$$ Chapter 2 Financial Management and Planning

$$ What is management?  The process of working with or through others to achieve an individual or business goal by efficiently and effectively using resources.  Five basic functions › Planning › Organizing › Staffing › Directing › Controlling operations. 

$$ 2-2 MANAGEMENT FUNCTIONS  Planning is a systematic process that takes us from some current state to some future desired state. › Strategic planning involves establishing an overall plan for the business. › Functional Planning is driven by strategic plans and are related to specific functional areas of a business such as Accounting, Marketing, or Human Resources.  Nobody begins a business with a plan for failure, but too many businesses have been started with a failure to plan. Copyright © 2014 Pearson Education, Inc.

$$ 2-3 Management Functions (continued)  Goal Setting is precursor to establishing a plan. › Goals must be measurable, achievable, and have a time frame. › Basic financial goals of a for-profit organization: –To maximize the wealth of the business owners (investors) over the life of the business –To meet interest payments on debt –To grow Copyright © 2014 Pearson Education, Inc.

$$ Management Functions (continued)  Goals vs Objectives › Goals are normally considered to be long term › Objectives are intermediate goals that measure progress toward the overall long- term goal.

$$ 2-5 Management Functions Continued  Organizing is the second function of the manager and defines the structure of the business. › Who will do it? › What skills do they need? › What is the time frame that we have set in which to have it accomplished? › Where will it be accomplished? › How do we get it accomplished? Copyright © 2014 Pearson Education, Inc.

$$ 2-6  Staffing requires that the manager obtain the most capable personnel to implement the business plans. › Determine job requirements. › Develop a job description.  Directing (Leading). Providing proper guidance and direction to others to accomplish the organization’s mission. Management Functions Continued Copyright © 2014 Pearson Education, Inc.

$$ 2-7  Controlling is a three-step process: › (1) establishing a standard of measurement › (2) measuring actual performance against the standard › (3) taking corrective action when actual performance varies from the established standard Management Functions Continued Copyright © 2014 Pearson Education, Inc.

$$ 1)Levels of Leadership 1) Management Functions (continued)

$$ 2-9 Forms of Business Ownership Copyright © 2014 Pearson Education, Inc.

$$ 2-10 Forms of Business Ownership  A sole proprietorship is operated by an individual for profit.  A partnership is an association of two or more persons who carry out a business as co-owners for a profit. Partnership is of the following types: › General Partnership › Limited Partnership › Limited Liability Partnership Copyright © 2014 Pearson Education, Inc.

$$ 2-11  The corporation is a legal entity according to U.S. law. › Incorporated in one of the fifty states or territories of the United States. –Public Corporation: stock is sold to the public. –Private Corporation: Stock is not sold to the public. –All corporations are formed as C corporations unless they meet the requirements and request Subchapter S tax status. Subchapter S corporation: Private corporation with special tax status granted by Internal Revenue Service (IRS) Maximum of 100 shareholders. No double taxation. Forms of Business Ownership (Continued) Copyright © 2014 Pearson Education, Inc.

$$ 2-12  A Limited Liability Company (LLC) is a hybrid business entity having features of both partnerships and corporations. › Taxed as a partnership › Has limited liability for its owners › Flows through income and losses to individual owner’s tax returns Forms of Business Ownership (Continued) Copyright © 2014 Pearson Education, Inc.

$$ 2-13 Forms of Business Ownership (Continued)  Franchise is not an actual form of ownership. A franchise is a business in which the buyer, who is the franchisee, purchases the right to sell the goods or services of the seller, who is the franchiser.  Nonprofit organizations are run as a business but view profit and money as taking a backseat to its main objective of supporting both the public and private sectors. Copyright © 2014 Pearson Education, Inc.

