12 Financial Management 12-1 Financial Planning C H A P T E R 12 Financial Management 12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management 12-4 Financial Decision-Making

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Need to know Vocabulary Revenue, Sales, or Gross Income All income Expenses Costs of operation Fixed Costs (Overhead)= bills that do not change based on output Rent, insurance, loan costs, salary workers Variable Costs = bills that differ based on output Materials, hourly workers, Earnings or Net Income Income after taxes and expenses

BASIC FINANCIAL EQUATION Profit / Loss Difference in revenue and expenses Revenue – Expenses = Profit or Loss (Earnings) Profit Revenue is greater than expenses Revenue > Expenses = Profit Loss Revenue is less than expenses Revenue < Expenses = Loss Break Even Revenue = Costs No profit or loss

Budget Detailed plans for financial needs Plan of all expenses and income Predict income and expenses Gather accurate information to support prediction Create a budget Share the budget with people who need to know Edit your budget

TYPES OF BUDGETS Start-up budget Operating budget Cash budget plans income and expenses from the beginning of a new business or a major business expansion until it becomes profitable Operating budget describes the plan for ongoing operations for a specific period Cash budget is an estimate of the actual money received and paid out for a specific period.

Check Book Work Question 1 Identify several unique business expenses for three important times in a business’ life. Startup, ongoing, expansion Create an operational budget for your daily life, steps 1 to 3 Predict income and expenses Gather accurate information to support prediction Create a budget Share the budget with people who need to know Edit your budget

12-2 Financial Records and Financial Statements Goal 1 Identify several types of financial records needed by businesses. Goal 2 Describe the differences between an income statement and a balance sheet.

FINANCIAL RECORDS Financial records = Financial documents that are used to record and analyze performance of a business Question 2: Difference between budget and Financial Record Budget = Plan, Record = What happened. Both to track and stay on goal Types of records Asset records Depreciation records Depreciation = loss of value over time Inventory records Records of accounts Cash records Question 3: Why is cash budget important? Payroll records Tax records

Basics of Accounting Assets (A) Liabilities (L) Owner’s Equity (E) Anything of value that is owned Cash, Inventory, Supplies, Accounts Rec. Liabilities (L) Amount owed Accounts Payable Owner’s Equity (E) Owner’s stake in the business How much $ invested Assets = Owner’s Equity + Liabilities Complete Page 1 Accounting Worksheet

Balance Sheet Show assets, liabilities and owner’s equity Created once or twice a year Google’s Balance Sheet Complete PART 3: Balance Sheet

Balance Sheet and T-Charts Transaction = a business activity that changes assets, liabilities, or owner’s equity At least 2 accounts must be used T account debit (dr) credit (cr) Normal Balance Assets = Left Side (dr) Liabilities = Right Side (cr) O.E. = Right Side (cr) Debits = Credits Assets = L. + O.E. Left Side Debit Side (A) Right Side Credit Side (L and E)

T – Chart Practice What accounts are affected? How is each account classified? (Normal Balance) How is each account balance changed? How is each amount entered in the accounts? Do credits = debits?

Transactions - What Accounts are Affected? Received cash from owner as an investment, 2,000 Paid cash for insurance, 600 Bought supplies on account from Swan’s Supply Company Cash, Owners Equity Asset (prepaid insurance), Cash Assets (supplies), Accounts Payable Complete Part 2 of Accounting Worksheet: Transactions on T-Charts

Income Statement Report of revenue, expenses, and net income or loss Shows all income first, Shows all expenses, Shows the difference McDonalds Income Statement Question 4: What information is in a Balance Sheet that is not in an Income Statement?

Checkpoint  Complete the Lemonade Stand Keep track of all transactions using T Charts Fill out Multiple Balance Sheets Credits = Debits

12-3 Payroll Management Goal 1 Describe the components of a business payroll system. Goal 2 Identify key information included in payroll records and paychecks.

PAYROLL SYSTEMS Legally must pay on time (at least once a month) Must pay taxes for employees Social Security and Medicare Disability Unemployment Take taxes that employees pay from checks Income taxes

SAMPLE EARNINGS REPORT AND DIRECT DEPOSIT RECEIPT

12-4 Financial Decision-Making Goal 1 Recognize important financial information managers use to make decisions. Goal 2 Identify the steps in making financial decisions in business.

USING FINANCIAL INFORMATION Every decision revolves around $$$ Preparing a budget. Using the budget as a guide to the operation of the business. Making needed adjustments to bring performance in line with the budget Alter budget if it was incorrect / things change Understanding financial performance ratios

FINANCIAL PERFORMANCE RATIOS Current Liabilities Current Assets = Current Ratio Owner’s Equity Total Liabilities = Debt to Equity Ratio Net Profit = Return on Equity Ratio Owner’s Equity Net Income Total Sales = Net Income Ratio Complete Financial Performance Ratio Worksheet