12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management

1. C H A P T E R 12 Financial Management 12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management 12-4 Financial Decision-Making

2. KEY TERMS • Revenue- Income from a business over a period of time • Expenses- the cost of operating a business • Budget- calculating details about revenue and expenses to develop a plan

3. BASIC FINANCIAL EQUATION • Revenue – Expenses = Profit or Loss • Profit • Revenue is greater than expenses • Revenue > Expenses = Profit • Loss • Revenue is less than expenses • Revenue < Expenses = Loss

4. ELEMENTS OF A BUSINESS BUDGET • Anticipate sources and amounts of income • Predict the types and amounts of expenses for a business activity or for the entire business

5. What are the four steps in preparing a business budget? • Preparing a list of each type of income and expenses • Gathering accurate information from business records and other information • Creating the budget by calculating each type of income, expense, and the amount of net income or loss • Explaining the budget to people who need financial information

6. 3 TYPES OF BUDGETS • Start-up budget — plans income and expenses from the beginning of a new business or a major business expansion until it becomes profitable • Operating budget — describes the plan for ongoing operations for a specific period • Cash budget — is an estimate of the actual money received and paid out for a specific period.

7. FINANCIAL RECORDS- (ACCOUNTING) Information that is gathered and recorded on all business transactions to analyze business performance • Types of records • Asset records • Depreciation records • Inventory records • Records of accounts • Cash records • Payroll records • Tax records

8. ACCOUNTING- “RECORDKEEPING”2 Main Financial Statements • A balance sheet reports assets, liabilities, and owner’s equity as of a specific date. • An income statement reports sales, expenses, and net profit or loss for a specified time period.

9. Balance Sheet • Assets- What a company owns, something of value (equipment, trucks) • Liabilities- What a company owes, debt or loans • Owner’s Equity- the value of the owners investment in the business

10. BALANCE SHEET

11. Income Statement • Revenue- Income, money coming in • Expenses- Cost of business, money going out • Net Income- Income after taxes (R>E) • Net Loss- Loss after taxes (R<E)

12. INCOME STATEMENT

13. 12-3 Payroll • Payroll- the financial record of employee compensation, deductions, and net pay. • What is the purpose of the payroll system? • The purpose of the payroll system is to maintain information on each employee to be able to calculate the company’s payroll and make the necessary payments to each employee, taking the proper legal state and federal deductions from each paycheck

14. PAYROLL TAXES (DEDUCTIONS) • Income taxes • Social Security and Medicare • Unemployment taxes

15. PREPARING A PAYROLL • Payroll records- the documentation used to process earnings payments and record each employee’s pay history. • Direct Deposit- Electronic transfer (deposit) of paycheck into employees bank

16. SAMPLE EARNINGS REPORT AND DIRECT DEPOSIT RECEIPT

17. 12-4 Financial Decision Making • financial performance ratios- calculations that indicate the profitability and health of a business- analytical data

18. Current Ratio = Current Assets Current Liabilities Debt to Income Ratio = Total Liabilities Net Income Return on Equity Ratio = Net Profit Owner’s Equity Net Income Ratio = Total Sales Net Income FINANCIAL PERFORMANCE RATIOS