Intro to Business, 7e
Chapter 12
CHAPTER 12
Financial Management
12-1 Financial Planning
12-2 Financial Records and Financial
Statements
12-3 Payroll Management
12-4 Financial Decision-Making
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Intro to Business, 7e
12-1 Financial Planning
Chapter 12
Goals
 Recognize important financial questions that
must be answered in a business.
 List the steps in budget preparation.
 Describe three types of business budgets.
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Intro to Business, 7e
Chapter 12
Key Terms
revenue
expenses
budget
start-up budget
operating budget
cash budget
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Intro to Business, 7e
Chapter 12
FINANCIAL PLANNING
Beginning a business
Ongoing operations
Business expansion
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Intro to Business, 7e
Chapter 12
BASIC FINANCIAL EQUATION
Revenue – Expenses = Profit or Loss
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Intro to Business, 7e
Chapter 12
Checkpoint >>
What is the basic financial equation for businesses?
Answer
 The basic financial equation for businesses is revenue
minus expenses equals profit or loss.
Revenue – Expenses = Profit or Loss
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
DEVELOPING BUSINESS
BUDGETS
Sources of budget information
Budget preparation
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Intro to Business, 7e
Chapter 12
Checkpoint >>
What are the four steps in preparing a business budget?
Answer
 Preparing a list of each type of income and expense that will be a
part of the budget
 Gathering accurate information from business records and other
information sources for each type of income and expense
 Creating the budget by calculating each type of income, expense,
and the amount of net income or loss
 Explaining the budget to people who need financial information
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Intro to Business, 7e
Chapter 12
TYPES OF BUDGETS
Start-up budget
Operating budget
Cash budget
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
Checkpoint >>
Identify and describe the three types of budgets needed
by all businesses.
Answer
 Start-up budget — plans income and expenses from
the beginning of a new business or a major business
expansion until it becomes profitable
 Operating budget — describes the plan for ongoing
operations for a specific period
 Cash budget — is an estimate of the actual money
received and paid out for a specific period.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
12-2 Financial Records and
Financial Statements
Chapter 12
Goals
 Identify several types of financial records
needed by businesses.
 Describe the differences between an income
statement and a balance sheet.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
Key Terms
financial records
assets
liabilities
owner’s equity
balance sheet
income statement
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Intro to Business, 7e
Chapter 12
FINANCIAL RECORDS
 Types of records







Asset records
Depreciation records
Inventory records
Records of accounts
Cash records
Payroll records
Tax records
 Maintaining financial records
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Intro to Business, 7e
Chapter 12
Checkpoint >>
How has the process of maintaining financial records been affected
by technology?
Answer
 Most financial information is collected using point-of-production
and point-of-sale technology and sent electronically to the people
who prepare the financial records.
 Also, businesses use computerized financial systems that
complete the necessary mathematical calculations and compare
those records with budgets.
 The software can even complete what-if comparisons to help
managers determine the impact of changes in budgets and
financial performance.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
FINANCIAL STATEMENTS
The balance sheet
The income statement
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Intro to Business, 7e
Chapter 12
Balance Sheet
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Intro to Business, 7e
Chapter 12
Income Statement
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Intro to Business, 7e
Chapter 12
Checkpoint >>
What is the difference between a balance sheet and an
income statement?
Answer
 A balance sheet reports assets, liabilities, and owner’s
equity as of a specific date.
 An income statement reports sales, expenses, and net
profit or loss for a specified time period.
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Intro to Business, 7e
12-3 Payroll Management
Chapter 12
Goals
 Describe the components of a business’
payroll system.
 Identify information included in payroll records
and paychecks.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
Key Terms
payroll
payroll record
direct deposit
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Intro to Business, 7e
Chapter 12
PAYROLL SYSTEMS
Income taxes
Social Security and Medicare
Unemployment taxes
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Intro to Business, 7e
Chapter 12
Checkpoint >>
What is the purpose of the payroll system?
Answer
 The purpose of the payroll system is to maintain
information on each employee to be able to calculate
the company’s payroll and make the necessary
payments to each employee, taking the proper legal
state and federal deductions from each paycheck.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
PREPARING A PAYROLL
Payroll records
Preparing paychecks
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Intro to Business, 7e
Chapter 12
Sample
Earnings Report
Sample Paycheck
Paycheck and Earnings Report
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Intro to Business, 7e
Chapter 12
Checkpoint >>
What is the difference between a payroll record and an
earnings report?
Answer
 A payroll record is the form used to track each
employee’s pay history.
 An earnings report is included with the employee’s
paycheck and contains information for the current pay
period as well as the cumulative amounts for the year.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
12-4 Financial Decision-Making
Chapter 12
Goals
 Recognize important financial information
managers use to make decisions.
 Identify the steps in making financial decisions
in business.
© 2009 South-Western, Cengage Learning
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Intro to Business, 7e
Chapter 12
Key Terms
financial performance ratios
discrepancies
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Intro to Business, 7e
Chapter 12
USING FINANCIAL
INFORMATION
Important financial information
Understanding financial performance
ratios
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Current ratio
Debt to equity ratio
Return on equity ratio
Net income ratio
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Intro to Business, 7e
Chapter 12
Financial
Performance
Ratios
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Intro to Business, 7e
Chapter 12
Checkpoint >>
Identify four important financial performance ratios used
by managers to determine how well the business is
performing.
Answer
 current ratio
 debt to equity ratio
 return on equity ratio
 net income ratio
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Intro to Business, 7e
Chapter 12
MAKING FINANCIAL
DECISIONS
Prepare a budget
Look for discrepancies between actual
and budgeted performance
Make needed adjustments
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Intro to Business, 7e
Chapter 12
Checkpoint >>
List the three steps in financial decision-making.
Answer
1. Preparing a budget.
2. Using the budget as a guide to the operations of
the business.
3. Making needed adjustments to bring performance
in line with the budget.
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