Chapter 12 Financial Management

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

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

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

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

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

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

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

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.

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.

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

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

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

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

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