Unit 8: Budgeting and Finance

1. Unit 8: Budgeting and Finance Business Essentials April 17, 2012 Mr. Archambeau

2. Unit 8: Budgeting and Finance • After discussing this PowerPoint, you will be able to do the following: • Recognize important financial questions that must be answered in a business • List the steps in budget preparation • Describe three types of budgets • Identify financial records used by businesses • Describe balance sheets and income statements • Describe personal balance sheets and cash flow statements • Identify purposes of a budget • Describe steps for preparing a budget • Identify ways to save for retirement

3. Financial Planning • The moment a decision is made to start a business, financial planning begins. • Business owners have to ask themselves a few basic questions: • How much money will be needed to start the business? • Where will that money come from? • How will adequate funds be obtained to operate the business until the business becomes profitable? • What will be the best sources of sales and income? • What will be the major expenses? How often will they be paid?

4. Financial Planning • Finances are a key part of the operations of all business. Every business activity costs money. • Businesses are guided by the basic financial equation: • Revenues – Expenses = Profit or Loss • If Revenue > Expenses the business turns a profit • If Revenue < Expenses the business incurs a loss • How do staffing decisions affect the financial equation? • Businesses that try to save money by hiring fewer people, paying lower wages, or reducing training may find that costs increase due to waste, inefficiency, or poor-quality products

5. Financial Planning:Developing Business Budgets • A budget provides detailed plans for the financial needs of individuals, families, and businesses • A business budget has two main purposes: • Anticipate the sources and amounts of income for a business • Predict the types and amounts of expenses for a specific business activity or the entire business • The business must be able to identify and predict the amount of each source of income and each type of expense.

6. Financial Planning:Budget Preparation • The most important step in financial planning is developing a budget. • Compare a budget to a GPS or mapping system used for travelling to an unfamiliar location. If you don’t follow the GPS/map you will have little idea where you are going. • Goals of a budget: • Determine the sources and amounts of income • Identify types of expenses and predict their costs • Determine how much income will be distributed to cover these expenses • Reward investors if there is a profit

7. Financial Planning:Budget Preparation • The budgeting process involves four steps: • Prepare a list of each type of income and expense that will be a part of the budget • Gather accurate information from business records and other information sources for each type of income and expense • Create the budget by calculating each type of income, expense, and the amount of net income or loss • Explain the budget to people who need financial information to make decision • What information sources can be used to create your budget? • SBA • Forbes • Fortune • Wall Street Journal

8. Financial Planning:Types of Budgets • There are three main types of business budgets. They are: • A start-up budget plans income and expenses from the beginning of a new business or a major business expansion until it becomes profitable. • The operating budget describes the financial plan for ongoing operations of the business for a specific period. • A cash budget is an estimate of the actual money received and paid out for a specific period.

9. Financial Records and Statements • Budgets reflect the financial plans of businesses. To determine if they are successful, financial records are needed. • Financial records are used to record and analyze the financial performance of a business. • Local, state, and federal governments sometimes require some records to be turned in by businesses. • Other records provide information to owners and managers to aid in decision making.

10. Financial Records and Statements • There are seven types of financial records: • Asset Records identify the buildings and equipment owned by the business, their original and current value, and amount owed. • Depreciation Records identify the amount assets have decreased in value due to their age and use. • Inventory Records identify the type and quantity of resources and products on hand along with the current value of each. • Records of Accounts identify all purchases and sales made using credit. • An accounts payable record identifies the companies from which credit purchases were made and the amounts purchased, paid, and owed. • An accounts receivable record identifies customers that made purchases using credit and the status of each account.

11. Financial Records and Statements • Types of records continued…. • Cash Records list all cash received and spent by the business. • Payroll Records contain information on all employees of the company, their compensation, and benefits. • Tax Records show all taxes collected, owed, and paid. • Financial records have to be accurate and should be updated on a regular basis.

12. Financial Records and Statements • The three most important elements of a company’s financial strength are its assets, liabilities, and owner’s equity. • Assets are what a company owns. • Liabilities are what a company owes. • Owner’s Equity is the value of the owner’s investment in the business. • Reports that sum up the financial performance of a business are financial statements.

