Financial Management 12 12-1 Financial Planning CHAPTER 12 4/12/2018 12 Financial Management 12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management 12-4 Financial Decision-Making

LESSON 12-1 Financial Planning CHAPTER 12 4/12/2018 LESSON 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. Chapter 12

Key Terms revenue expenses budget start-up budget operating budget CHAPTER 12 4/12/2018 Key Terms revenue expenses budget start-up budget operating budget cash budget Chapter 12

CHAPTER 12 4/12/2018 FINANCIAL PLANNING What financial questions need to be answered before starting a business? How much will be needed to start the business? Where will the financing come from? What will be the best source of income? What will be the major expenses? Chapter 12

CHAPTER 12 4/12/2018 FINANCIAL PLANNING What will be the result without careful planning and management? Income will not cover expenses All income that a business receives over a period of time is called revenue Expenses are the costs of operating a business Chapter 12

BASIC FINANCIAL EQUATION CHAPTER 12 4/12/2018 BASIC FINANCIAL EQUATION Revenue – Expenses = Profit or Loss Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T What is the basic financial equation for businesses? Chapter 12

DEVELOPING BUSINESS BUDGETS CHAPTER 12 4/12/2018 DEVELOPING BUSINESS BUDGETS A budget provides detailed plans for the financial needs of individuals, families, and businesses A business budget has two main purposes: Anticipate sources and amounts of income Predict the types and amounts of expenses Chapter 12

DEVELOPING BUSINESS BUDGETS CHAPTER 12 4/12/2018 DEVELOPING BUSINESS BUDGETS Finding information? Small Business Administration Business magazines / newspapers Professional Associations Other Businesses What is the most important step in financial planning? Planning a budget Chapter 12

Creating a Budget Prepare a list of each type of income and expenses CHAPTER 12 4/12/2018 Creating a Budget Prepare a list of each type of income and expenses Gather appropriate information for each type Calculate each type Explain the budget to people who need the information Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T What are the four steps in preparing a business budget? Chapter 12

TYPES OF BUDGETS Start-up budget Operating budget Cash budget CHAPTER 12 4/12/2018 TYPES OF BUDGETS Start-up budget Operating budget Cash budget Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T Identify and describe the three types of budgets needed by all businesses. Chapter 12

LESSON 12-2 Financial Records and Financial Statements CHAPTER 12 4/12/2018 LESSON 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. Chapter 12

Key Terms financial records assets liabilities owner’s equity CHAPTER 12 4/12/2018 Key Terms financial records assets liabilities owner’s equity balance sheet income statement Chapter 12

FINANCIAL RECORDS What do budgets identify in business? CHAPTER 12 4/12/2018 FINANCIAL RECORDS What do budgets identify in business? The financial plans of the business What are financial records? Used to record and analyze the financial performance of a business Chapter 12

TYPES OF RECORDS Asset: names all that is owned by the company CHAPTER 12 4/12/2018 TYPES OF RECORDS Asset: names all that is owned by the company Depreciation: identifies the amount assets have decreased Inventory: identify number and type of products on hand for sale Accounts: accounts payable and accounts receivable Chapter 12

TYPES OF RECORDS Cash: lists cash received and spent CHAPTER 12 4/12/2018 TYPES OF RECORDS Cash: lists cash received and spent Payroll: lists employees, compensation, and benefits Tax: shows all taxes collected, owed, and paid Chapter 12

CHAPTER 12 4/12/2018 Technology’s affect Much of the information now collected using point-of-production and point-of-sale technology using scanners, touch-screens, PDA’s Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T How has the process of maintaining financial records been affected by technology? Chapter 12

CHAPTER 12 4/12/2018 FINANCIAL STATEMENTS Define the three most important elements of a company’s financial strength Assets: company owns Liabilities; company owes Owner’s equity: value of the owner’s investment Chapter 12

CHAPTER 12 4/12/2018 Chapter 12

CHAPTER 12 4/12/2018 Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T What is the difference between a balance sheet and an income statement? Chapter 12

LESSON 12-3 Payroll Management CHAPTER 12 4/12/2018 LESSON 12-3 Payroll Management Goals Describe the components of a business’ payroll system. Identify information included in payroll records and paychecks. Chapter 12

Key Terms payroll payroll record direct deposit Chapter 12 CHAPTER 12 4/12/2018 Key Terms payroll payroll record direct deposit Chapter 12

