12-1 Financial Planning 12-2 Financial Records and Financial Statements 12-3 Payroll Management

1. 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

2. 12-1 Financial Planning 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.

3. KEY TERMS • revenue • expenses • budget • start-up budget • operating budget • cash budget

4. FINANCIAL PLANNING • Beginning a business • Ongoing operations • Business expansion

5. 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

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

7. DEVELOPING BUSINESS BUDGETS • Sources of budget information • Budget preparation

8. 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

9. TYPES OF BUDGETS • Start-up budget • Operating budget • Cash budget

10. 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.

11. 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.

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

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

14. 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.

15. FINANCIAL STATEMENTS • The balance sheet • The income statement

16. BALANCE SHEET

17. INCOME STATEMENT

18. 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.

19. 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.

20. KEY TERMS • payroll • payroll record • direct deposit

21. PAYROLL SYSTEMS • Income taxes • Social Security and Medicare • Unemployment taxes

22. 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.

23. PREPARING A PAYROLL • Payroll records • Preparing paychecks

24. SAMPLE EARNINGS REPORT AND DIRECT DEPOSIT RECEIPT

25. 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.

26. 12-4 FinancialDecision-Making Goal 1 Recognize important financial information managers use to make decisions. Goal 2 Identify the steps in making financial decisions in business.

27. KEY TERMS • financial performance ratios • discrepancies

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

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

30. 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

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

32. 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.