Chapter: 12 BFM

1. Chapter: 12BFM Financial Management

2. 12-1—Financial Management • The moment a decision is made to start a business, financial planning begins. • Questions to ask yourself: • How much money will be needed to start the business? • Where will the financing come from? • How will adequate funds be obtained to operate the business?

3. Financial Planning • Many new businesses fail due to poor financial planning. • Experts in business finance should be consulted to help the new business with its financial planning.

4. Ongoing Operations Revenue Expenses Are the costs of operating a business. • All income that a business receives over a period of time revenue.

5. Basic Financial Equation • Every business is guided by the basic financial equation. • Revenue-Expenses = Profit or Loss • Profit is when revenue is greater than expenses. • Loss is when expenses exceed revenue.

6. Question??? • If a company’s annual revenue is $2 million and expenses were 1.5 million, did the business make a profit or a loss?

7. Ongoing Operations • All managers are responsible for the cost of the part of the business they manage. • Why should employees also care if a business is making money? • The profitability of the business is directly linked to the number of employees and the wages the business can pay.

8. Business Expansion • Successful businesses expand to be able to: • Serve more customers • Reach unserved markets • Sell new products

9. Business Expansion • Business expansion calls for research to develop new products • Most expansion plans occur over a long and can cost thousands of dollars. • Each time business expansion is anticipated, careful financial planning must be completed.

10. Developing Business Budgets • A budget provides detailed plans for the financial needs of individuals, families, and businesses.

11. Developing Business Budgets • A business budget has two main purposes: • 1. Anticipated sources and amounts of income. • 2. 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.

12. Small Business Administration The Small Business Administration (SBA) provides many planning tools for new businesses. Among those tools are guides to developing a budget and financial information to help the new business predict income and expenses.

13. Private Businesses • Another source of information is private businesses that collect and publish financial information on similar businesses. Examples include Dun and Bradstreet, and Value Line. • Some information is also available from business magazines include: Fortune, Forbes, Entrepreneur and The Wall Street Journal.

14. Budget Preparation • The most important step in financial planning is developing a budget. • A budget identifies where the business is going. It allows the owner to determine if the business is making progress toward its financial destination.

15. The Budgeting Process • The budgeting process involves fourfundamental steps.1. Prepare a list of each type of income and expense that will be a part of the budget.

16. The Budgeting Process • 2. Gather accurate information from business records and other information sources for each type of income and expense.

17. The Budgeting Process 3. Create the budget by calculating each type of income, expense, and the amount of net income or loss.

18. Types of Budgets For every business, three particular budgets are essential. They are the start-up budget, the operating budget, and the cash budget.

19. Types of Budgets • The start-up budget plans income and expenses from the beginning of a new businesses or a major business expansion until it becomes profitable. • The operating budget describes the financial plan for ongoing operations the business for a specific period of time. • Usually planned for 3 months, 6 months, or a year.

20. Types of Budgets A cash budget is an estimate of the actual money received and paid out for a specific period. A cash budget anticipates that cash will come into a business and that cash will be paid out during each week or month of operation.

21. Chapter: 12.2BFM Financial Records and Financial Statements

22. Financial Records • Financial records are used to record and analyze the financial performance of a business.

23. Types of Records • The following records are commonly maintained to document the performance of a business. • Asset records Tax records • Depreciation records Payroll records • Inventory records • Records of accounts • Cash records

24. Asset Records • Asset records name the buildings and equipment owned by the business, their original and current value, and the amount owed if money was borrowed to purchase the asset.

25. Depreciation Records • Depreciation records identify the amount assets have decreased in value due to their age and use.

26. Inventory Records • Inventory records identify the type and number of products on hand for sale. Adequate records are critical to correctly determine the number of products sold, damaged, or lost and the current value of inventory.

27. Records of Accounts • Record of accounts identify all purchases and sales made using credit. • Accounts payable identifies the companies from which credit purchases were made and the amount purchases, paid, and owed.

28. Records of Accounts • Accounts receivable record identifies customers that made purchases using credit and the status of each account.

29. Cash Records • Cash records list all cash received and spent by the business.

30. Payroll records • Payroll records contain information on all employees of the company, their compensation, and benefits.

31. Tax Records • Tax records show all taxes collected, owed, and paid. As part of payroll, employers must withhold a percentage of employees’ salaries and wages for income taxes, SocialSecurity, and Medicare taxes.

32. Maintaining Records • Business records have to be accurate and should be kept up to date. • Technology is changing the way financial information is now collected using point-of-production and point-of-sale technology using scanners, touch screens, and PDA’s.

33. Financial Statements • The three most important elements of a company’s financial strength are its assets, liabilities, and owner’s equity.

34. Financial Statements In simple terms, assets are what a company owns, liabilities are what a company owes, and owner’s equity is the value of the owner’s investment in the business.

35. Financial Statements Reports that sum up the financial performance of a business are financial statements. A company’s reports its assets, liabilities, and owner’s equity on the balance sheet.

36. Balance Sheet The assets, liabilities, and owner’s equity for a specific date are listed on the balance sheet. The left side of the balance sheet lists the assets.

37. Assets There are two common divisions of assets. Current assets include cash and those can be readily converted to cash such as inventory. Long-term assets (also known as fixed assets) are the assets with a lifespan of more than a year such as land, equipment, and buildings.

38. Liabilities The right side of the balance sheet is divided into two sections. Liabilities are amounts owed by the business. Current paid within a yearLong-term debts longer than a year. (payments owed to banks)

39. Owner’s Equity Finally, owner’s equity is the value of the business after liabilities are subtracted from assets. It shows how much the business is worth on the date the balance sheet is provided.

40. Balance Sheet Example

41. Income Statement To report revenue, expenses, and net income or loss from operations for a specific period, a business prepares an income statement.

42. Income Statement An income statement usually covers six months or a year. , but may also encompass a shorter period such as a month.

43. Income Statement Revenue is all income received by the business during the period. Sources of income include the sale of products and services, plus interest earned from investments.

44. Expenses Expenses are all of the costs of operating the business during the period. Expenses include such things as rent, supplies, inventory, payroll, and utilities.

45. Net Income/Loss The business has net income when revenue is greater than expenses. A net loss occurs when expenses are greater than income.

46. Income Statement Example

47. Financial Statements Business managers review financial statements carefully to determine how their businesses are performing. A business that is less profitable than similar businesses, or with lower sales or higher expenses, may have a hard time competing.

48. Chapter: 12.3BFM Payroll Management

49. Payroll • A payroll is the financial record of employee compensation, deductions, and net pay. • A payroll system maintains information on each employee to be able to calculate the company’s payroll and to make the necessary payments.

50. Payroll • Most businesses pay every employee on a weekly, bi-weekly, or monthly basis. • A majority of employees in most businesses receive an hourly wage, but the wage rate may be different for each employee. • The amount of salary for each person may be different. Some may earn additional payments in the form of commissions, bonuses, and profit sharing.