FINANCIAL PLANNING Notes

Financial Planning in Business Financial questions never go away… Beginning a Business Where will you get the money? How much do you need? Ongoing Operations Revenue – all income a company receives (sales, accounts receivable, etc.) Expenses – the costs of operating (bills, supplies, wages, etc.) Business Expansion Research to determine new products or locations New factories or equipment Additional trained employees

Budgeting BUDGET – detailed plans for the financial needs of individuals, families, and businesses. A business budget has two purposes: 1. Anticipate sources and amounts of income 2. Predict the types and amounts of expenses for a specific business activity

The Budget Process Prepare List List all income and expenses you can expect Gather Information Accurate information from business records and other sources for each type of income and expense Create Budget Calculate each income and expense as net income or a loss Explain Budget People who make financial decisions should be informed

3 Essential Types of Budgets Start-up Budget Type 1 plans income and expenses from beginning until it becomes profitable Includes buildings, supplies, equipment, new employees, utilities, advertising. Operating Budget Type 2 Describes the financial plan for ongoing operations 3, 6, or 12 month terms Planner reviews prior budgets to estimate income and expenses Cash Budget Type 3 An estimate of actual money received and paid out for a specific period Usually 1 week or 1 month

Basic Financial Equation Every business is guided by the Basic Financial Equation RevenueExpenses Profit (+) Loss (-)

Example If a business has annual revenue of $5 million and expenses of $3 million, did that company make a profit or suffer a loss? $5 million $3 million $2 million Profit (+)