This chapter presents information on financial planning decisions and procedures used in business.

1. This chapter presents information on financial planning decisions and procedures used in business. Chapter 12 Financial Management Business Essentials  Mrs. Wilson

2. Before Activity – Question It! • Picture yourself as a business owner… • List a question that as a new business owner you might need to consider that involves finance. Think about the following key areas of business operation: • Capital • Equipment • Personnel • Supplies • Marketing (p292)

3. 12-1 Financial Planning This lesson looks at the financial questions faced by businesses and how to prepare and use business budgets.

4. Financial Planning • As a business owner, financial questions never go away • Even the most successful businesses are continually active in financial planning • The moment a decision is made to start a business, financial planning begins • Many new businesses fail due to poor financial planning!

5. Financial Planning • Finances are a key part of the operations of all businesses • Every business activity costs money • Without careful planning, those costs can grow to a level where the business income cannot cover the expenses • Revenue – all income that a business receives over a period of time • Expenses – the costs of operating a business

6. Financial Planning • Every business is guided by the basic financial equation: Revenue – Expenses = Profit or Loss • If revenue is greater than expenses, the business will make a profit • If expenses exceed revenue, the business will suffer a loss • Ex) If a company’s annual revenue is $2 million and expenses were $1.5 million, did the business make a profit or suffer a loss? How much?

7. Financial Planning • All managers are responsible for the costs of the part of the business they manage • Each employee should be concerned about those costs • Managers and employees should find ways to reduce waste and control expenses

8. Developing Business Budgets • Budget – provides detailed plans for the financial needs of individuals, families, and businesses • A business budget has 2 main purposes: • Anticipate sources and amounts of income • Predict the types and amounts of expenses for a specific business activity or the entire business • The most important step in financial planning is developing a budget

9. Developing Business Budgets • A business budget has the same basic goals as a personal or family budget developed to manage the household finances • The budgeting process involves 4 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 decisions

10. Types of Budgets • For every business, 3 particular budgets are essential: • Start-up budget – plans income and expenses from the beginning of a new business or a major expansion until it becomes profitable • Operating budget – financial plan for ongoing operations of the business for a specific period • Cash budget – an estimate of the actual money received and paid out for a specific period

11. Let’s Review! • What additional budget items would need to be considered when buying a car? (p296) • Use the basic financial equation to determine the profit or loss for each of the following: • revenue $85,695; expenses $72,624 • revenue $1,824,300; expenses $2,183,680 • revenue $729,655; expenses $499,220 (p297)

12. 12-2 Financial Records & Financial Statements This lesson describes financial records needed by businesses and explains the differences between an income statement and a balance sheet.

13. Financial Records • Budgets reflect the financial plans of businesses • To determine if those plans have resulted in success, financial records are needed • Financial records – used to record and analyze the financial performance of a business • Several types of records are maintained: • Asset records • Depreciation records • Inventory records • Accounts payable and accounts receivable records • Cash records • Payroll records • Tax records (298-99)

14. Financial Statements • The 3 most important elements of a company’s financial strength are its: • Assets – what a company owns • Liabilities – what a company owes • Owner’s equity – the value of the owner’s investment in the business • 3 other key elements for a business are the amounts of sales, expenses, and profits • Balance sheet – lists the business’ assets, liabilities, and owner’s equity for a specific date • It is usually prepared every 6 months or once a year

15. Financial Statements

16. Financial Statements • Income statement – reports the revenue, expenses, and net income or loss from business operations for a specific period • It usually covers 6 months or a year • Revenue – all income received • Expenses – all of the costs • Net income – revenue is greater than expenses (profit) • Net loss – occurs when expenses are greater than income

17. Financial Statements

18. Let’s Review! • The purpose of a balance sheet is _________. • The purpose of an income statement is _________. • _______ are what a company owns, ________ are what a company owes.

19. 12-3 Payroll Management This lesson describes the components of a payroll system and the information that is included in payroll records and paychecks.

20. Payroll Systems • One of the most important financial duties of a business is maintaining a payroll • Payroll – 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 necessary payments to each employee • Most businesses pay every employee on a weekly, bi-weekly, or monthly basis

21. Payroll Systems • Businesses are responsible for making required federal and state payments for each employee; commonly referred to as payroll taxes: • Income taxes • Social Security & Medicare • Unemployment taxes (p304) • Most payroll systems are part of a larger personnel records system • It is a central location for all information the company maintains on all employees • Businesses must carefully and securely maintain the records

22. Preparing a Payroll • Maintaining payroll records and preparing paychecks is an ongoing and time-consuming task for a business • In the past, each employee completed a time card • Today, computerized payroll record systems make the process more efficient and accurate

23. Preparing a Payroll • Payroll record – the form used to track each employee’s pay history • After all employees’ payroll records have been completed and pay amounts have been calculated, a paycheck is prepared for each person • Businesses may offer a direct deposit service for employees • Direct deposit – the employer transfers net pay electronically into the employee’s bank account

24. Let’s Review! • List 2 examples of payroll taxes. • What is direct deposit?

25. 12-4 Financial Decision-Making This lesson discusses the financial information that managers use when making decisions and the steps they follow to make financial decisions in their businesses.

26. Using Financial Information • Financial statements present summaries of the financial activities of a business • Managers who understand the information in financial statements will be able to make decisions that result in the wise use of the company’s money • Managers use the financial elements found on the financial statements to calculate financial performance ratios– comparisons of a company’s financial elements that indicate how well the business is performing

27. Using Financial Information • Important financial performance ratios: • Current ratio = current assets/current liabilities • Debt to equity ratio = total liabilities/owner’s equity • Return on equity ratio = net profit/owner’s equity • Net income ratio = total sales/net income

28. Making Financial Decisions • Financial decision-making steps: • Prepare a budget • Use budget as a guide to operate business • Make adjustments needed to bring performance in line with the budget • Remember, mangers get regular financial reports and examine them carefully looking for discrepancies – differences between actual and budgeted performance

29. Let’s Review! • What is the purpose of calculating afinancial performance ratio? • What is the first step in financial decision-making?

30. After Activity – Review It! • What information is recorded on a balance sheet? • What information is recorded on an income statement?