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Chapter Six: Analyzing Cash Flow and Other Financial Information
Bonus Internet Exercises
Bonus Internet Exercise 6.1: Financial Resources and the New Entrepreneur
(LO 6-1, 6-2, 6-3)
In this chapter the authors focused on cash flow, budgets, and other financial tools to
assist the new entrepreneur with the financial planning needs for a new business. It is
important to recognize that cash flow represents the cash that moves into the business
and cash that moves out of the business. You can see why profits and a positive cash
flow are important goals for the new small business.
New small business owners utilize their resources to learn specific details about
finance, financial management, and other beneficial tools to assist them with their
planning needs. Visit the Institute for Management Accountant’s (IMA) website at
http://www.imanet.org/ and review the information that might help a new small business
owners with their financial needs.
Discussion Questions:
1. What information did you discover that might be beneficial to new small business
owners to help them analyze cash flow? List at least three resources that are
available at this website and explain why these resources are important. Be
specific.
2. Summarize the publications that are available on the website. Discuss how they
can assist a new small business owner.
3. Review the Core Values tab on the website. List them and explain how these
values could be relative to the new small business owner.
4. What other resources did you find on the website? Why are they important?
Bonus Internet Exercise 6.1: Financial Resources and the New Entrepreneur
(LO 6-1, 6-2, 6-3) - Notes
Discussion Questions:
1. What information did you discover that might be beneficial to new small
business owners to help them analyze cash flow? List at least three
resources that are available on this website and explain why these
resources are important. Be specific. The site lists several resources and
2. Summarize the publications that are available on the website. Discuss how
they can assist a new small business owner. Publications include “The
IM 6-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
3. Review the Core Values tab on the website. List them and explain how
these values could be relative to the new small business owner. The core
4. What other resources did you find on the website? Why are they
important? Responses will vary.
Bonus Internet Exercise 6.2: Entrepreneurs Establish Business Ethics for Financial
Decisions
(LO 6-1, 6-2, 6-3)
New entrepreneurs initiate their financial planning and discover the cash flow relative to
their new small business. Founders create equity when they invest their personal assets
in the new small business. In addition, they develop a balance sheet and other financial
tools that assist them with their finance needs.
Sound business practices ensure that the future financial functions of the new small
business are in compliance with stakeholders, partners, investors, regulatory agencies,
and, of course, the IRS. As a result, new small business owners must assure that they
make honest business decisions that enhance their new small business.
Study the “International Business Ethics (International Business Ethics Institute (IBEI))i”
website at http://www.business-ethics.org/. and discuss the following questions.
Discussion Questions:
1. Why should a new small business owner understand the concept of ethics as it
applies to the financial functions of the new small business?
2. How can new small business owners utilize this site to learn about ethical
decisions for their new small businesses when they consider how the new
businesses will be financed?
3. What professional services can a new small business owner use to assure that
the owner will make ethical business decisions?
4. Review the publication section on the website. What publications can new small
business owners use to enhance their ethical business practices?
IM 6-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
Bonus Internet Exercise 6.2: Entrepreneurs Establish Business Ethics for Financial
Decisions (LO 6-1, 6-2, 6-3) - Notes
This website titled “International Business Ethics” has some very interesting articles.
The site also lists several resources related to business ethics. The articles are current
and change often. The students should select an article of interest and see how it
relates to the previous questions.Bonus Internet Exercise 6.-3: The Balance Sheet:
Balances for the New Entrepreneur
(LO 6-1, 6-2, 6-3)
One part of the business environment is the population in a given area. Visit
www.census.gov and answer the following question using the research provided on this
website.
1. What is the American Community Survey? How is it different from the Census
survey taken every ten years?
2. What are the projections for the population during 2010-2050? Is the population
expected to increase or decrease?
3. What are infant mortality rate projections for 2010-2050? How might this data be
useful if you were starting a business?
4. Find the most recent data for the economic census. How many establishments
are involved in oil and gas extraction? How many establishments are involved in
food manufacturing? How many retail bakeries are there?
5. What other information would be useful to the new entrepreneurial business
owner on this site?
Bonus Internet Exercise 6.3: The Balance Sheet: Balances for the New Entrepreneur
(LO 6-1, 6-2, 6-3) - Notes
1. What is the American Community Survey? How is it different from the
Census survey taken every ten years? The American Community Survey is a
2. What are the projections for the population during 2010-2060? Is the
population expected to increase or decrease? The population in the US is
3. What is infant mortality rate for your state? How might this data be useful
if you were starting a business? If the business is related to infants or
4. Find the most recent data for the economic census. How would you find
the number of establishments that are involved in oil and gas extraction?
IM 6-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
5. What other information would be useful to the new entrepreneurial
business owner on this site? Responses could include geographic maps,
Critical Thinking Exercises
Critical Thinking Exercise 6.1: Budgeting for the Entrepreneur
(LO 6-1, 6-2)
Recall that the authors in the text revealed that the purpose of a budget is to project the
costs that are expected to be incurred over a predetermined period of time. One way a
new entrepreneur can establish new budgeting skills is to evaluate their personal,
individual budgets. Complete the following personal budget and consider how a
personal budget differs from a budget for a new small business.
