1. Chapter 12-Financial Management

2. 12-1 Financial Planning FINANCIAL PLANNING Beginning a Business
The moment a decision is made to start a business, financial planning begins.

3. The following questions need to be answered:
How much money will be needed to start the business?
Were will that financing come from?
How will adequate funds be obtained to operate the business for the months or years until it becomes successful?

4. What will be the best sources of sales and other income?
What will be the major expenses?
When must they be paid?
Many new businesses fail due to poor financial planning.

5. Ongoing Operations
Finances are a key part of the operations of all businesses.
Every business activity cost money.
Without careful planning and management, those costs can grow to a level where the business income cannot cover expenses.

6. Revenue- all income a business receives over a period of time
Expenses- the costs of operating a business

7. Every business is guided by the basic financial equation:
Revenue – Expenses = Profit or Loss
If revenue is greater than expenses, the business will make a profit.
If expenses are greater than revenue, the business will suffer a loss.

8. The profitability of a business is directly linked to the number of employees and the wages the business can pay.
Managers and employees should find ways to reduce waste and control expenses.
They can also make suggestions about ways to increase sales and income through better products and services.

9. Business Expansion
Successful businesses expand to be able to serve more customers, reach unserved markets, and sell new product.
Expansion costs money
The income generated by the expansion will be far greater than the cost.

10. Business expansion calls for research to develop new products and locate new markets.
New factories and equipment may be needed to produce the products.
Additional employees must be hired and trained.

11. Most expansion plans occur over a long period of time and cost thousands or even millions of dollars.
Planning must anticipate the:
cost associated with the expansion
source of the funds to pay for the expansion
expected income that will result from the new plans
If the planning is not correct, the expansion results in heavy losses rather than profits or the business may fail.

12. Checkpoint>>
What is the basic financial equation for businesses?

13. DEVELOPING BUSINESS BUDGETS
Budget- provides detailed plans for the financial needs of individuals, families, and businesses.
A business budget has two main purposes:
Anticipate sources and amounts of income.
Predict the types and amounts of expenses for a specific business activity of the entire business.

14. The business must be able to identify and predict the amount of each source of income and each type of expense.
Determine when each expense must be paid and when income will be received.
For a business to succeed, enough revenue must be available to pay all expenses

15. Sources of Budget Information
The main source of information for an existing business are the financial records.
Budgeting for new businesses is much harder for a new business.
No financial records exist to serve as a guide.

16. Other sources of information must be used including:
Small Business Administration- provides many planning tools for new businesses
Guides to developing a budget
Financial information to help predict income and expenses

17. Private businesses that collect and publish financial information on similar businesses and industries
Examples: Fortune, Forbes, Entrepreneur, and The Wall Street Journal

18. A new franchisee will typically receive assistance from the franchisor.
This help might include a complete beginning budget.
A bank or other financial institution where a new business has established accounts is another source for financial planning.

19. Budget Preparation
The most important step in financial planning is developing a budget.
Compare the use of a budget to a road map when traveling to an unknown location.
Without the map, you would have little idea of where you are going while you travel.
If you take a wrong turn, you have difficulty knowing your mistake.
It will be hard to get back to the correct road without the map.

20. A budget identifies where the business is going.
Allows the owner to determine if the business is making progress toward its financial destination.
By regularly comparing the business’ financial performance to the budget, the owner can determine if the budget goals are being met.
If not, the owner can make corrections before serious financial problems occur.

21. The budgeting process includes four fundamental steps:
Prepare a list of each type of income and expense that will be part of the budget.
Gather accurate information from business records and other information sources for each type of income and expense.
Create a 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 decisions.

22. The person responsible for preparing budgets needs several skills:
Understanding of financial information
Computer skills
Mathematical abilities
Communication skills

23. New small business owners usually get help from an accountant or banker when preparing the first budget.
Small and medium –sized businesses hire an accounting firm to maintain financial records and help with budgeting.
Larger businesses employ accountants and other financial planning experts to maintain the business’ financial records.