13. Financial Records and Statements:Balance Sheet • A company reports its assets, liabilities and owner’s equity for a specific date on the balance sheet. A balance sheet is prepared usually every six months or once a year. • The balance sheet has a distinct format:

14. Financial Records and Statements:Balance Sheet • The left side of the balance sheet lists all assets: • Current Assets – Cash and other items that can be readily converted into cash (inventory, accounts receivable, etc.) • Long-Term Assets (aka Fixed Assets) – Assets with a life span of more than a year (land, buildings, equipment, etc.) • The right side of the balance sheet is divided into two categories: • Liabilities • Current Liabilities – Liabilities that will be paid off within a year (short term loans) • Long-Term Liabilities – Debts that will continue for longer than a year (debts owed for land, buildings, equipment, etc.) • Owner’s Equity (aka Shareholder’s or Stockholder’s Equity) – the value of the business after liabilities are subtracted from assets • Shows how much the business is worth on the date of the balance sheet • In order for a balance sheet to be correct: • Total Assets = Total Liabilities + Owner’s Equity

15. Financial Records and Statements:Business Balance Sheet

16. Financial Records and Statements:Personal Balance Sheet

17. Financial Records and Statements:Income Statement • To report the revenue, expenses and net income or loss from operations for a specific period, a business prepares an income statement. • An income statement usually covers six months or a year, but may also encompass a shorter period such as a month. • The income statement includes revenue, expenses and net income. • Revenue is all income received by the business during the period. • Expenses are all of the costs of operating the business during the period. • The business has a net income when revenue exceeds expenses. A net loss occurs when expenses exceed revenue.

18. Financial Records and Statements:Business Income Statement

19. Financial Records and Statements:Personal Income Statement

20. Financial Planning: Personal Budgeting • A personal budget allows you to meet your personal goals with a system of saving and wise spending. • The process of creating and using a personal budget involves four main steps: • Set financial goals • Plan budget categories • Maintain financial records • Evaluate your budget

21. Financial Planning:Personal Budgeting • Step 1: Set Financial Goals • You should set both short-term and long-term goals for your budget. • Your goals should take the SMART approach: • S – Specific • M – Measurable • A – Action oriented • R – Realistic • T – Time based • Step 2: Plan budget categories • Some examples include savings, food, clothing, household, transportation, health and personal care, recreation and education, gifts and contributions, etc. • Be sure to include both fixed and variable expenses

22. Financial Planning:Personal Budgeting • Step 3: Maintain Financial Records • Record your income and expenses to find out if the plan is working.

23. Financial Planning:Personal Budgeting • Step 4: Evaluate Your Budget • Look through your records and take note of any budget variances. • A budget variance refers to any difference in budgeted amounts and actual spending amounts. • A budget deficit occurs when actual spending is greater than planned spending. • A budget surplus is when actual spending is less than the budgeted amount.

24. Financial Planning:Successful Budgeting • Effective budgeting is an ongoing learning process for everyone. • The following are common characteristics of a successful budget: • Must be realistic • Should be flexible • Should be evaluated regularly • Must be well planned and clearly communicated • Should have a simple format • It’s up to you to decide whether or not you keep a handwritten budget or use a budgeting software.

25. Planning for Your Future Planning for Retirement • Social Security – Provides pensions to retired workers and their families, death benefits to dependents of workers who die, and benefits to disabled workers and families. • Minimum age for SSI is 62 years old • Pension – A pension is a series of regular payments made to a retired worker under an organized plan. • Retirement Accounts • Individual Retirement Account (IRA) – A tax-sheltered retirement plan in which people can annually invest earnings up to a certain amount. • 401(k) – A tax-deferred retirement plan available through your employer • Annuities – You pay an insurance company a certain amount of money and in return, they pay you a regular income beginning at a certain age and continuing for life or a specific number of year

26. Unit 8: Budgeting and Finance Part II • After discussing this PowerPoint, you will be able to do the following: • Identify the types of taxes paid by consumers • Describe the steps for filing a tax return • Describe tax exemptions and deductions

