CHAPTER
12
SLIDE 1
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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Principles of Business, 8e
12-1 Financial Planning
Goal 1 Recognize important financial
questions that must be answered in
a business.
Goal 2 List the steps in budget preparation.
Goal 3 Describe three types of business
budgets.
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SLIDE 2
CHAPTER
12
SLIDE 3
KEY TERMS
● revenue
● expenses
● budget
● start-up budget
● operating budget
● cash budget
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Principles of Business, 8e
CHAPTER
12
SLIDE 4
FINANCIAL PLANNING
● Beginning a business
● Crucial to determine amount and sources of income,
expenses to start, and when to pay
● Ongoing operations
● Will revenue be enough to cover expenses and still
make a profit?
● Good and bad ways to cut costs
● Business expansion
● Is it worth it?
● Make sure expected profit gain will exceed expense
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Principles of Business, 8e
CHAPTER
12
SLIDE 5
BASIC FINANCIAL EQUATION
● Revenue – Expenses = Profit or Loss
● Profit
● Revenue is greater than expenses
● Revenue > Expenses = Profit
● Loss
● Revenue is less than expenses
● Revenue < Expenses = Loss
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SLIDE 8
Checkpoint 
● What is the basic financial equation for
businesses?
● The basic financial equation for businesses
is revenue minus expenses equals profit or
loss.
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Principles of Business, 8e
CHAPTER
DEVELOPING BUSINESS
BUDGETS
12
SLIDE 9
● Reasons for budgets:
● Anticipate sources/amounts of income
● Predict types/amounts of expenses
● Sources of budget information
● Can use past financial records
● New business – SBA, S&P, WSJ, bank, etc.
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Principles of Business, 8e
CHAPTER
12
SLIDE 10
BUDGET PREPARATION
● Like a roadmap: compare where you want
to go with where you actually are
● Budgeting Process:
1. Prepare list of each type of income/expense
2. Gather info from records (or other sources)
for each type
3. Create budget: Calculate each type,
determine net income/loss
4. Explain to decision-makers
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12
SLIDE 13
Checkpoint 
● What are the four steps in preparing a business
budget?
● 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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Principles of Business, 8e
CHAPTER
12
SLIDE 14
TYPES OF BUDGETS
● Departmental/specialized budgets
● Start-up budget (new or expanding bus.)
● Includes expenses for building, licensing, supplies,
employees, etc.
● Should measure up to point of profitability
● Operating budget – tracks income/ expenses for
several months to a year
● Cash budget – will there be enough cash to pay
expenses as they’re due?
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CHAPTER
12
SLIDE 17
Checkpoint 
● Identify and describe the three types of
budgets needed by all businesses.
● 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.
© 2012 Cengage Learning. All Rights Reserved.
Principles of Business, 8e
12-2
Financial Records and
Financial Statements
Goal 1 Identify several types of financial
records needed by businesses.
Goal 2 Describe the differences between
an income statement and a balance
sheet.
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SLIDE 18
CHAPTER
12
SLIDE 19
KEY TERMS
● financial records
● assets
● liabilities
● owner’s equity
● balance sheet
● income statement
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Principles of Business, 8e
CHAPTER
12
SLIDE 20
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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CHAPTER
12
SLIDE 24
Checkpoint 
● Give at least two examples of how the process of
maintaining financial records has been affected by
technology:
● Most financial information is collected using point-ofproduction 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.
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12
SLIDE 27
FINANCIAL STATEMENTS
● The balance sheet
● Reports assets, liabilities, and owner’s equity
on a specific date
● Current vs. fixed (long-term) assets/liabilities
● The income statement
● Shows revenue and expenses and calculates
net income (or loss) for a period of time
● Compare to previous time periods
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Principles of Business, 8e
CHAPTER
12
SLIDE 28
BALANCE SHEET
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CHAPTER
12
SLIDE 29
INCOME STATEMENT
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CHAPTER
12
SLIDE 32
Checkpoint 
● What is the difference between a
balance sheet and an income
statement?
● 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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CHAPTER
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12
Principles of Business, 8e
12-3 Payroll
Management
Goal 1 Describe the components of a
business payroll system.
Goal 2 Identify key information included in
payroll records and paychecks.
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SLIDE 34
CHAPTER
12
SLIDE 35
KEY TERMS
● payroll
● payroll record
● direct deposit
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CHAPTER
12
SLIDE 36
PAYROLL SYSTEMS
● Income taxes
● Social Security and Medicare (FICA)
● Unemployment taxes
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CHAPTER
12
SLIDE 40
Checkpoint 
● What is the purpose of the payroll
system?
● 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.
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Principles of Business, 8e
CHAPTER
12
SLIDE 41
PREPARING A PAYROLL
● Payroll records
● Preparing paychecks
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Principles of Business, 8e
CHAPTER
SAMPLE EARNINGS REPORT
AND DIRECT DEPOSIT RECEIPT
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12
SLIDE 42
Principles of Business, 8e
CHAPTER
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CHAPTER
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CHAPTER
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CHAPTER
12
SLIDE 46
Checkpoint 
● What is the difference between a payroll
record and an earnings report?
● A payroll record is documentation used to
process earnings payments and record
each employee’s pay history.
● An earnings report contains information for
the current pay period as well as the
cumulative amounts for the year.
© 2012 Cengage Learning. All Rights Reserved.
Principles of Business, 8e
12-4 Financial
Decision-Making
Goal 1 Recognize important financial
information managers use to make
decisions.
Goal 2 Identify the steps in making financial
decisions in business.
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SLIDE 47
CHAPTER
12
SLIDE 48
KEY TERMS
● financial performance ratios
● discrepancies
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Principles of Business, 8e
CHAPTER
USING FINANCIAL
INFORMATION
12
SLIDE 49
● Important financial information
● Understanding financial performance
ratios
● Current ratio (assets vs. liabilities)
● Debt to equity ratio (reliance on debt to run
company)
● Return on equity ratio (money made on
investment)
● Net income ratio (profit per $1 of revenue)
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Principles of Business, 8e
CHAPTER
FINANCIAL PERFORMANCE
RATIOS
Current Ratio
Debt to Equity Ratio
Return on Equity Ratio
Net Income Ratio
=
=
=
=
12
SLIDE 50
Current Assets
Current Liabilities
Total Liabilities
Owner’s Equity
Net Profit
Owner’s Equity
Total Sales
Net Income
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Checkpoint 
12
SLIDE 53
● Identify four important financial
performance ratios used by managers to
determine how well the business is
performing.
● Current ratio
● Debt to equity ratio
● Return on equity ratio
● Net income ratio
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CHAPTER
MAKING FINANCIAL
DECISIONS
12
SLIDE 56
● Prepare a budget
● Look for discrepancies between actual and
budgeted performance
● Make needed adjustments
● Adjustments to revenue and/or expenses
● Last resort: change budget to match actual
amounts
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12
SLIDE 58
Checkpoint 
● List the three steps in financial decisionmaking.
● Preparing a budget.
● Using the budget as a guide to the
operation of the business.
● Making needed adjustments to bring
performance in line with the budget.
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CHAPTER
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Principles of Business, 8e
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12
Principles of Business, 8e
HOMEWORK
• 12-4 Assessment: 1-4, 6&7
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SLIDE 61