Financial Planning Chapter 12-1

Financial Planning Constant problem you face as a business owner is financing Ongoing process Financing questions never go away

Beginning a Business Financial planning begins the moment you decide to start a business Many new businesses fail due to poor financial planning How much money is needed? Where will it come from? What will be the major expenses?

Ongoing Operations Finances are a key part of the operations of all businesses. Every business activity involves money. Even the most successful businesses are continually active in financial planning.

Basic Financial Equation Revenue – all income that a business receives over a period of time Expenses – the cost of operating a business The Basic Financial Equation: Revenue – Expense = Profit or Loss If revenue is greater than expenses, the business will make a profit. If expenses exceed revenue, the business will suffer a loss.

Business Expansion Successful businesses expand to be able to serve more customers, reach unserved markets, and sell new products. Expansion costs money. Most expansion plans occur over a long period and can cost thousands or even millions of dollars. Each time business expansion is anticipated, careful financial planning must be completed.

Developing a Business Budget A budget provides detailed plans for the financial needs of individuals, families, and businesses. A budget has two main purposes: 1.Anticipate sources and amounts of income 2.Predict the types and amounts of expenses for a specific business activity or the entire business

Sources of Budget Information A business that has existed for several years – use prior financial records. New business – SBA provides many planning tools and private businesses collect and publish financial information on similar businesses.

Budget Preparation The most important step in financial planning is developing a budget. A budget identifies where a business is going. The goal of a business budget is to: 1.Determine the source and amounts of income 2.Identify the types of expenses and predict their cost 3.Determine how income will be distributed to cover those expenses

Steps in the Budget Process 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 information sources for each type 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

Types of Budgets 1.Start-up budget – plans income and expenses from the beginning of a new business until it becomes profitable. 2.Operating budget – describes the financial plan for ongoing operations of the business for a specific period. 3.Cash budget – an estimate of the actual money received and paid out for a specific period.