27. Taxes • What are taxes? • A tax is a charge imposed by a government to finance public services. • Federal, state and local governments levy taxes. • Most people pay taxes in four major categories: • Purchases • Property • Wealth • Earning

28. Common Taxes • Purchases • Sales Tax • Excise Tax • Property • Real Estate Property Tax • Personal Property Tax • Wealth • Estate Tax • Inheritance Tax • Gift Tax • Earnings • Social Security Tax • Income Tax (State and Federal)

29. Common Taxes

30. Income Tax Payments • People make payments for federal, state and local income taxes in two ways • Withholding • Estimated Payments • Withholding is a “pay-as-you-go” system in which an employer deducts income tax from the earnings of workers each pay period • Receive your W-2 in January from your employer • W-2 is a summary of a worker’s earnings for the previous year

31. Income Tax Payments • Estimated payments is a system in which payments are made quarterly (April 15, June 15, September 15, and January 15 of the next year) and paid directly to the government • Examples: significant income from savings and retirement, royalties and pensions, and income from self-employment or working as an independent contractor • Most states charge an income tax to fund cost of highways, state parks, and other public services • Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming currently do not have a state income tax.

32. Preparing Tax Returns • The Internal Revenue Service (IRS) is part of the U.S. Treasury. The IRS is responsible for collecting federal income tax. • Taxpayers are required to file, or submit, a federal income tax return each year by April 15th. • The purpose of preparing a tax return is to determine the amount of tax a taxpayer is required to pay. • Once a taxpayer files, they will be told if they have paid all they owe, need to pay more, or are entitled to a refund or credit.

33. Preparing Tax Returns • Seven steps to preparing a tax return: • Determine gross income • Calculate adjusted gross income • Subtract deductions • Determine exemptions • Compute taxable income • Calculate tax owed • Make tax payments or ask for a refund or credit

34. Steps for Preparing Tax Return Step 1:Determine Gross Income • Two main types of income: • Earned Income results from wages, salary, commission, fees, tips, and bonuses. • Investment Income is the result of earnings from dividends, interest, and rent. • Federal income tax must also be paid on other types of income such as alimony, awards, lottery winnings, and prizes. • Do cash/prizes won on a game show fall into this category? • Absolutely, they are subject to federal AND state taxes • Tax-Exempt income is income not subject to tax (bonds) • Tax-Deferred Income is income that will be taxed at a later date

35. Steps for Preparing Tax Return Step 2: Calculate Adjusted Gross Income • Certain items are subtracted from gross income to obtain adjusted gross income (AGI). Subtractions include deposits in retirement accounts and alimony payments. Step 3: Subtract Deductions • A tax deduction is an amount that reduces taxable income. • Subtract deductions from AGI • Examples of deductions: • Certain medical and dental expenses • Interest paid on mortgages • Contributions to charitable organizations

36. Steps for Preparing Tax Return Step 4: Determine Exemptions • An exemption is a tax deduction for the taxpayer, a spouse, and each dependent. For each exemption, taxable income is reduced by a set amount. • Therefore, the more dependents a taxpayer can claim, the greater the reduction in taxable income. • For a person to qualify as a dependent: • The person must not earn more than a certain amount unless he or she is under 19 or is a full-time student under 24. • The taxpayer must provide more than half of the dependent’s support • The dependent must live with the taxpayer or be a relative

37. Steps for Preparing Tax Return Step 5: Compute Taxable Income • Taxable Income is the amount on which taxes are calculated. • Taxable Income = Gross Income – (Adjustments + Deductions + Exemptions) Step 6: Taxes Owed • Tax rates are the percentages used to compute the amount owed for taxes. • Ranges from 10% to 35%, depending on level of taxable income • A person’s income can be reduced by a tax credit, an amount subtracted directly from taxes owed.

