Budgeting and Controlling Budgeting and Controlling Operations and TaxesOperations and Taxes

ControlControl

Financial Planning Financial Planning Operating System Operating System StepsSteps

Set performance standardsSet performance standards Set in advance; must be acceptable to employeesSet in advance; must be acceptable to employees

Measure actual performanceMeasure actual performance Compare actual performance with standardsCompare actual performance with standards Are deviations excessive?Are deviations excessive? Determine corrective actionDetermine corrective action

Characteristics of effective Control SystemsCharacteristics of effective Control Systems

Using Budgets to Communicate Using Budgets to Communicate StandardsStandards

What is a Budget?What is a Budget? TypesTypes

CapitalCapital Buildings and equipmentBuildings and equipment

OperatingOperating Sales budgetSales budget

ProductionProduction PersonnelPersonnel

Cash flow budgetCash flow budget Daily/WeeklyDaily/Weekly MonthlyMonthly

Budgetary ControlBudgetary Control

Budget “needs teeth” to be effectiveBudget “needs teeth” to be effective Budgetary ControlBudgetary Control

Credit extensionCredit extension Monitor costsMonitor costs

AuditingAuditing Financial auditingFinancial auditing Internal auditingInternal auditing Operations auditingOperations auditing

Obtaining & Using Performance Obtaining & Using Performance Information for ControlInformation for Control

Obtaining the InformationObtaining the Information ObservationObservation Oral reportsOral reports Written reportsWritten reports

Comparing Actual Performance v. Comparing Actual Performance v. StandardsStandards

Evaluating Financial PositionEvaluating Financial Position

RatiosRatios ComparisonsComparisons

Current RatioCurrent Ratio Return on EquityReturn on Equity Return on SalesReturn on Sales Net Profits / Net SalesNet Profits / Net Sales

Evaluating Financial PositionEvaluating Financial Position

Can Business Pay Debts?Can Business Pay Debts? Current ratioCurrent ratio Acid test (quick ratio)Acid test (quick ratio) Working capitalWorking capital

How Good are Business’s Assets?How Good are Business’s Assets? Collection PeriodCollection Period Turnover RateTurnover Rate Net sales/ Working CapitalNet sales/ Working Capital

Evaluating Financial PositionEvaluating Financial Position

Is Equity Satisfactory?Is Equity Satisfactory? Retained EarningsRetained Earnings

Two functionsTwo functions LT Liabilities / Working CapitalLT Liabilities / Working Capital Debt / Owner’s EquityDebt / Owner’s Equity Current Liabilities/ Owner’s EquityCurrent Liabilities/ Owner’s Equity Fixed Assets/ Owner’s EquityFixed Assets/ Owner’s Equity

Tax SystemTax System

Who pays?Who pays? Direct v. indirect taxesDirect v. indirect taxes

How taxes affect small businessesHow taxes affect small businesses Tax on corporate profitsTax on corporate profits Taxes on employeesTaxes on employees Owners’ personal salaries are taxedOwners’ personal salaries are taxed Taxes on ownership transferTaxes on ownership transfer Taxes affect organizational structureTaxes affect organizational structure Administrative costsAdministrative costs

Taxes Imposed on Taxes Imposed on BusinessesBusinesses

Taxes and Fees to OperateTaxes and Fees to Operate Permits, licensesPermits, licenses

Excise and Intangible Property TaxesExcise and Intangible Property Taxes Excise taxesExcise taxes Intangible property taxesIntangible property taxes

State & Local Sales & Use TaxesState & Local Sales & Use Taxes Sales taxSales tax

ExceptionsExceptions Use TaxesUse Taxes

Income TaxesIncome Taxes

Business Structure v. TaxesBusiness Structure v. Taxes

Proprietorship & PartnershipProprietorship & Partnership CorporationsCorporations S-CorporationsS-Corporations Limited Liability CompanyLimited Liability Company ESOPESOP

Federal Corporate Income Federal Corporate Income TaxesTaxes

What is our tax rate?What is our tax rate? Depends onDepends on

What is taxable income?What is taxable income? Revenues- ExpendituresRevenues- Expenditures

What are deductible expenses?What are deductible expenses? InventoryInventory

FIFO, LIFO, average costFIFO, LIFO, average cost

Federal Corporate Income Federal Corporate Income TaxesTaxes

What are deductible expenses?What are deductible expenses? InventoryInventory

FIFO, LIFO, average costFIFO, LIFO, average cost Interest paymentsInterest payments Business lunches, entertainment, and Business lunches, entertainment, and

traveltravel Automobile, home, and computerAutomobile, home, and computer Be careful!!!Be careful!!!

Employment-Related TaxesEmployment-Related Taxes

Income TaxesIncome Taxes WithholdingWithholding

Social Security/MedicareSocial Security/Medicare Workers’ CompensationWorkers’ Compensation

Personal Taxes Paid by Personal Taxes Paid by OwnerOwner

Salaries and BonusesSalaries and Bonuses DividendsDividends Some expenses are tax-free to Some expenses are tax-free to

employeesemployees Some benefits are not taxed until Some benefits are not taxed until

receivedreceived

Sale of BusinessSale of Business

AgreementsAgreements Three partsThree parts Double taxationDouble taxation Money v. stockMoney v. stock

Record Keeping and Tax Record Keeping and Tax ReportingReporting

Two Reasons to Keep Business RecordsTwo Reasons to Keep Business Records

How long should you keep records?How long should you keep records?

RecordsRecords IncomeIncome ExpensesExpenses

IndirectIndirect AssetsAssets

Reporting TaxesReporting Taxes

Credit ManagementCredit Management

Methods of PaymentMethods of Payment CashCash ChecksChecks CreditCredit

Use own credit lineUse own credit line Revolving charge accountsRevolving charge accounts Installment payment planInstallment payment plan Major credit card companies?Major credit card companies?

Debit cardsDebit cards

Credit ManagementCredit Management

Setting Credit PoliciesSetting Credit Policies Three policiesThree policies

Carrying Out PoliciesCarrying Out Policies Classifying Credit RisksClassifying Credit Risks

Good Good FairFair WeakWeak

Checking Customers’ CreditworthinessChecking Customers’ Creditworthiness Establishing Collection ProceduresEstablishing Collection Procedures