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

FINANCIAL PLANNING Beginning a business Ongoing operations – Every business activity costs money. All income a business receives over a period of time is called revenue. Expenses are the costs of operating a business. If revenue is greater than expenses, the business will make a profit. If expenses exceed revenue, the business will suffer a loss. Business expansion Chapter 12

BASIC FINANCIAL EQUATION Revenue – Expenses = Profit or Loss Chapter 12

DEVELOPING BUSINESS BUDGETS A budget provides detailed plans for the financial needs of individuals, families, and businesses. Anticipate sources & amounts of income. Predict the types and amounts of expenses. Chapter 12

Sources of budget information If a business has operated for several years, identifying sources of income and types of expenses will not be difficult.The mains source of that information is the financial records of the business. Budgeting is much harder for a new business. Chapter 12

Budget preparation – involves 4 steps 1. Prepare a list of each type of income and expense that will be a part of the budget. 2. Gather accurate information from business records and other sources for income & expenses. 3. Create the budget by calculating each type of income, expense, and the amount of net income or loss. 4. Explain the budget to people who need financial information to make decisions. Chapter 12

TYPES OF BUDGETS Start-up budget – plans income and expenses from the beginning a of a new business or a major business expansion until it becomes profitable. Operating budget – describes the financial plan for ongoing operations of the business for a specific period. The operating budget is planned for 3 months, six months, or a year. Chapter 12

Cash budget – is an estimate of the actual money received and paid out for a specific period. A cash budget anticipates that cash will come into a business and that cash will be paid out during each week or month of operation. If a new business is losing money, it still must have adequate cash on hand to pay current expenses. Chapter 12

FINANCIAL RECORDS – are used to record and analyze the financial performance of a business. Types of records – commonly maintained to document the performance of a business. Asset records – name the buildings, and equipment owned by the business, their original and current value, and the amount owed if money was borrowed to purchase the assets. Depreciation records – identify the amount assets have decreased in value due to their age and use. Inventory records – identify the type and number of products on hand for sale. Adequate records are crucial to correctly determine the number of products sold, damaged, or lost and the current value of that inventory. Chapter 12

Cash records – list all cash received and spent by the business. Records of accounts – identify all purchases and sales made using credit. Accounts Payable Record – identifies the companies from which credit purchases were made and the amount purchased, paid, and owed. Accounts Receivable Record – identifies customers that made purchases using credit and the status of each account Cash records – list all cash received and spent by the business. Payroll records – contain information on all employees of the company, their compensation, and benefits. Chapter 12

Maintaining financial records Tax records – show all taxes collected, owed and paid. Maintaining financial records Business records have to be accurate and should be kept up to date. Technology is changing the way financial information is collected. Much of the information is now collected using point-of-production and point-of-sale technology such as scanners, touch screens, and personal digital assistants (PDAs). Chapter 12

FINANCIAL STATEMENTS Three most important elements of a company’s financial strength: Assets – what a company owns Liabilities – what a company owes Owners’ Equity – the value of the owner’s investment in the business. Chapter 12

The Balance Sheet The assets, liabilities, and owner’s equity for a specific date are listed on the balance sheet. Prepared once every 6 months or year. Left side lists assets – anything of value Current Assets – include cash and those items that can be readily converted to cash such as inventory and accounts receivable. Long Term Assets (fixed assets) – are assets with a lifespan of more than a year. Common fixed assets are land, building, equipment, and expensive technology. Chapter 12

The right side – is divided into 2 categories Liabilities – are amounts owed by the business to others Current Liabilities – are those that will be paid within a year. Example – payments owed to banks, payments due to suppliers. Long-term Liabilities – are debts that will continue for longer than a year. Examples – debts owed for land, buildings, and expensive equipment. Owners equity – the value of the business after liabilities are subtracted from assets. This shows how much the business is worth. Chapter 12

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The Income Statement To report the revenue, expenses, and net income or loss from operations for a specific period, a business prepares an income statement. Revenue – all income received by the business during the fiscal period. Expenses – include operations, purchase of equipment, supplies, inventory, payroll, and taxes. Chapter 12

Net Income – Revenue is greater than expenses. Net Loss – Expenses are greater than revenue. Business managers review financial information to determine how the business is performing. In addition to comparing financial performance from one time period to another, the owner will want to make comparisons with similar businesses. A business that is less profitable than similar businesses, or with lower sales or higher expenses, may have difficulty competing. Chapter 12

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PAYROLL SYSTEMS Payroll is the financial record of employee compensation, deductions, and net payroll. 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. Compensation to employees – benefits Businesses are responsible for making require federal and state payments for each employee. These taxes consist of income taxes, Social Security, Medicare, and unemployment taxes and are commonly referred to as payroll taxes. Chapter 12

Income Taxes – The Federal government require employers to withhold income tax from their employee’s pay. The taxes are based on the amount of wages and income and the number of dependents. Social Security and Medicare (FICA) – Federal Insurance Contributions Act – government requires employers to withhold and deposit these taxes from employee’s paychecks. Employers must also make matching contributions. Unemployment taxes – Employers pay (FUTA) Federal Unemployment Tax to the unemployment insurance system. Employers withhold taxes from wages and make their required contribution. Chapter 12

Personnel records include: Personal information, employment history Performance evaluation Compensation records Most information in personnel files is confidential. Because of this, the business must carefully and securely maintain records. Chapter 12

PREPARING A PAYROLL Payroll records – The form used to track each employee’s pay history. Name, Social Security Number, Address Individual tax information, and a record of benefits such as vacation and sick days available and used. The employee’s current and year-to-date earnings, deductions, gross pay and net pay. Chapter 12

Preparing paychecks – Earnings Report – includes amount of deductions for the current pay period. Includes Information for the current pay period as well as the cumulative amounts for the year. Direct Deposit – the 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 Managers who understand the information in financial statements will be able to make decisions that result in the wise use of the company’s money. Understanding financial performance ratios Current ratio – Current assets compared to the current liabilities. Can pay their debts when they are do. Debt to equity ratio – Companies liabilities divided by the owner’s equity. How much the business is relying on money borrowed from others. Return on equity ratio – Net profit of the business compared to the amount of owner’s equity. Net income ratio – Total sales compared to the net income for a period such as six months or a year. Shows how much profit is being made by each dollar of sales for the period analyzed. Chapter 12

FINANCIAL PERFORMANCE RATIOS Chapter 12

MAKING FINANCIAL DECISIONS Managers are responsible for the financial health of their company and for the specific areas of the company under their control. Prepare a budget – use as a guide Look for discrepancies between actual and budgeted performance Chapter 12

Make needed adjustments Last adjustment managers could attempt is to redo the budget. Businesses usually hold managers responsible if their part of the company faces financial problems. Managers will be rewarded if they are effective in managing the financial resources of company. Chapter 12