FINANCIAL PLANNING Beginning a business Startup Money source CHAPTER 12 9/14/2018 FINANCIAL PLANNING Beginning a business Startup Money source Cost to maintain Profitable when? Expenses Chapter 12

FINANCIAL PLANNING Ongoing operations Revenue - CHAPTER 12 9/14/2018 FINANCIAL PLANNING Ongoing operations Revenue - All income received over a period of time Expenses – Costs of operating a business Chapter 12

BASIC FINANCIAL EQUATION CHAPTER 12 9/14/2018 BASIC FINANCIAL EQUATION Revenue – Expenses = Profit Revenue – Expenses = Loss

FINANCIAL PLANNING Business expansion Expand to serve more Research CHAPTER 12 9/14/2018 FINANCIAL PLANNING Business expansion Expand to serve more Research More employees More costs Poor planning = failure Chapter 12

DEVELOPING BUSINESS BUDGETS CHAPTER 12 9/14/2018 DEVELOPING BUSINESS BUDGETS Budget Detailed plans for financial needs Budget purposes: Anticipate sources/amounts of income Predict types/amounts of expenses Chapter 12

Sources of Budget Information CHAPTER 12 9/14/2018 Sources of Budget Information Established Business Past financial records New Business SBA Company Publications ~ Dun & Bradstreet ~ Value Line ~Standard & Poor’s Business Magazines ~ Fortune ~ Forbes ~ The Wall Street Journal Professional associations ~National Federation of Independent Business Chapter 12

Budget Preparation Developing a budget ~ Most important step CHAPTER 12 9/14/2018 Budget Preparation Developing a budget ~ Most important step Fundamental steps Prepare list of types of income & expenses Gather accurate information Create budget Explain the budget Skills Understand financial information Computer skills Mathematical ability Effective communication Chapter 12

TYPES OF BUDGETS Start-up budget Operating budget Cash budget CHAPTER 12 9/14/2018 TYPES OF BUDGETS Start-up budget Plans income/expenses from the beginning of a new business or expansion Operating budget Financial plan for ongoing operations of a business for a specific period Cash budget Estimate of the actual money rec. and paid out for a specific period. Start up – most require thousands of dollars. Buildings/equip must be purchase, Inventory, supplies and materials, new employees hired or retrained. Expenses for utilities, licenses, advertising, transportation. Sources of financing. Operating – cost of daily operations Cash – estimate of cash coming in and out on a weekly basis Chapter 12

CHAPTER 12 FINANCIAL RECORDS 9/14/2018 Used to record & analyze the financial performance of a business. Types of records Asset records Building & equipment Depreciation records Amount assets have decreased in value Inventory records Type & number of products on hand Chapter 12

FINANCIAL RECORDS Types of records (con’t) Records of accounts CHAPTER 12 9/14/2018 FINANCIAL RECORDS Types of records (con’t) Records of accounts Identify all purchases & sales Accounts payable Purchases made from other companies Accounts receivable Customers that made purchases using credit Cash records All cash received & spent by business Chapter 12

FINANCIAL RECORDS Types of records (con’t) Payroll records Tax records CHAPTER 12 9/14/2018 FINANCIAL RECORDS Types of records (con’t) Payroll records Information on all employees Tax records All taxes collected, owed & paid Maintaining financial records Must be accurate & up to date Used to be manual & time consuming Technology has improved process Chapter 12

FINANCIAL STATEMENTS Assets Liabilities Owners’ equity CHAPTER 12 9/14/2018 FINANCIAL STATEMENTS Assets What a company owns Liabilities What a company owes Owners’ equity Value of the owners’ investment Chapter 12

FINANCIAL STATEMENTS The balance sheet The income statement CHAPTER 12 9/14/2018 FINANCIAL STATEMENTS The balance sheet Assets, liabilities, & owner’s equity for a specific date Usually prepared every six months The income statement Reports the revenue, expenses, and net income or loss for a specific period. Chapter 12

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PAYROLL …the financial record of employee compensations, deductions, and net pay Chapter 12

PAYROLL SYSTEMS Actual Income Benefits Payroll taxes Income taxes Social Security and Medicare (FICA) Unemployment taxes (FUTA) Chapter 12

PREPARING A PAYROLL Payroll records Preparing paychecks Direct Deposit …the form used to track each employee’s pay history. Preparing paychecks Includes earnings report Direct Deposit Employer transfers net pay electronically into the employee’s bank account. Chapter 12

AN EMPLOYEE’S PAYCHECK AND EARNINGS REPORT Sample Earnings Report Sample Paycheck Chapter 12

USING FINANCIAL INFORMATION Important financial information Understanding financial performance ratios Current ratio Current assets/current liabilities Can company pay when debts are due Best ratio is 1:1 Chapter 12

USING FINANCIAL INFORMATION Understanding financial performance ratios Debt to equity ratio Company liabilities /Owners’ equity How much company is relying on outside money No higher than 2:1 Return on equity ratio Net profit/ Owners’ Equity Rate the Owners’ are getting on their money Compare to other private investments Chapter 12

USING FINANCIAL INFORMATION Understanding financial performance ratios Net income ratio Total sales/Net Income Profit for each dollar of sales for a specific period Compare to past ratio Chapter 12

MAKING FINANCIAL DECISIONS 1st Prepare a budget 2nd Use budget to guide operations 3rd Look for discrepancies between actual and budgeted performance 4th Make needed adjustments Chapter 12