24. Checkpoint>>
Why are the four steps in preparing a business important for each business owner to follow?

25. TYPES OF BUDGETS
Start-Up Budget
Start-up budget- plans income and expenses from the beginning of a new business or a major business expansion until it becomes profitable

26. Most start-ups require expenditures (expenses) of thousands or even hundreds of thousands in order to open.
Buildings and equipment must be purchased or leased.
New employees will be hired or existing employees retrained.
Expenses for utilities, licenses, advertising, and transportation.

27. Operating Budget
Operating budget- describes the financial plan for ongoing operations of the business for a specific period
Usually planned for three months, six months, or one year
Prepared for the entire business
Income and expenses from prior budgets are reviewed
Planners look for changes that could increase or decrease income and expenses.
Finally the new budget is created.

28. Cash Budget
Cash budget- an estimate of the actual money received and paid out for a specific period
Anticipates the amount of cash that will come into a business and the cash that 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.
Even profitable businesses may have times when adequate cash in not available due to high expenses or a delay in receiving payments.

29. Checkpoint>>
Why do you think businesses need to prepare each of the three types of budgets described above?

30. Please complete the 12-1 Assessment Questions found at the end of the packet.

31. 12-2 Financial Records and Financial Statements
Financial records- used to record and analyze the financial performance of a business
Local, state, and federal governments require some records.
Other records provide information needed by owners and managers to aid in decision-making.

32. Types of Records
Asset records- name the buildings and equipment owned by the business
Their original and current value
The amount owed if money was borrowed to purchase the assets

33. Depreciation records- identify the amount assets have decreased in value due to age and use
Inventory records- identify the type and number or 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 inventory

34. 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

35. Cash records- list all cash received and spent by the business
Payroll records- contain information on all employees of a company, their compensation and benefits
Tax records- show all taxes collected, owed, and paid
As a part of payroll, employers must withhold a percentage of employees’ salaries and wages for income taxes, Social Security and Medicare taxes, and unemployment compensation.
Some businesses collect and pay state and local taxes.

36. Maintaining Financial Records
Business records have to be accurate and should be kept up to date.
In the past, the preparation and maintenance of financial records was an expensive and time-consuming process. It was often done manually using paper documents that had to be completed, saved, and protected.
Those documents were then sent to the people responsible for preparing the company’s financial records.

37. 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
Examples: scanners, touch screens and personal digit assistants
Data files are transferred from the places information is collected to the computers of the people who prepare the final budget.

38. Technology is also changing the way financial records are prepared and maintained.
Businesses use computerized financial systems that have templates for each financial record.
The software completes the necessary math calculations, updates records, and compares those records with budgets.

39. Checkpoint>>
How has the process of maintaining financial records been affected by technology

40. FINANCIAL STATEMENTS
Assets- what a company owns
Liabilities- what a company owes
Owner’s equity- the value of the owner’s investment in the business

41. Financial statements- reports that sum up the financial performance of a business
Balance sheet- where a company reports its assets, liabilities, and owner’s equity
Income statement- where a business reports its sales, expenses, and profits

42. The Balance Sheet
Lists assets, liabilities, and owner’s equity for a specific date
Usually prepared every six months or once a year
See page 300 for a sample balance sheet.

43. Left Side
Assets- anything of value owned by the business
Current assets- include cash and anything that can be converted to cash
Examples: inventory and accounts receivable
Long term assets (fixed assets)- assets with a lifespan of more than a year
Examples: land, buildings, equipment

44. Right Side
Liabilities- amounts owed by the business to others
Current liabilities- those that will be paid within a year
Examples: payments owed to banks for short-term loans, payments to suppliers for inventory, or supplies
Long term liabilities- debts that will continue for longer than a year
Examples: debts owed for land, buildings, and expensive equipment

45. Owner’s equity- the value of the business after liabilities are subtracted from assets
Shows how much the business is worth on a specific date

46. The Income Statement
Income statement- reports revenue, expenses and net income or loss for a specific period
Usually prepared every six months or year
See page 301 for a sample income statement.

