Financial Planning Budgeting and Accounting: The financial language of business

To prepare a practical budget follow these steps: 1. Set your financial goals...\Economy and you\GOAL SETTING WORKSHOP.ppt 2.Keep a Spending Record Utilize the small notebooks to record all financial transactions between now and March 19 Write down everything you spend money on Identify if you used cash, debit card, credit card, or check Write down all sources of income that enables you to spend money. Budgeting to Achieve Your Financial Goals

Budgets  What is a budget?  What is the purpose of a budget?  The two basic parts of a budget are:  How is a budget created?

Budget Use an Excel spreadsheet:  Estimate your income.  Estimate your expenses Rainy day fund  unexpected expenses savings fixed expenses variable expenses.  Record the actual income and expenditures Record what you spend.  Taken from the spending journal/record Compare actual to budgeted Review spending and saving patterns.

Estimates for expenditure categories: Recommended Spending Plan %  10% into Financial Freedom Account This is your long term investment  Roth IRA  10% into Fun account  Remaining % into these categories 10% into rainy day savings 10% into education 10% into giving 50% into daily living

Sample Monthly Budget

Use Excel to Create Financial Statements  Income statement How much did we make?  Did we make a profit?  Did we incur a loss?  Shows income and expenses  Balance sheet Assets, Liabilities, Capital  Capital statement How much we are worth Shows the change in the amount of capital

Income Statement  It is a form that shows how much money the company made or lost during a fiscal period Income or Revenue from sales less cost of goods sold, if any equals gross profit less expenses (cost of doing business) equals net profit or net income (net loss if the company’s expenses exceed income

Roy’s Landscaping Service

Balance sheet  Shows the entrepreneur, business owner, or investor the value of the business on a specific day  It is a listing of the Assets, Liabilities, and Capital or Owner’s Equity of the business

Roy’s Landscaping Service Balance Sheet December 31, 200X AssetsLiabilities and Capital Current AssetsCurrent Liabilities Cash$12,300 Accounts payable$ 8,900 Accounts receivable22,900 Wages payable11,525 Inventory32,090 Total Current Liabilities$20,425 Prepaid Insurance2,500 Long-Term Liabilities Total Current Assets$69,790Bank Loan Payable17,500 Fixed AssetsTotal Long-Term Liability17,500 Equipment100,200 Total Liabilities37,925 Less: Accumulated Depreciation(78,321) Capital Total Fixed Assets 21,879Roy Beta, Capital 53,744 Total Assets$91,669Total Liabilities/Capital$91,669

A Business Plan is a budget for a new business Molly Singer wants to start her own business, Cricket Lane Flowers. With some research completed, she is ready to create a business plan. A business plan has these parts: Strategic plan SWOT analysis Goals Marketing Plan The Financial Plan

Strategic Plan/SWOT  SWOT Analysis Strengths Weaknesses Opportunities Threats  For her SWOT analysis, she researched the local flower market  Located a source/vendor for flowers identified the competition Identified a suitable location for her enterprise decided on a line of flowers and services Determined how much capital she required

Goals:  Short Term  Computerize all accounting functions  Increase sales by 5 percent each month  Long Term  Show profit by end of second year  Develop business clients

Business Plan includes a Marketing Plan To create her marketing plan, Molly  Analyzed the competition  Identified advertising outlets  Developed promotional activities  Established a marketing budget  Decided to spend $2,000 each month for the first three months to advertise her business

A Financial Plan for Cricket Lane Flowers A good financial plan reflects your knowledge and skills, and projects a financial picture of the potential success of your business.

The business plan includes a Financial Plan  Estimated Start-Up Capital  Projected 12-Month Income Statement  Projected 12-Month Statement of Cash Flows  Projected 3-Year Income Statement  Projected 3-Year Statement of Cash Flows  Projected 3-Year Balance Sheet

CRICKET LANE FLOWERS Business Plan Prepared by MOLLY SINGER BUSINESS OBJECTIVE BUSINESS OBJECTIVE:  To open and operate a financially successful flower shop.

Projected 3-Year Income Statement A Financial Plan for Cricket Lane Flowers

Projected 3-Year Statement of Cash Flows A Financial Plan for Cricket Lane Flowers

Projected 3-Year Balance Sheet A Financial Plan for Cricket Lane Flowers

Sources of Capital Funds from the first three sources of capital will be invested immediately in the business. The amount of the home equity loan will be used in the initial operation of the business. A Financial Plan for Cricket Lane Flowers Cash from Owner$ 30,000 Personal Loans 6,000 Short-Term Commercial Loan 30,000 (SBA Guaranteed) Home Equity Loan 50,000 Total Available Capital$116,000

Accounting The language and terminology of business

Accounting Cycle  Source Document Analysis Original record of transaction  Journalize transaction A journal is a chronological record of transactions  Ledger Record of accounts Group of the accounts  How you keep track of the increase and decrease in the balance of each thing that you are keeping track of  Worksheet/ Trial Balance  Financial Statements Balance sheet Income Statement Capital statement

Source Document  Transaction Receipt or paper or record Always affects two accounts Must figure out which two accounts are affected Must determine if there is an increase or decrease in the balance of the account We do this through Debit and Credit theory  Debit Entry to left side of an account  Credit Entry to right side of account

Journal Entry  The place where we record the results of the source document It is a chronological record Also called a general journal  Journalizing The process of entering the transactions into the computer

Ledger A group of accounts  Assets  Liabilities  Capital or Owner’s Equity Income Expenses Capital 

Account  Each account has two sides A left side and a right side A debit side and credit side  Each account also has a side that is an increase side and one that is a decrease side But the + or – side is a function of the laws of the accounting equation.

Accounting Equation  Assets equal Liabilities plus Owner’s Equity  Assets have debit balance and increase on left side  Liabilities and Owners Equity have credit balance and increase on right side

Assets  What you own cash accounts receivable inventory equipment vehicles land building

Liabilities  liabilities What you owe accounts payable

Capital or Owner’s Equity  Investment by owner  Value of assets after subtracting what you owe for them  Affected by Income and Expense Income increases capital  Income has a credit balance/ right side Expenses decrease capital  Expenses have a debit balance/left side  Fixed and variable expenses Also called costs Cost of merchandise decreases capital