PERSONAL BUDGET
January
Februar
y March April May June
Income
Total Income:
Payment/Debt Rent/Mortgage
Automotive
Insurance
Gas
Maintenance
Groceries
Clothing/Shoes
Utilities
Medication
Health Ins.
Taxes
Savings
IRA
401(k)
Misc.
Personal
Total Payments
Ending Cash
IM 6-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
1. List your income for each month in the designated column. Be sure to use the
amount you actually receive, not the amount before taxes.
.
2. List your payments and expenses for each month in the designated column.
3. Subtract the expenses from the income and list your remaining cash figure.
4. How much money do you expect to have left over at the end of each month?
Compare your budget to your actual expenditures.
5. Next, discuss how your personal budget will vary from the budget you create for
your new small business. Be specific.
6. Create a budget for your new small businessCritical Thinking Exercise 6.1:
Personal Budgeting - Notes
The purpose of this lesson is to introduce the budgeting process to the students. In this
exercise the students develop skills to assure they understand the concepts related to a
budget. The students analyze their personal income, personal debt, and where their
money is spent during a period of six months. Students learn to develop the personal
budget and apply the skills they learn to the budget of their new small business.
Students are expected to discuss the variances between a personal budget and a
budget for a new small business. Students are encouraged to create a budget for their
new small businesses.
Critical Thinking Exercise 6.2: Analyzing Cash Flow
(LO 6-1, 6-2)
As we learned in this chapter, cash flow is the actual cash that flows into the business
subtracted from the cash that flows out of the business. It is imperative that the new
entrepreneurial business maintains a positive cash flow to ensure that the business can
operate at an optimal level of efficiency. Imagine you are ready to start the business and
apply these questions to your new small business.
Assignment:
1. Evaluate the sources of cash flow that you will use in your new business.
2. Describe the sources of equity that a new business owner might use to invest in
the new small business. List at least three sources of equity.
IM 6-5
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
3. Summarize the advantages and disadvantages of equity. Discuss the benefits
and risks associated with this type investment?
4. Discuss how the new small business owner benefits from float. List the
advantages and disadvantages of float.
Critical Thinking Exercise 6.2: Analyzing Cash Flow - Notes
The purpose of this exercise is to ensure that the students gain the essential skills to
recognize the sources of cash flow that are available to the new small business owner.
In addition, the students discuss the benefits and risks associated with equity as a form
of investment.
Critical Thinking Exercise 6.3: Balancing the Books
(LO 6-1, 6-.2, 6-3)
The authors of the text discussed that the balance sheet provides a summary of the
assets, liabilities, and equity associated with the business. You learned that the pro
forma balance sheet provides a comparison for the new small business owner to
evaluate how each asset is utilized in the business.
Discussion Questions:
1. Discuss the two types of assets that are included in the balance sheet. List three
examples of each asset. Why they are important.
2. Discuss the two types of liabilities that are included in the balance sheet. List
three examples of each liability. Why are they important?
3. Why are assets subtracted from liabilities on the balance sheet? Be specific.
4. Why is the estimate of the current assets limited for a new small business?
IM 6-6
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
5. What is working capital? How is it calculated?Critical Thinking Exercise 6.3:
Balancing the Books - Notes
The purpose of this exercise is to teach the students the components of the balance
sheet. The students are expected to learn the two types of assets, the two types of
liabilities, and how they are calculated on the balance sheet.
In addition, the students discover that the estimates of the firm’s assets are limited on
the balance sheet because the new small business has not generated any assets from
the operations of the new business.
Students also learn how to calculate working capital and they understand why it is
important to the business.
Bonus Cases
Bonus Case 6.1: Cash Flow and the New Entrepreneur
(LO 6-1, 6-2)
One the most interesting areas of business is the social aspect. How can companies
provide benefits that meet the needs of single people, single parents and married
couples? One of those ways is to introduce a cafeteria style benefits program. This
program gives each employee a specific dollar amount in which to spend on benefits,
and each family can review their situation and choose the right selection of benefits for
them.
This flexible approach to benefits can address the changing social structure in our
economy. For example a cafeteria style benefits program might provide the following
options:
Car insurance Life Insurance
Pet Insurance Tuition reimbursement
Health benefits Dental benefits
On –site daycare Extra vacation days
401k or retirement plan Bus or metro pass
In other words, an employee would receive X amount per year, and can pick and
choose the benefits he or she can use. For example, let’s say a single female, aged 23
is hired for a job. She doesn’t have kids, so doesn’t care about day-care or life
insurance, but would like more time off. With cafeteria benefits, she would be able to
take that time, while her 35 year old co-worker with 2 kids could enjoy daycare on-site.
IM 6-7
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
Likewise, a 62 year old man whose kids are grown might be most interested in good
healthcare coverage and retirement plans. Remember that as part of the Health Care
Act, all persons must have health insurance.
Some companies are even going to the extreme and for employees to opt not to take
any benefits, they receive an amount back in cash on each paycheck.
1. In your current situation, which three benefits would you choose?
2. Do you see your situation changing in the next 10 years? Which benefits might
be important to you then?
