3.06 Manage financial

resources to ensure solvency

3.00 3.00 Understand product/service management, Understand product/service management, emotional intelligence, financial analysis, emotional intelligence, financial analysis,

selling and customer relations.selling and customer relations.

Essential Question

What are budgets in business and how are they used?

Vocabulary:Budgets – a financial forecast that projects out for a set time into the future

You could set up a budget so you could save for a car and make the monthly payments

Warm-up

What is a financially based long term goal you would like to reach?

Explain why budgets are about money

Three M’s: Money – how much and when? Maps – an outline of where money will be spent during the

budget period Management – allows expenditures to be monitored by

the managers to ensure the goals will be reached

Money: Budgets use $’s to reach a company’s goals Looks at the past to determine how money was spent and

earned Looks into the future in planning for goals that are specific

and measurable

Two Major Categories: Income – money earned by selling goods/services,

investments Expense – money spent by a business on things such as

utilities, payroll, advertising, equipment, taxes, and loans

Think - Share

Why is it important to review how money was spent in the past?

Is there a time when you saved up for a large purchase? Did you write up a plan? Why or Why not?

Why would a business want to follow a budget?

How is a budget useful to a business manager?

Describe how budgets are financial maps Company’s goal = Destination Company’s strategies = Directions Budget = Map

The map or budget shows where the company is and where it headed.

Provides a visual of the route to achieving the goal.

Businesses are able to see where things are off course and then adjust to get back on track.

Identify reasons that budgets are management tools Managers can make informed decisions about

the company’s strategies for reaching the goals. Managers communication with employees more

precisely. Managers make better day to day decisions. Managers make plans for using the profit.

Managers can make realistic, accurate and useful decisions with the information in an up to date budget.

Monitoring the budget allows managers to see what might need to be adjusted to reach the goals as time goes on. Remember that competitors and even customers

can make changes after a budget has been built.

Explain the importance of budgets to business success

To create physical records. A business is able to keep records that are accurate,

accessible and meaningful. Serve as the framework for a company’s annual financial

reports.

To organize business activities. A good business plan includes a detailed budget to

account for all financial activities. This decreases the potential for problems later.

To guide operational decisions When to buy, what to buy, how much to pay, how much

inventory, and how many employees These decisions impact the success or failure of a

business.

Explain the importance of budgets to business success

To evaluate a business’ long and short term performance. Managers look at previous budgets to determine growth

and/or performance. Provides benchmarks to measure changes. Variances are the difference between a budgeted amount

and an actual amount. Show where they are on target and where they are not.

To protect against financial crisis. Includes a plan for savings Just in case plan for paying expenses that are due to

unforeseen problems

Think-Share

What might happen to a business that does not keep a physical record of money coming in and money spent?

What would a business manager benefit from comparing budgeted and actual dollar amounts?

Identify ways that businesses can create budgets

Categories Income

Sales Cash Credit

Income from Investments

Expenses Rent Insurance Utilities Supplies Wages

Once the categories are decided, management allocates dollar amounts to each one.

Identify ways that businesses can create budgets

Allocation of Dollar Amounts Previous year’s budget

make adjustments as needed due to changes anticipated this year

Previous year’s budget with an across the board percentage increase Based on inflation or on projected growth

Zero Based budgeting Each category begins with zero and is

determined by need rather than previous figures.

Identify ways that businesses can create budgets

Time Period Fiscal year

Quarterly (every 3 months) Monthly Rolling or continuous budgets – beginning with a 12

month budget, a new month is added as each month goes by. Advantages:

Year long plan in place Major annual budgeting efforts are avoided More flexible Encourages managers to assess activities and adjust

figures more frequently.

Distinguish between general and specialized budgets

General budgets look at the company as a whole and address standard business items

A Master budget – often one large budget general budget that is the summation of the all the department and special budgets

Businesses that use this are retailers and manufacturers. Retailer – sales, purchases selling expense, general and

administrative expense, and cash Manufacturer – raw materials, plant/equipment,

transportation

Distinguish between general and specialized budgets Cont.

Specialized budgets usually focus on just one department or project

Specialized budgets are interrelated in that they depend on one another for estimates of future activity

The budgeting process begins with sales forecasts. Departments can estimate how much they have to spend to support the forecast

Think-Share

Why would it be helpful to compare current month figures with the same month’s figures of a previous year?

Describe characteristics of a successful budget Well planned

Integrate all the specialized budgets, so that they work together and are in agreement.

Realistic Avoid making guess if at all possible. Use past records if available. Get information from trade associations, the local Chamber of

Commerce, and the SBA. Flexible

Budget figures may have to be adjusted due to economic trends, changes in competition, population shifts, and weather conditions.

Clearly Communicated All employees need to see the budget to know his/her effect on

company profits. Employees may become more cost-conscious.

Evaluated Assess the company’s progress in achieving its goals.

Think-Share

Why should budgets be flexible? What would happen in a business if

employees were not aware of how they affect the budget?

Activities Complete:

Individual What Does Your Budget Do? LAP Handout More Music. . . More Money LAP Handout

Groups In groups of 4, research the following websites reviewing

the goods/service that each company provides. Select one business and develop 10 hypothetical expense categories, including ones that are unique to that particular kind of business. www.citibank.com www.ford.com www.nationalzoo.si.edu

Believe Your Budget Simulation

Resource

Money Tracks Financial Analysis LAP 3MBA Research 2006