4.01 Understand financial planning. POB 4.01 Parts 1 & 2 4.01 Understand financial planning.

Financing Terms Revenue – all income a business receives over a period of time Expenses – costs of operating a business Profit – occurs when revenue is greater than expenses Loss – occurs when expenses are greater than revenue

Financial Planning for Businesses Beginning of a Business Money needed to start Financing sources Money to operate until profitable Sources of sales Expenses

Financial Planning for Business, cont Ongoing Paying employees Supplies & materials Maintaining the building and equipment Technology updates

Financial Planning for Business, cont Business Expansion Reasons to expand – serve more customers, reach unserved markets, or sell new products Costs associated with expansion – research, new employees, marketing activities Need to determine if revenue will be greater than costs

What is a Budget? Budget – detailed plans for the financial needs of individuals, families, and businesses. Purposes of a Budget Anticipate sources and amounts of income Predict types and amounts of expenses A budget is successful when revenue > expenses

4 Steps in Planning a Budget 1. Prepare a list of each type of income and expense 2. Gather accurate info for each type of income and expense 3. Create a budget and calculate income, expenses, and net profit or loss 4. Explain the budget to those who make decisions

Types of Budgets Start-Up – plans income and expenses from the beginning of the new business or a major expansion until it becomes profitable. Includes buildings, equipment, inventory, supplies, materials, employees, utilities, licenses, advertising and transportation

Types of Budgets, cont Operating Budget – a financial plan for ongoing operations of the business for a specific period of time Usually 3 months, 6 months or 1 year

Types of Budgets, cont Cash Budget – estimate of actual money received and paid out for a specific period. Need to determine if there will be enough money to pay bills or if the business will need to borrow money