38. Steps for Preparing Tax Return Step 7: Make Tax Payments or Ask for a Refund or Credit • Compare amount paid through the year with the amount owed for taxes • If amount owed > amount paid, you owe more money • If amount owed < amount paid, you can receive a refund or credit

39. Tax Preparation • There are several different ways to file your taxes, either by yourself or hiring someone to do it for you. • IRS Services • Tax Publications • Online Sources • Tax Preparation Software • Tax Preparation Services

40. Banking Systems • After discussing this PowerPoint, you will be able to do the following: • Explain the purpose of the Federal Reserve System • List the types of financial institutions • Identify the financial services used by consumers

41. The Banking System • Banks operate in much the same way as consumer stores. • Banks sell services such as checking accounts, savings accounts, loans, and investments. • The difference is that banks are regulated more strictly than most other businesses. • Reason being, if a business fails, some people lose money. If a bank fails, thousands of people are affected.

42. The Federal Reserve System • What is the Federal Reserve System (Fed)? • Supervises and regulates member banks and helps banks serve the public efficiently. • All national banks are required to join the Federal Reserve System, and state banks may join. • Banks that join the system are known as member banks. • The Federal Reserve System has 12 districts that are spread throughout the entire United States with a central Federal Reserve Bank in each district.

44. The Federal Reserve System • What is the purpose of the Federal Reserve System? • First, the Fed holds reserves for member banks. • Banks cannot lend all the money they receive from customers. They are required to keep a part of the money with the Fed. • The Fed holds these deposits in case the banks need additional funds to meet the daily customer demand. • As a result, a bank will lend only a certain percentage of deposited funds, the rest are kept in the reserve. • For example, if a customer deposits $1,000 and the bank is required to hold 15% of all deposits in reserve. This means the bank can lend $850, which is 85% of the new deposit.

45. The Federal Reserve System • What is the purpose of the Federal Reserve System? • Second, the Fed clears checks for member banks. • Clearing refers to the process of paying checks and other payments among different banks. • The Fed electronically processes millions of payments each day, making sure that the correct amounts are added to and subtracted from the appropriate accounts.

46. Types of Financial Institutions • Deposit Institutions(Deposit Intermediaries) accept deposits from people and businesses and use them to finance their business • Examples of Deposit Institutions are: • Commercial Banks – offer checking accounts, savings accounts, loans (individual and business), investments and other services. Also known as full-service banks. • Savings and Loan Associations – specializes in savings accounts and making loans for home mortgages. Since the 1980s, have started to expand their services. • Mutual Savings Banks – owned by, and operated for the benefit of, its depositors. Profits are distributed in proportion to the amount of business each participant does. Mainly in Northeast US. • Credit Unions – User owned, not for profit, cooperative financial institution. Have to be a member to use their services. The National Credit Union Administration (NCUA), a federal agency, regulates credit unions.

47. Types of Financial Institutions • Non-Deposit Institutions (non-depository intermediaries) do not take or hold deposits. They earn money selling specific services or policies. • Examples of Non-Deposit Institutions are: • Life Insurance Companies – offer life insurance policies and can also offer other financial services, such as investments • Investment Companies – help people choose the best investment opportunities for long-term growth • Consumer Finance Companies – a business that specializes in making loans for long-lasting or durable goods (cars or refrigerators) and for financial emergencies

48. Types of Financial Institutions • More examples of Non-Deposit Institutions: • Mortgage Companies – specialize in providing loans for buying a home or other real estate • Check-Cashing Outlets – offer a wide range of services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and the sale of bus and subway tokens. Usually more expensive than using other businesses • Pawnshops – make loans based on the value of some tangible object, such as jewelry or other valuable items. Commonly charge higher fees than other financial institutions

49. Financial Services • There are four basic services offered by financial institutions. They are: • Savings Accounts • Checking Accounts • Loans and other credit plans • Other (safe-deposit boxes, investments, etc.) • Financial institutions also offer peace of mind to consumers through the Federal Deposit Insurance Corporation (FDIC). • What is the FDIC? • A federal agency that insures all accounts in the same name at each bank up to an amount of $250,000. • Almost 99% of all banks are FDIC members

50. Consumer Credit • After discussing this PowerPoint, you will be able to do the following: • Identify the types of consumer credit • Describe the pros and cons of using credit • Calculate interest in consumer credit situations • Explain the activities of a credit bureau • Identify credit application regulations