1. Chapter 12 Financial Management

2. 12-1 Financial Planning
Recognize important financial questions that must be answered in a business
List the steps in budget preparation
Describes three types of business budgets

3. Financial Planning Beginning a Business
The moment a decision is made to start a business, financial planning begins.
Questions to be answered
How much money is needed to start the business
Where will the financing come from
How will adequate funds be obtained to operate the business for the months or years until the business becomes profitable
What will be the major expenses
When must they be paid

4. Many businesses fail due to poor financial planning
Consulting an expert in business finance and developing financial management skills are essential

5. The financial Equation
Ongoing Operations
Revenue – all income that a business receives over a period of time
Expenses – the costs of operating a business
The financial Equation
Revenue – Expenses = Profit or Loss

6. Revenue greater than Expenses = Profit
Revenue less than Expenses= Loss (Profit Loss)
The profitability of the business is directly linked to the number of employees and the wages the business can pay.
Managers & Employees should
Reduce waste & control expenses
Decide on ways to increase sales and income

7. The following are included in the ongoing operations of a business
Payment of employees
Ordering of supplies and materials
Building maintenance
Equipment repaired
Technology updated

8. Business Expansion Expansions Occurs to
Serve more customers
Reach unserved markets
Sell new products
Most expansion plans occur over a long period and can cost thousands or even millions of dollars

9. The planning of an expansion
Must anticipate the costs associated with the expansion
The source of the funds to pay for the expansion
Expected income that will result form the new plans
If the result of the expansion is heavy losses, the previously successful business may fail.

10. Developing Business Budgets
A budget provides detailed plans for the financial needs of individuals, families, and businesses
Anticipate sources and amounts of income
Predicts the types and amounts of expenses for a specific business activity or the entire business
The business must be able to identify and predict the amount of each source of income and each type of expense.

11. Predicting income and expenses can be easy for a business that has been operating for a while due to past financial records.
The Small Business Administration (SBA) provides many planning tools for a new business
By regularly comparing the business’ financial performance to the budget, the owner can determine if the budget goals are being met

12. Budgeting Process
Prepare a list of each type of income and expense that will be a part of the budget
Gather accurate information from business records and other information sources for each type of income and expense
Create the budget by calculating each type of income, expense, and the amount of net income or loss
Explain the budget to people who need financial information to make decisons

13. Skills needed to prepare a Business Budget
Understanding of financial information
Computer skills
Mathematical abilities
Effective communication skills

14. Types of budgets Three budgets are essential for every business
Start-up
Operating
Cash
Start- up
Plans income and expenses from the beginning of a new business or a major expansion until it becomes profitable

15. Operating
Describes the financial plan for ongoing operations of the business for a specific period.
Planned for 3 or six months, or a year
Represents the entire business
Requires of review of previous budgets to make predictions
Cash
Estimate of the actual money received and paid out for a specific period
Determines whether there is enough money to pay bills
Determines if there is enough money to invest, which will provide another source of income