CHAPTER 12 4/12/2018 PAYROLL SYSTEMS A payroll is 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 the necessary payments to each employee Chapter 12

CHAPTER 12 4/12/2018 PAYROLL SYSTEMS By law, a business must pay every employee on a weekly, bi-weekly, or monthly basis As part of the compensation system, most businesses provide employees a range of benefits Chapter 12

CHAPTER 12 4/12/2018 PAYROLL SYSTEMS What federal and state payments for each employee are businesses responsible for making? Income taxes Social security and Medicare Unemployment taxes Chapter 12

PAYROLL SYSTEMS What is included in personnel records? CHAPTER 12 4/12/2018 PAYROLL SYSTEMS What is included in personnel records? Personal information Employment history Performance evaluations Compensation records Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T What is the purpose of the payroll system? Chapter 12

PREPARING A PAYROLL How has preparing a payroll changed from the past? CHAPTER 12 4/12/2018 PREPARING A PAYROLL How has preparing a payroll changed from the past? Past: payroll had to be completed by hand Today: computerized The form used to track each employee’s pay history is a payroll record Chapter 12

AN EMPLOYEE’S PAYCHECK AND EARNINGS REPORT CHAPTER 12 4/12/2018 AN EMPLOYEE’S PAYCHECK AND EARNINGS REPORT Sample Earnings Report Sample Paycheck Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T What is the difference between a payroll record and an earnings report? Chapter 12

LESSON 12-4 Financial Decision-Making CHAPTER 12 4/12/2018 LESSON 12-4 Financial Decision-Making Goals Recognize important financial information managers use to make decisions. Identify the steps in making financial decisions in business. Chapter 12

Key Terms financial performance ratios discrepancies Chapter 12 4/12/2018 Key Terms financial performance ratios discrepancies Chapter 12

USING FINANCIAL INFORMATION CHAPTER 12 4/12/2018 USING FINANCIAL INFORMATION Financial statements present summaries of the financial activities of a business As previously discussed, the three most important elements of a company’s financial strength are its assets, liabilities, and owner’s equity Chapter 12

USING FINANCIAL INFORMATION CHAPTER 12 4/12/2018 USING FINANCIAL INFORMATION The other key financial elements for a business are the amount of sales and profits Financial performance ratio are comparisons of a company’s financial elements that indicate how well the business is performing Current assets compared to the current liabilities is the current ratio Chapter 12

USING FINANCIAL INFORMATION CHAPTER 12 4/12/2018 USING FINANCIAL INFORMATION What are current assets? Assets that could be converted into cash within one year What are current liabilities? All payments that the business must make within one year What does the current ratio tell? If the business can pay its debts when they become due The current ratio should be at least 1:1 for a healthy business Chapter 12

USING FINANCIAL INFORMATION CHAPTER 12 4/12/2018 USING FINANCIAL INFORMATION The company’s liabilities divided by the owners’ equity is the debt to equity ratio What does the debt to equity ratio tell? How much the business is relying on money borrowed Most banks want to see a debt to equity ratio no higher than 2:1 Chapter 12

USING FINANCIAL INFORMATION CHAPTER 12 4/12/2018 USING FINANCIAL INFORMATION The net profit of the business compared to the amount of the owner’s equity is the return on equity ratio What does the return on equity ratio show? The rate of return the owners are getting on the money invested in the company Chapter 12

USING FINANCIAL INFORMATION CHAPTER 12 4/12/2018 USING FINANCIAL INFORMATION The total sales compared to the net income for a period such as six months or a year is the net income ratio What does the net income ratio show? How much profit is being made by each dollar of sales for the period being analyzed Chapter 12

FINANCIAL PERFORMANCE RATIOS CHAPTER 12 4/12/2018 FINANCIAL PERFORMANCE RATIOS Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T Identify four important financial performance ratios used by managers to determine how well the business is performing. Chapter 12

MAKING FINANCIAL DECISIONS CHAPTER 12 4/12/2018 MAKING FINANCIAL DECISIONS The first step in financial decision making is preparing a budget Managers examine budgets carefully, looking for discrepancies which are differences between actual and budgeted performance At the end of the period covered by the budget, the business will prepare new financial statements Chapter 12

CHAPTER 12 4/12/2018 >> C H E C K P O I N T List the three steps in financial decision-making. Chapter 12