3. How do you think cafeteria style benefits might help employee motivation? How
can they help maintain a diverse workforce?
Bonus Case 6.2: Ethics and Financial Planning
(LO 6-1, 6-2, 6-3)
Entrepreneurs provide products and services to enhance their community; and to
implement positive social change in the communities they serve. Most business people
in society today trust the individuals and groups they choose to conduct their business.
Unfortunately, there are individuals who do not incorporate ethics in their business
decisions.
To illustrate this concept, consider the recent case of Bernie Madoff. According to recent
court documents from the US Department of Justice, Bernard L. Madoff had extensive
charges filed against him in Manhattan Federal Court. These charges consisted of
“eleven felony charges including securities fraud, investment adviser fraud, mail fraud,
wire fraud, three counts of money laundering, false statements, perjury, false filings with
the United States Securities and Exchange Commission ("SEC"), and theft from an
employee benefit plan (Justice)ii” (page 1). Recall that case and answer the following
questions.
Discussion Questions:
1. What is your reaction to this case?
2. If you were Bernie Madoff’s client, how would you react to these charges? Why?
3. Explain why a new entrepreneur should incorporate viable business planning
practices into the financial planning strategies for the new small business?
IM 6-8
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
4. What can a new small business owner do to assure honest reporting in the
business’s cash flow statement, the balance sheet, and other financial
documents affiliated with the new small business? Why?
5. Why should an entrepreneur incorporate good ethical decisions into the financial
planning for the new small business?
Bonus Case 6.2: Ethics and Financial Planning - Notes
The purpose of this lesson is to illustrate how new small business owners can
incorporate ethics into their financial planning process. This is a classic example that
illustrates why the new small business owner should ensure that viable business
decisions are made as they relate to the financial functions of the new small business.
Investors were outraged when they discovered Bernie Madoff’s unethical business
practices.
New small business owners plan the financial tools they will use in their new small
businesses. As a result, they need to learn how to make viable business decisions that
project a practical approach to honesty, integrity, and the concepts of right and wrong
behaviors as they relate to ethics.
Bonus Case 6.3: Sensitivity Analysis
(LO 6-2)
Sensitivity analysis is essential to the new entrepreneur because it provides an
examination of positive and negative scenarios. It also provides a strong sense of
judgment to reveal how sensitive the firm would be to fluctuations in cash flow.
Discussion Questions:
1. A company notices that the gross profit (sales minus cost of goods sold) has
been decreasing. What should the company review to find the problem?
2. What factors should a company review if the company is considering a price
increase?
3. What factors should a company review if the company is considering an
expansion?
4. What factors should a company review if the company is considering moving to a
different location?
IM 6-9
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
Bonus Case 6.3: Sensitivity Analysis (LO 6-2) - Notes
Developing new cash flow projections is part of each of the scenarios discussed.
Discussion Questions:
1. The company needs to look at its cost per product – has this cost increased if the
product is being purchased. If the product is being manufactured, the company
should its review labor costs and material costs. Even increases in utility costs
can adversely affect the cost of the goods sold.
2. Will the company lose customers? If they do, will an increase in price make up
for any lost customers? Will the new pricing affect the company’s competitive
advantage?
3. What would be all the costs of the expansion? Will personnel be tied up in the
expansion and be unable to perform their usual tasks? What is the expected
increase in sales or reduction in costs resulting from the expansion?
4. What would be the costs of the move to the new location? Will the customer
base follow the company to the new location? Will the new location add
substantial customers? Will the company lose sales during the transition?
Bonus Case 6.4: UPC Codes
(LO 6-3)
In this chapter, we discussed ways in which the government could help businesses be
successful. Among many ways, the government implements standards such as the
UPC code for retail products (this is the bar code required on products for sale in retail
stores). There are UPC codes on everything that you buy
1. Go to the web and find out how UPC codes are assigned.
2. Who keeps track of the codes?
3. What criteria are needed to get a code
Bonus Case 6.4: UPC Codes (LO 6-3) - Notes
IM 6-10
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
1. Go to the web and find out how UPC codes are assigned. UPC codes have
four groups of numbers. The first group (2 numbers) is the country code.
Numbers 00 through 13 indicate those companies based in the US or Canada.
The next group (5 numbers) is the company code. The next group (5 numbers) is
the article code that is recorded in a centralized database. The last group (1
number) is a check digit. This is used to verify that the bar code has been
scanned correctly.
2. Who keeps track of the codes? GS1 is a not-for-profit group based in
Brussels, Belgium that administers the standards.
3. What criteria is needed to get one? To get a code, a business contacts GS1 US
and pays a fee. Then the company is issued a member kit and follows its
directions to obtain the code.
Endnotes
IM 6-11
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
i International Business Ethics Institute (IBEI). (2009). International Business Ethics Institute (IBEI). http://www.business-ethics.org/,
Retrieved on October 17, 2009.
ii United States v. Bernard L. Madoff and Related Cases. (2009). The United States Department of Justice. Southern District of New York.
http://www.justice.gov/usao/nys/madoff.html, Retrieved on October 18, 2009.
