1. Managing Business Finances
Chapter 17
Business Principles B

2. How will I manage the finances?
If I open my own restaurant, how much money will I need?
Will I need to borrow money?
Will my expenses be more than my profits?
How many employees will I need?
How will I manage the finances?

3. Financial Management
One reason small businesses fail is they do not manage their finances properly.
A financial plan is an important part of a business plan.
Businesses must manage the money they take in and pay out to become profitable and stay in business.

4. Financial Planning
Financial Plan—an outline of your expenses, needs, and goals, and how you expect to meet them
Business Budget – a detailed plan for meeting the financial needs of the business
Anticipating sources and amounts of income
Predicting the types and amounts of expenses

5. Financial Planning, con’t.
Asset—property or items of value that your business owns
Cash
Equipment
Buildings
Supplies
Inventory
Land
Assignment: List your own personal assets (belongings) and estimate their total dollar value.

6. Purchasing Assets Determine method to use to make purchases
Cash?
Currency
Checking account
Borrow?
Credit plan
Loan
Business owners must be careful to make wise decisions about needs verses wants

7. Accounting requirements
Recognizing the financial records you need to keep
Financial forecast—def. an estimate of what business conditions will be like in the future
Cash or savings on hand is essential—the first year may be operating at a loss
Plan for possible negative changes in the economy
Up-to-date financial information
Make informed, reasonable decisions
Analyzing financial statements
Controlling cash
Paying debts
Thousands of small businesses close each year because of poor financial management.

8. Accounting
Def.—the systematic process of recording and reporting the financial position of a business
Efficient operations
Profitable operations
Financial manager—def. the person in charge of a business’s financial planning, funding, and accounting
Manage the funds
Make payments on time
Make the payroll on time
Pay operating expenses

9. Accounting, con’t. Financial manager must also:
Find sources for additional funds
Loans
Investors
Planning long-range financial goals
Plans for five years
Open a chain
Add to the dining space
Expand the kitchen

10. Budgeting
Budget – a written plan for what you expect your income and expenses to be over a specified period of time
Helps predict money needed
Helps control spending
Well-prepared budget helps avoid costly financial mistakes
Lets managers know how the business is doing in terms of meeting its financial goals

11. Types of Business Budgets
Start-Up Budget – used to plan income and expenses from the beginning of a new business or major business expansion until it becomes profitable
Purchase of buildings and equipment
Material, supplies, licenses
Advertising, hiring, payroll
Cash Budget – an estimate of the money expected to be received and paid out over a specific period of time
Lets the manager know when to borrow
Money must always be on hand to pay expenses

12. Budgeting, con’t.
Operating Budget – financial plan for the day-to-day operations of the business
Covers a specific period of time (ex. 6 months, or 1 year)
Follows this equation:
Revenue – Expenses = Profit (or Loss)
All anticipated revenues and expenses are listed
Planned net profit or loss is shown

13. Financial Records Show the financial performance of the business
Records of the actual transactions that occur day-to-day
Profits and losses are calculated for specific periods of time
Might enable you to borrow more money, or expand business
Investors and creditors want to see you financial accounts occasionally
Accounting period can be set by the business
One month
Three months (quarterly)
One year (annually)
One year is often referred to as the fiscal year

14. Financial Statements
Used to prepare 2 important financial statements – Income Statement, Balance Sheet
Asset records name the buildings and equipment owned by the business, their original and current value and amount owed
Depreciation records identify the amount that assets have decreased in value due to age and use
Inventory records identify the type and number of products on hand for sale
Payroll records contain information on all employees’ compensation and benefits
Cash records list all cash received and spent
Records of accounts identify purchases made using credit
Tax records show all taxes collected, owed, and paid

15. Financial Statements Accounting records Accounting Equation
Keep track of money coming in and going out
Provide a system for recording, classifying, summarizing, and interpreting financial data
Every sale, payment, or purchase is a transaction
Liability--any amount your business owes
if you buy supplies on credit, the amount you owe is a liability
Debts you owe to banks or investors are also claims against the assets of your business
The owner’s claim to his assets is called Owner’s Equity
Accounting Equation
Assets = Liabilities + Owner’s Equity
Assets are always on the left side of the equation
Liabilities and Owner’s Equity are always on the right side

16. Financial Statements
Income Statement—A financial statement that shows revenues, expenses, and net income (profit) or loss for a period of time
Revenues-Expenses= Profit if positive, Loss if negative
Usually covers a period of 6 months or a year but may be shorter
End-of-year statement shows how the business did for the entire year
Basis for payment of taxes and decision-making

17. Income Statement Definitions
Income (Revenue) – the money a business takes in or receives
Most revenue or income comes from sales of products or services
Credit – many sales not paid for 30 days or longer (is this still true?)
Statement of Cash Flow – shows actual cash a business receives and has available on a daily basis
Expenses – operating costs of the business
Employee wages, benefits, advertising, rent, utilities, supplies, etc.

18. Income Statement
Calculate the net profit or loss for the month for Galaxy Comic Books: (use equation)
Cash sales - $3560
Charge sales - $1240
Other revenue - $165
Salaries - $2450
Advertising - $200
Rent - $550
Supplies - $120

19. Balance Sheet
A financial statement that lists a business’ assets (what a company owns) and liabilities (what a company owes)
Shows what the business is worth on a particular date, usually the end of a year
Shows owners equity (value of the owner’s investment in the business (also called net worth)
Owner’s equity equation:
Assets = Liabilities + Owner’s Equity

20. Overland Design Company Income Statement For the Year Ended December 31, 2012
Revenue
Cash Sales $ 38,200
Charge Sales ,600
Other Revenue 12,900
TOTAL REVENUE $231,700
Expenses
Salaries and Wages $ 70,800
Marketing ,250
Administrative Costs ,900
Materials and Supplies ,800
Other Expenses ,100
TOTAL EXPENSES ,850
Net Income (REVENUE – EXPENSES) $ 62,850

21. Ex. Schribner’s Automotive, Inc.
In a balance sheet, both sides of the statement must be in balance
Right-hand side shows the total of liabilities and owner’s equity to show that they equal the value of the assets on the left-hand side
Ex. Schribner’s Automotive, Inc.
Balance Sheet
December 31, 2015
ASSETS
LIABILITIES
Cash
$35,850
Accounts Payable
$103,300
Investments
40,000
Payroll Taxes
22,000
Accounts Receivable
42,375
Mortgage
126,800
Buildings/Equipment
370,000
TOTAL LIABITIES
$252,100
Owner’s Equity
$236,125
Total Assets
$488,225
Total Liabilities and Owner’s Equity