47. Revenue- all income received by the business during the period
Examples: sale of products, interest earned from investments
Expenses- all of the costs of operating the business during the period
Examples: rent, supplies, inventory, payroll, and utilities

48. Net income- when revenue is greater than expenses
Net loss- when expenses are greater than revenue
Because financial statements summarize financial performance for a specific period, the business owner can compare the current period with the performance of last month or year.

49. Checkpoint>>
What is the difference between a balance sheet and an income statement?

50. Please complete the 12-2 Assessment Questions at the end of the section.

51. 12-3 Payroll Management
PAYROLL MANAGEMENT
Payroll- the financial record of employee compensation, deductions and net pay

52. A majority of employees in most businesses receive an hourly wage
A payroll system maintains information on each employee in order to calculate the company’s payroll and make necessary payments to each employee
Most employers pay every employee on a weekly, bi-weekly, or monthly basis
A majority of employees in most businesses receive an hourly wage
The wage rate may be different for each employee

53. Some employees work part time while others work a full 40 hours per week
Managers and other professional positions receive a weekly or monthly salary
some may earn additional payments in the form of commissions, bonuses, or profit sharing

54. As part of compensation, many businesses offer employees benefits.
Benefits may include insurance options, paid or unpaid vacation, sick and personal leave, and education assistance
Businesses must keep records of employees benefits used.
Businesses are responsible for making required federal and state payments for each employee.
Payroll taxes-consist of income taxes, Social Security, Medicare, and unemployment taxes

55. Income Taxes
Federal, state, and local governments require employers to withhold income taxes from their employees’ paychecks.
Taxes are based on the amount of wages and income and the number of employee dependents.

56. Social Security and Medicare
These payments are often referred to as FICA- Federal insurance Contributions Act
The government requires employers to withhold and deposit these contributions from employees’ paychecks along with matching contributions from the employer.

57. Unemployment Taxes
Employers pay Federal Unemployment Tax (FUTA) to the unemployment insurance system
The amount of tax is based on the business’ total employee wages
Many states also have their own unemployment taxes

58. Businesses must prepare and maintain tax records.
They must also send required payments to the government on time.
Most payroll systems are part of a larger personnel records system.
In a centralized location for all information the company maintains on all employees
From the time they are hired until they no longer work for the business

59. Personnel records include personal information, employment history, performance evaluations, and compensation records.
Most personnel record information is confidential.
Businesses must carefully and securely maintain the records.

60. Checkpoint >>
What is the purpose of the payroll system?

61. PREPARING A PAYROLL
Maintaining payroll records and preparing paychecks is an on going and time-consuming task
In the past, each employee completed and submitted a time card
Payroll clerks then entered the information into each employee’s payroll record
When paychecks were to be issued, employee compensation and dedications had to be calculated, withholding and benefits records completed, and paychecks prepared.

62. Today computerized payroll record systems make the process more efficient and accurate.
The software needed to manage a basic payroll system can be purchased at a relatively low cost.
The system can collect employee work records each day.
All individual paychecks are prepared electronically.

63. Payroll records- the form used to track each employee’s pay history
Each payroll record holds the employee’s name, social security number, and address
Also includes individual tax information and a record of benefits
Vacation and sick days available and used
Employee current and year-to-date earnings, deductions, gross pay, and net pay
See electronic Payroll Record on page 306

64. Preparing Paychecks
After all employees’ payroll records have been completed and pay amounts have been completed and pay amounts have been calculated, a paycheck is prepared.
Earnings report- included with the employee’s paycheck
Includes information for the current pay period as well as cumulative amounts for the year.
See page 307 for an example

65. Direct deposit- the employer transfers net pay electronically into the employee’s bank account
The employee does not receive a paper check

66. Checkpoint>>
What is the difference between a payroll record and an earnings report?

67. Please complete the assessment questions at the end of the packet.