4.01 Understand financial planning.

 Assets: what the company owns  Liabilities: what the company owes  Owner’s Equity: value of owner’s investment in the business  Financial Statements: reports that sum up the performance of the business ◦ Balance sheets ◦ Income statements

 Balance Sheet: shows assets, liabilities, and owner’s equity for a specific date ◦ Usually done every 6 months or yearly

 Assets: anything of value owned by the business ◦ Current: cash and items readily converted to cash (inventory, accounts receivable) ◦ Long-Term (aka “fixed”): lifespan of more than one year (land, buildings, equipment, technology)  Liabilities: amounts owed by the business to others ◦ Current: will be paid within 1 year (short-term loans, inventory, supplies, and inexpensive equipment) ◦ Long-Term: debts that will continue for more than 1 year (buildings, land, expensive equipment)

 Income Statement: report of revenue, expenses and net income or loss from operations for a specific period of time ◦ Often for a 6 month period or 1 year

 Revenue: all income that is received by the business during the time period ◦ Sources: sale of products, interest earned on investments  Expenses: all the costs incurred by the business during the time period ◦ Ex: operations, purchase of equipment, inventory, supplies, as well as payroll and taxes  Net Income: when revenue > expenses  Net Loss: when expenses > revenue

 Compare your business performance from year- to-year  Compare your business to similar businesses to assess your ability to compete  When assets are rising you have the ability to invest in new products, buildings and equipment  When liabilities are increasing or when expenses go up while revenue goes down, the business needs to evaluate why the situation is occurring.