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Understanding the Business World: Key Concepts and Financial Strategies

Explore the fundamental concepts of business, entrepreneurship, and financial management, including how organizations make money, employee expenses, taxes, benefits, and accounting principles.

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Understanding the Business World: Key Concepts and Financial Strategies

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  1. Business Understanding the Big Picture

  2. A Step Back • What does it mean to have a job • An organization is willing to pay you to help them • They have to make money • By hiring you, they are betting that you will generate more revenue than your salary

  3. A Step Back • What does it mean to be an entrepreneur • Start your own organization and generate your own revenue • You [and investors] are betting on yourself to generate profit • If you’re in it for the money • You have to generate more profit/year than the salary you turned down • If you’re in it for the fun • Go for it! • Do it now

  4. Every Organization Has to Make Money • Even non-profits and charities have to keep the lights on • As much as we’d rather just write code • Someone has to make sure all the bills and salaries are paid on time

  5. How Organizations Make Money • Hire a combination of employees with specific skills and organize them towards a profitable goal • How expensive are employees?

  6. The Employee

  7. Employer Expenses • Salary • Social security 6.2% • Medicare 1.45% • Federal Unemployment $56 • State Unemployment: Varies 2-10% • Workers Comp: Varies • Benefits: Varies • Health Insurance • Retirement • Vacation

  8. Employee Taxes • Social security 6.2% • Medicare 1.45% • Federal Income Tax • State Income Tax • Varies by state

  9. Federal Income Tax • Tax brackets are widely misunderstood! • No such thing as making a little more money and paying a lot more in taxes

  10. 2014 Federal Income Tax - Single • {Income : $89,300 , Federal Income Tax : $16,631} • {Income : $89,400 , Federal Income Tax : $16,656}

  11. Deductions • The previous example was misleading • After deductions, the taxable income of both salaries were in the same bracket • Itemized deductions • Claim everything that is a tax deductible • Complicates filing for taxes • For most people, it will not save money • Standard deduction • The default deduction if you don’t itemize • Filing single: $6200 • Taxable income is income minus deductions

  12. Example Revised – Filing Single • Income : $95,500 • Taxable Income after standard deduction: $89300 • Federal Tax: $18181 • Effective tax rate: 19% • Income : $95,600 • Taxable Income after standard deduction: $89400 • Federal Tax: $18208 • Effective tax rate: 19%

  13. Benefits • Your salary is only the beginning • Insurance (Health, Dental, Vision) • Very expensive to purchase independently • Vacation • Profit-sharing and bonuses • Take them if you can get them • Stock Options

  14. Benefits – 401K • Most common employer sponsored retirement plan • Set income aside and invest to earn interest • Varying level of flexibility for investments • Common for employer to match a % of contributions • Pre-tax contributions • Effectively an additional deduction on your taxable income • Contributions + interest are taxed when withdrawn • Similar to Tradition IRA • Sometimes an option to use post-tax income • No tax during retirement • Similar to Roth IRA • Penalties for withdrawing before retirement

  15. Accounting

  16. Accounting – The Big Three • Income Statement • Did the company make money? • Balance Sheet • What does the company own? • Statement of Cash Flow • How liquid is the company? • The business world works in quarters • Public corporations report to shareholders every 3 months

  17. Accounting – Income Statement • Revenue • How much capital was generated • Mostly through sales • Expenses • How capital much was used • Income • Income = Revenue – Expenses; • The bottom line on the income statement • What all investors are watching • Usually translated into Earnings Per Share (EPS)

  18. Microsoft Income Statement (Abridged)

  19. Accounting – Balance Sheet • Assets • Everything a company owns • Includes cash, accounts receivable, properties, equipment, investments, goodwill • Liabilities • Everything a company owes • Includes debt, accounts payable, deferred tax, and other financial obligations • Equity • Equity = Assets – Liabilities; • The sheet must balance this equation

  20. Apple Balance Sheet (Abridged)

  21. Cash Flow • A measure of liquidity (Flexibility) • Cash is the most liquid asset • Everyone wants it • Non-cash assets make a company rigid • Slower to adapt • Susceptible to market changes • Bottom line is the change in cash on hand

  22. Facebook Cash Flow

  23. Cash Flow Scenario • A small startup has $100,000 cash • Sells $1M in product that will cost $100,000 to produce • $900,000 profit! • Revenue increases by $1M on the income statement • Accounts receivable increases by $1M on the balance sheet • Equity and Income look great: $900,000 • Common to wait 90 days after delivery for a payment • Cash flow looks bad in the short term: ($100,000) • Startup must go an entire quarter with no cash • Can’t fill any orders while waiting • Taking orders during this time can cause a successful business to fail • Desperately look for new loans and investments

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