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Part 5: Basic Financial Part 5: Basic Financial Planning and ControlPlanning and Control

14.14.Basic Financial PlanningBasic Financial Planning15.15.Budgeting and Controlling Budgeting and Controlling

TaxesTaxes16.16.Using Computer Technology Using Computer Technology

in Small Businessesin Small Businesses17.17.Risk Management, Insurance, Risk Management, Insurance,

and Crime Preventionand Crime Prevention

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Chapter 14Chapter 14

Basic Basic Financial Financial PlanningPlanning

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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BasicFinancial Planning

Need For Profit PlanningNeed For Profit PlanningChanges In Company Changes In Company

Financial PositionFinancial PositionFinancial StructureFinancial StructurePlanning For ProfitPlanning For Profit

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Nick Rowe/Getty Images

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14 - 4McGraw-Hill/Irwin

Profit PlanningProfit Planning“…“…a series of a series of

prescribed steps to prescribed steps to be taken to ensure be taken to ensure that a profit will be that a profit will be

made.”made.”

Profit planning must Profit planning must precedeprecede other activities other activities

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Drop InDrop InFinancial PositionFinancial Position

Uncollectible A/RUncollectible A/RToo Many AssetsToo Many Assets

Negative Cash FlowNegative Cash Flow

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BenchmarkingBenchmarking

“…“…setting up standards setting up standards (for reference) and (for reference) and

then measuring then measuring performance against performance against

them.”them.”

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Accounting RecordsAccounting Records

“…“…records of a firm’s records of a firm’s financial position financial position

that reflect any that reflect any changes in that changes in that

position.”position.”

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Accounting EquationAccounting Equation

Owners’ Equity+Liabilities

Total Assets

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AssetsAssets

“…“…things a things a business business owns.”owns.”

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LiabilitiesLiabilities

“…“…the financial the financial obligations of a obligations of a

business.”business.”

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Owner’s EquityOwner’s Equity

“…“…owners’ share of (or owners’ share of (or net worth in) the net worth in) the

business after liabilities business after liabilities are subtracted from are subtracted from

assets.”assets.”

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Balance SheetBalance Sheet

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Current AssetsCurrent AssetsCashCashAccounts ReceivableAccounts ReceivableInventoryInventoryShort-Term Short-Term

InvestmentsInvestmentsPrepaid ExpensesPrepaid Expenses

PhotoLink/Getty Images

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Total LiabilitiesTotal Liabilities

Current LiabilitiesCurrent LiabilitiesAccounts PayableAccounts PayableNotes PayableNotes Payable

Long-Term LiabilitiesLong-Term LiabilitiesLong-Term Loans (non-Long-Term Loans (non-

mortgage)mortgage)Mortgage PayableMortgage Payable

Royalty-Free/CORBIS

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Owners’ EquityOwners’ Equity

+Capital StockCapital Stock

+Retained Retained EarningsEarnings

(c) Duncan Smith/Getty Images

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Income StatementIncome Statement

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RevenueRevenue

CashCash

Accounts Accounts Receivable Receivable

Royalty-Free/CORBIS

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ExpensesExpensesMaterialsMaterialsSalariesSalariesUtilitiesUtilitiesDepreciationDepreciationRentRentBuilding Building

ServicesServicesInsuranceInsuranceInterestInterest

Office & Office & SuppliesSupplies

Sales Sales PromotionPromotion

Taxes & Taxes & LicensesLicenses

MaintenanceMaintenanceDeliveryDeliveryMiscellaneousMiscellaneous

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Profit (Income)Profit (Income)

“…“…the difference the difference between revenue between revenue

earned and earned and expenses incurred.”expenses incurred.”

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Well-ManagedWell-ManagedSmall BusinessSmall Business

LiquidLiquidBalance Sheet Balance Sheet

ImportantImportantStability vs. GrowthStability vs. GrowthLong-Range PlanningLong-Range Planning

Royalty-Free/CORBIS

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Initial StepsInitial StepsIn Profit PlanningIn Profit Planning

1)1) Establish GoalEstablish Goal2)2) Determine Volume Determine Volume

For Profit For Profit3)3) Estimate ExpensesEstimate Expenses4)4) Determine Estimated Determine Estimated

Profit Profit5)5) Compare Estimate Compare Estimate

With Goal With GoalRyan McVay/Getty Images

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Action StepsAction StepsIn Profit PlanningIn Profit Planning

6)6) List AlternativesList Alternatives

7)7) Determine Determine Expenses Expenses

8)8) Determine ProfitsDetermine Profits

9)9) Analyze AlternativesAnalyze Alternatives

10)10)Select & ImplementSelect & Implement

Lawrence Lawry/Getty Images

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Need For RealismNeed For Realismin Profit Planningin Profit Planning

UncertaintUncertaintyy

PlanningPlanning==

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Planning For ProfitPlanning For Profit1.1. Establish Profit GoalEstablish Profit Goal $ 52,000$ 52,0002.2. Determine Sales VolumeDetermine Sales Volume 530,000 530,0003.3. Estimate ExpensesEstimate Expenses 490,000490,0004.4. Determine Profit Est. $ 40,000Determine Profit Est. $ 40,0005.5. Compare Profit To GoalCompare Profit To Goal -$12,000 -$12,0006.6. List AlternativesList Alternatives

a.a. Change Sales VolumeChange Sales Volumeb.b. Decrease ExpensesDecrease Expensesc.c. Add Products/ServicesAdd Products/Servicesd.d. SubcontractSubcontract

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Action StepsAction StepsIn Profit PlanIn Profit Plan

7.7. Expenses Vary With VolumeExpenses Vary With Volume SalesSales ExpensesExpenses

a.a. $364,000$364,000 $364,000$364,000b.b. $530,000$530,000 $490,000$490,000c.c. $700,000$700,000 $618,700$618,700

8.8. VolumeVolume ProfitProfita.a. $364,000$364,000 $ -0-$ -0-b.b. $530,000$530,000 $ 40,000$ 40,000c.c. $700,000$700,000 $ 81,300$ 81,300

9.9. Analyze AlternativesAnalyze Alternatives10.10.Select/Implement PlanSelect/Implement Plan

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Breakeven ChartBreakeven Chart

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Pro FormaPro FormaIncome StatementIncome Statement