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