Financial Management

1. Chapter 12 CHAPTER 12 Financial Management 12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management 12-4 Financial Decision-Making

2. Chapter 12 12-1 Financial Planning Goals Recognize important financial questions that must be answered in a business. List the steps in budget preparation. Describe three types of business budgets.

3. Chapter 12 Key Terms • revenue • expenses • budget • start-up budget • operating budget • cash budget

4. Chapter 12 FINANCIAL PLANNING • Beginning a business • Ongoing operations • Business expansion

5. Chapter 12 BASIC FINANCIAL EQUATION Revenue – Expenses = Profit or Loss

6. Checkpoint >> What is the basic financial equation for businesses? Chapter 12 Answer • The basic financial equation for businesses is revenue minus expenses equals profit or loss. Revenue – Expenses = Profit or Loss

7. Chapter 12 DEVELOPING BUSINESS BUDGETS • Sources of budget information • Budget preparation

8. Checkpoint >> What are the four steps in preparing a business budget? Chapter 12 Answer • Preparing a list of each type of income and expense that will be a part of the budget • Gathering accurate information from business records and other information sources for each type of income and expense • 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

9. Chapter 12 TYPES OF BUDGETS • Start-up budget • Operating budget • Cash budget

10. Checkpoint >> Identify and describe the three types of budgets needed by all businesses. Chapter 12 Answer • 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.

11. Chapter 12 12-2 Financial Records and Financial Statements Goals Identify several types of financial records needed by businesses. Describe the differences between an income statement and a balance sheet.

12. Chapter 12 Key Terms • financial records • assets • liabilities • owner’s equity • balance sheet • income statement

13. Chapter 12 FINANCIAL RECORDS • Types of records • Asset records • Depreciation records • Inventory records • Records of accounts • Cash records • Payroll records • Tax records • Maintaining financial records

14. Checkpoint >> How has the process of maintaining financial records been affected by technology? Chapter 12 Answer • Most financial information is collected using point-of-production and point-of-sale technology and sent electronically to the people who prepare the financial records. • Also, businesses use computerized financial systems that complete the necessary mathematical calculations and compare those records with budgets. • The software can even complete what-if comparisons to help managers determine the impact of changes in budgets and financial performance.

15. Chapter 12 FINANCIAL STATEMENTS • The balance sheet • The income statement

16. Chapter 12 Balance Sheet

17. Chapter 12 Income Statement

18. Checkpoint >> What is the difference between a balance sheet and an income statement? Chapter 12 Answer • 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.

19. Chapter 12 12-3 Payroll Management Goals Describe the components of a business’ payroll system. Identify information included in payroll records and paychecks.

20. Chapter 12 Key Terms • payroll • payroll record • direct deposit

21. Chapter 12 PAYROLL SYSTEMS • Income taxes • Social Security and Medicare • Unemployment taxes

22. Checkpoint >> What is the purpose of the payroll system? Chapter 12 Answer • 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.

23. Chapter 12 PREPARING A PAYROLL • Payroll records • Preparing paychecks

24. Chapter 12 Sample Earnings Report Sample Paycheck Paycheck and Earnings Report

25. Checkpoint >> What is the difference between a payroll record and an earnings report? Chapter 12 Answer • A payroll record is the form used to track each employee’s pay history. • An earnings report is included with the employee’s paycheck and contains information for the current pay period as well as the cumulative amounts for the year.

26. Chapter 12 12-4 Financial Decision-Making Goals Recognize important financial information managers use to make decisions. Identify the steps in making financial decisions in business.

27. Chapter 12 Key Terms • financial performance ratios • discrepancies

28. Chapter 12 USING FINANCIAL INFORMATION • Important financial information • Understanding financial performance ratios • Current ratio • Debt to equity ratio • Return on equity ratio • Net income ratio

29. Chapter 12 Financial Performance Ratios

30. Checkpoint >> Identify four important financial performance ratios used by managers to determine how well the business is performing. Chapter 12 Answer • current ratio • debt to equity ratio • return on equity ratio • net income ratio

31. Chapter 12 MAKING FINANCIAL DECISIONS • Prepare a budget • Look for discrepancies between actual and budgeted performance • Make needed adjustments

32. Checkpoint >> List the three steps in financial decision-making. Chapter 12 Answer Preparing a budget. Using the budget as a guide to the operations of the business. Making needed adjustments to bring performance in line with the budget.