12 Financial Management 12-1 Financial Planning C H A P T E R 12 Financial Management 12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management 12-4 Financial Decision-Making

CHAPTER 12 12-1 Financial Planning 4/7/2017 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.

KEY TERMS revenue expenses budget start-up budget operating budget cash budget

FINANCIAL PLANNING Beginning a business Ongoing operations Business expansion

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

Checkpoint  What is the basic financial equation for businesses? The basic financial equation for businesses is revenue minus expenses equals profit or loss.

DEVELOPING BUSINESS BUDGETS Sources of budget information Budget preparation

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

TYPES OF BUDGETS Start-up budget Operating budget Cash budget

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.

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.

KEY TERMS financial records assets liabilities owner’s equity balance sheet income statement

FINANCIAL RECORDS Types of records Maintaining financial records Asset records Depreciation records Inventory records Records of accounts Cash records Payroll records Tax records Maintaining financial records

Checkpoint  How has the process of maintaining financial records been affected by technology? 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.

FINANCIAL STATEMENTS The balance sheet The income statement

BALANCE SHEET

INCOME STATEMENT

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.

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.

KEY TERMS payroll payroll record direct deposit

PAYROLL SYSTEMS Income taxes Social Security and Medicare Unemployment taxes

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.

PREPARING A PAYROLL Payroll records Preparing paychecks

SAMPLE EARNINGS REPORT AND DIRECT DEPOSIT RECEIPT

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.

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.

KEY TERMS financial performance ratios discrepancies

USING FINANCIAL INFORMATION Important financial information Understanding financial performance ratios Current ratio Debt to equity ratio Return on equity ratio Net income ratio

FINANCIAL PERFORMANCE RATIOS Current Liabilities Current Assets = Current Ratio Owner’s Equity Total Liabilities = Debt to Equity Ratio Net Profit = Return on Equity Ratio Owner’s Equity Net Income Total Sales = Net Income Ratio

Checkpoint  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

MAKING FINANCIAL DECISIONS Prepare a budget Look for discrepancies between actual and budgeted performance Make needed adjustments

Checkpoint  List the three steps in financial decision-making. 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.