Budgeting and Controlling Operations and Taxes

Control Financial Planning  Operating System Financial Planning  Operating System Steps Steps Set performance standards Set performance standards Set in advance; must be acceptable to employees Set in advance; must be acceptable to employees Measure actual performance Measure actual performance Compare actual performance with standards Compare actual performance with standards Are deviations excessive? Are deviations excessive? Determine corrective action Determine corrective action Characteristics of effective Control Systems Characteristics of effective Control Systems

Using Budgets to Communicate Standards What is a Budget? What is a Budget? Types Types Capital Capital Buildings and equipment Buildings and equipment Operating Operating Sales budget Sales budget Production Production Personnel Personnel Cash flow budget Cash flow budget Daily/Weekly Daily/Weekly Monthly Monthly

Budgetary Control Budget “needs teeth” to be effective Budget “needs teeth” to be effective Budgetary Control Budgetary Control Credit extension Credit extension Monitor costs Monitor costs Auditing Auditing Financial auditing Financial auditing Internal auditing Internal auditing Operations auditing Operations auditing

Obtaining & Using Performance Information for Control Obtaining the Information Obtaining the Information Observation Observation Oral reports Oral reports Written reports Written reports Comparing Actual Performance v. Standards Comparing Actual Performance v. Standards

Evaluating Financial Position Ratios Ratios Comparisons Comparisons Current Ratio Current Ratio Return on Equity Return on Equity Return on Sales Return on Sales Net Profits / Net Sales Net Profits / Net Sales

Evaluating Financial Position Can Business Pay Debts? Can Business Pay Debts? Current ratio Current ratio Acid test (quick ratio) Acid test (quick ratio) Working capital Working capital How Good are Business’s Assets? How Good are Business’s Assets? Collection Period Collection Period Turnover Rate Turnover Rate Net sales/ Working Capital Net sales/ Working Capital

Evaluating Financial Position Is Equity Satisfactory? Is Equity Satisfactory? Retained Earnings Retained Earnings Two functions Two functions LT Liabilities / Working Capital LT Liabilities / Working Capital Debt / Owner’s Equity Debt / Owner’s Equity Current Liabilities/ Owner’s Equity Current Liabilities/ Owner’s Equity Fixed Assets/ Owner’s Equity Fixed Assets/ Owner’s Equity

Tax System Who pays? Who pays? Direct v. indirect taxes Direct v. indirect taxes How taxes affect small businesses How taxes affect small businesses Tax on corporate profits Tax on corporate profits Taxes on employees Taxes on employees Owners’ personal salaries are taxed Owners’ personal salaries are taxed Taxes on ownership transfer Taxes on ownership transfer Taxes affect organizational structure Taxes affect organizational structure Administrative costs Administrative costs

Taxes Imposed on Businesses Taxes and Fees to Operate Taxes and Fees to Operate Permits, licenses Permits, licenses Excise and Intangible Property Taxes Excise and Intangible Property Taxes Excise taxes Excise taxes Intangible property taxes Intangible property taxes State & Local Sales & Use Taxes State & Local Sales & Use Taxes Sales tax Sales tax Exceptions Exceptions Use Taxes Use Taxes Income Taxes Income Taxes

Business Structure v. Taxes Proprietorship & Partnership Proprietorship & Partnership Corporations Corporations S-Corporations S-Corporations Limited Liability Company Limited Liability Company ESOP ESOP

Federal Corporate Income Taxes What is our tax rate? What is our tax rate? Depends on Depends on What is taxable income? What is taxable income? Revenues- Expenditures Revenues- Expenditures What are deductible expenses? What are deductible expenses? Inventory Inventory FIFO, LIFO, average cost FIFO, LIFO, average cost

Federal Corporate Income Taxes What are deductible expenses? What are deductible expenses? Inventory Inventory FIFO, LIFO, average cost FIFO, LIFO, average cost Interest payments Interest payments Business lunches, entertainment, and travel Business lunches, entertainment, and travel Automobile, home, and computer Automobile, home, and computer Be careful!!! Be careful!!!

Employment-Related Taxes Income Taxes Income Taxes Withholding Withholding Social Security/Medicare Social Security/Medicare Workers’ Compensation Workers’ Compensation

Personal Taxes Paid by Owner Salaries and Bonuses Salaries and Bonuses Dividends Dividends Some expenses are tax-free to employees Some expenses are tax-free to employees Some benefits are not taxed until received Some benefits are not taxed until received

Sale of Business Agreements Agreements Three parts Three parts Double taxation Double taxation Money v. stock Money v. stock

Record Keeping and Tax Reporting Two Reasons to Keep Business Records Two Reasons to Keep Business Records How long should you keep records? How long should you keep records? Records Records Income Income Expenses Expenses Indirect Indirect Assets Assets Reporting Taxes Reporting Taxes

Credit Management Methods of Payment Methods of Payment Cash Cash Checks Checks Credit Credit Use own credit line Use own credit line Revolving charge accounts Revolving charge accounts Installment payment plan Installment payment plan Major credit card companies? Major credit card companies? Debit cards Debit cards

Credit Management Setting Credit Policies Setting Credit Policies Three policies Three policies Carrying Out Policies Carrying Out Policies Classifying Credit Risks Classifying Credit Risks Good Good Fair Fair Weak Weak Checking Customers’ Creditworthiness Checking Customers’ Creditworthiness Establishing Collection Procedures Establishing Collection Procedures