any potential problems that will need
addressing.
a. Set a budget
b. Keep records
c. Review your spending regularly
d. Introduce a credit control process
e. Diversify your revenue streams

5. Put a plan to place to make sure you’re paid on time, within your payment
terms.
a. Set a budget
b. Keep records
c. Review your spending regularly
d. Introduce a credit control process
e. Diversify your revenue streams