MANAGING
BUSINESS FINANCES
Chapter 17
Business Principles B
Financial Management
• One reason small businesses fail is they do not
manage their finances properly.
• A financial plan is an important part of a business
plan.
• Businesses must manage the money they take in
and pay out to become profitable and stay in
business.
Financial Planning
• Financial Plan—an outline of your expenses, needs,
and goals, and how you expect to meet them
• Business Budget – a detailed plan for meeting the
financial needs of the business
• Anticipating sources and amounts of income
• Predicting the types and amounts of expenses
Financial Planning, con’t.
• Asset—property or items of value that your
business owns
• Cash
• Equipment
• Buildings
• Supplies
• Inventory
• Land
• Assignment:
List your own personal assets
(belongings) and estimate their total dollar value.
Purchasing Assets
• Determine method to use to make purchases
• Cash?
• Currency
• Checking account
• Borrow?
• Credit plan
• Loan
• Business owners must be careful to make wise
decisions about needs verses wants
Accounting requirements
• Recognizing the financial records you need to keep
• Financial forecast—def. an estimate of what business
conditions will be like in the future
• Cash or savings on hand is essential—the first year may be operating
at a loss
• Plan for possible negative changes in the economy
• Up-to-date financial information
• Make informed, reasonable decisions
• Analyzing financial statements
• Controlling cash
• Paying debts
•
Thousands of small businesses close each year because of poor financial
management.
Accounting
• Def.—the systematic process of recording and
reporting the financial position of a business
• Efficient operations
• Profitable operations
• Financial manager—def. the person in charge of
a business’s financial planning, funding, and
accounting
• Manage the funds
• Make payments on time
• Make the payroll on time
• Pay operating expenses
Accounting, con’t.
•Financial manager must also:
• Find sources for additional funds
• Loans
• Investors
• Planning long-range financial goals
• Plans for five years
• Open a chain
• Add to the dining space
• Expand the kitchen
Budgeting
• Budget – a written plan for what you expect your
income and expenses to be over a specified period of
time
• Helps predict money needed
• Helps control spending
• Well-prepared budget helps avoid costly financial
mistakes
• Lets managers know how the business is doing in terms
of meeting its financial goals
Types of Business Budgets
• Start-Up Budget – used to plan income and
expenses from the beginning of a new business or
major business expansion until it becomes
profitable
• Purchase of buildings and equipment
• Material, supplies, licenses
• Advertising, hiring, payroll
• Cash Budget – an estimate of the money expected
to be received and paid out over a specific period of
time
• Lets the manager know when to borrow
• Money must always be on hand to pay expenses
Budgeting, con’t.
•Operating Budget – financial plan for the
day-to-day operations of the business
• Covers a specific period of time (ex. 6 months,
or 1 year)
• Follows this equation:
• Revenue – Expenses = Profit (or Loss)
• All anticipated revenues and expenses are listed
• Planned net profit or loss is shown
Financial Records
• Show the financial performance of the business
• Records of the actual transactions that occur day-to-day
• Profits and losses are calculated for specific periods of
time
• Might enable you to borrow more money, or expand
business
• Investors and creditors want to see you financial
accounts occasionally
• Accounting period can be set by the business
• One month
• Three months (quarterly)
• One year (annually)
• One year is often referred to as the fiscal year
Financial Statements
• Used to prepare 2 important financial
statements – Income Statement, Balance Sheet
• Asset records name the buildings and equipment owned by the
business, their original and current value and amount owed
• Depreciation records identify the amount that assets have
decreased in value due to age and use
• Inventory records identify the type and number of products on
hand for sale
• Payroll records contain information on all employees’
compensation and benefits
• Cash records list all cash received and spent
• Records of accounts identify purchases made using credit
• Tax records show all taxes collected, owed, and paid
Financial Statements
• Accounting records
• Keep track of money coming in and going out
• Provide a system for recording, classifying, summarizing, and
interpreting financial data
• Every sale, payment, or purchase is a transaction
• Liability--any amount your business owes
if you buy supplies on credit, the amount you owe is a liability
• Debts you owe to banks or investors are also claims against the assets of your
business
•
• The owner’s claim to his assets is called Owner’s Equity
• Accounting Equation
• Assets = Liabilities + Owner’s Equity
• Assets are always on the left side of the equation
• Liabilities and Owner’s Equity are always on the right side
Financial Statements
• Income Statement—A financial statement that shows
revenues, expenses, and net income (profit) or loss for a period of
time
• Revenues-Expenses= Profit if positive, Loss if negative
• Usually covers a period of 6 months or a year but may be shorter
• End-of-year statement shows how the business did for the entire
year
• Basis for payment of taxes and decision-making
Income Statement Definitions
• Income (Revenue) – the money a business takes
in or receives
• Most revenue or income comes from sales of products
or services
• Credit – many sales not paid for 30 days or longer (is
this still true?)
• Statement of Cash Flow – shows actual cash a business
receives and has available on a daily basis
• Expenses – operating costs of the business
• Employee wages, benefits, advertising, rent, utilities,
supplies, etc.
Income Statement
• Calculate the net profit or loss for the month for
Galaxy Comic Books: (use equation)
• Cash sales - $3560
• Charge sales - $1240
• Other revenue - $165
• Salaries - $2450
• Advertising - $200
• Rent - $550
• Supplies - $120
Balance Sheet
• A financial statement that lists a business’ assets
(what a company owns) and liabilities (what a
company owes)
• Shows what the business is worth on a particular
date, usually the end of a year
• Shows owners equity (value of the owner’s
investment in the business (also called net worth)
• Owner’s equity equation:
• Assets = Liabilities + Owner’s Equity
Overland Design Company
Income Statement
For the Year Ended December 31, 2012
Revenue
Cash Sales
$ 38,200
Charge Sales
180,600
Other Revenue
12,900
TOTAL REVENUE
$231,700
Expenses
Salaries and Wages
$ 70,800
Marketing
22,250
Administrative Costs
31,900
Materials and Supplies
24,800
Other Expenses
19,100
TOTAL EXPENSES
Net Income (REVENUE – EXPENSES)
168,850
$ 62,850
• In a balance sheet, both sides of the statement must be in balance
• Right-hand side shows the total of liabilities and owner’s equity to show
that they equal the value of the assets on the left-hand side
Ex.
Schribner’s Automotive, Inc.
Balance Sheet
December 31, 2015
ASSETS
Cash
LIABILITIES
$35,850
Accounts Payable
Investments
40,000
Payroll Taxes
Accounts Receivable
42,375
Mortgage
Buildings/Equipment
370,000
Total Assets
$488,225
$103,300
22,000
126,800
TOTAL LIABITIES
$252,100
Owner’s Equity
$236,125
Total Liabilities and
Owner’s Equity
$488,225