$$ Forms of Business Ownership (continued)  What form to choose? › Liability › tax advantages › financial support › the owner’s desires › the type and location of the business.  Where to form the business › V6xx4BftQ V6xx4BftQ

$$ 2-15 STARTING A BUSINESS  Run a SWOT analysis › Strengths & Weaknesses are internal to the business. –Strengths are the core competencies of a business. They are those factors that will make your business succeed because you perform in these areas better than your competitor. –Weaknesses are those areas of your company that definitely needs improvement. › Opportunities & Threats are external to the business and exist in the external environment. –Opportunities are factors that exist outside of your business, but that if taken advantage of, will help your business to grow and prosper (e.g., low interest rates for business loans). –Threats are factors that exist in the environment that may impede the growth of your business, directly or indirectly (e.g., new competition). Copyright © 2014 Pearson Education, Inc.

$$ 2-16 DEVELOPMENT OF A BUSINESS PLAN  Executive summary: Part of business plan that investors review to determine if they want to read further. Two pages or less of the executive summary should contain: › Business strategy for success › Brief description of the market and what makes your business unique › Brief description of the product or service › Brief description of Management teams qualifications › Summary of revenue and expense projections › Estimate of how much money is needed and how it will be used Copyright © 2014 Pearson Education, Inc.

$$ 2-17  General Company Description: › Mission Statement: › Company goals › Company objectives › Business philosophy › Form or forms of business ownership › Products and services › Marketing plan –4 Ps: Price, Product, Promotion, Place –Government contracts as a source of revenue › Operational plan › Management and organization › Personal financial statement of each owner or major stockholder › Start up expenses and capitalization › Financial Plan; a 4-year projection of profit DEVELOPMENT OF A BUSINESS PLAN (continued) Copyright © 2014 Pearson Education, Inc.

$$ 2-18 DEVELOPMENT OF A BUSINESS PLAN  Appendices › Brochures, advertising materials, business cards › Industry studies › Maps and photos of location › List of equipment owned or purchased › Copies of leases or contracts › Letters of support from suppliers and future customers › Market research studies › List of assets available for a loan Copyright © 2014 Pearson Education, Inc.

$$ Business Ownership Succession Plans  Succession Planning: › Many small businesses are family owned. › Who will take over the business if the entrepreneur is unable to function because of accident, severe illness, or death? › Must be discussed with spouse and other interested family members. › Do heirs receive ownership rights directly or in a trust? › Should ownership be held by family only or passed to non-family members. › If a partnership or LLC : Do you want a buy-sell agreement? › Consult with attorney and other professionals.  ilpage&v=vITv-jjve9Y ilpage&v=vITv-jjve9Y 2-19 Copyright © 2014 Pearson Education, Inc.

$$ 2-20 FINANCING A BUSINESS OR RAISING CAPITAL  Suppliers of funds include lenders and investors › Lenders increase debt and include banks and any other lender –The amount of the loan. –How the funds are used. –What the loan will accomplish and how it makes the business stronger. –How many years to repay the loan –What collateral is being offered for the loan. Copyright © 2014 Pearson Education, Inc.

$$ Sources of Financing  Sources of financing typically include: › Personal assets: savings, investments, credit cards, and home equity lines. › Equity financing: retained earnings, fixed assets (buildings, equipment, and inventory) as collateral. › Small Business Administration: –Not a lender but a guarantor of a percentage of the loan amount. –504-Major machinery or building construction or expansion. –7(a)-Guarantee Loan Program. –Other programs: Micro-Loan Technical Assistance Grants, SBA Micro-Loan and Patriot Express Pilot Loan Initiative Copyright © 2014 Pearson Education, Inc.

$$ Investors and Grants › Investors increase company equity and expect a positive return on their investment: –Company owners –Angel investors provide seed money and mentoring to start-up businesses –Venture capitalist normally invests in companies with proven track record › Grants are monies provided to the firm which do not have to be paid back as long as grantee provides services for which the grant was approved Copyright © 2014 Pearson Education, Inc.

$$  Steve Jobs and Management Steve Jobs and Management › _detailpage&v=39mXMv8MyNI _detailpage&v=39mXMv8MyNI  Leadership vs Mgt ›