CHAPTER 16Introduction to Financial Management for Business

SECTION 16.1

A Plan for Business

What You’ll Learn

How to identify the three parts of a business plan

How to explain the importance of financial management for business

How to describe the aspects of a financial plan

Why It’s Important

When you own or operate a business, most of your decisions are based on financial information.

For a business to thrive, a sound business plan and an understanding of financial management are essential.

The Environment of Business When you hear the word business, what

do you think of? All are part of the free enterprise

system, which is when people are free to choose what they buy, what they produce and sell, and where they work.

The Environment of Business One of the main measurements of success for

a business is the amount of profit it earns. Profit is the amount of money earned over

and above the amount spent to keep the business operating.

People are motivated by profit to take the risk of starting a business

To survive businesses must: operate at a profit and attract and keep individuals who are willing to take the risk of running the business

Creating a Business Plan

Business plan – a written outline of a new business venture that describes all aspects of the business

Creating a Business Plan

1. Strategic plan – outlines your business goals and the steps you’ll take to achieve them

2. Marketing plan – outlines how you’ll promote your business to increase customers and sales to make a profit

3. Financial plan – outlines how you’ll get money to create and operate your business and how you will maintain your financial operations and business records

Strategic Plan Need to follow three steps…

1. Set goals. Goals for a business have the same guidelines as the goals you’ll establish for your personal finances. They should be realistic, specific, have a clear time frame, and help you decide what type of action to take. Should have common objectives: increase sales, add new customers, or updating equipment.

2. Identify steps to achieve your goals. First, identify your short-term and long-term goals. Then create a plan that consists of specific steps toward each goal.

3. Put the strategic plan in action. After setting goals and identifying steps, you must actually DO what you have set out to do.

Marketing Plan

To prepare a marketing plan, you first need to research the existing market. By seeing what’s out there, you can better develop an effective marketing plan. This plan will become your road map for reaching new customers and expanding your business.

Areas you should identify and analyze include the following: Competition Services offered Current area pricing and advertising Potential customers

Financial Plan

Sound financial decisions provide the opportunity for: Sales to rise Expenses to fall Profits to increase Assets to be acquired Liabilities to be paid Credit to expand Customers to increase New products to be developed

Financial Plan

A financial plan addresses three aspects of operating your business:

1. Identifying needed assets - property or items of value owned by the business, might include:

Products to sell or machines, supplies, office equipment, and transportation necessary for operations

2. Purchasing assets – how will your business pay for the things it needs, might include:

Cash that you have or borrowing the money from a bank or credit union

3. Recording and reporting business finances (most important aspect of a business) – daily financial operations, includes:

recording, summarizing, reporting, and analyzing

Section 16.1 Assessment Questions On your own paper, write your name,

today’s date, Period, and Assessment 16.1. From page 534, answer the following questions using complete sentences: Check Your Understanding #2 Think Critically #4 Solving Money Problems #6

SECTION 16.2

Financial Management in Business

What You’ll Learn

How to recognize the importance of accounting in financial management

How to discuss the primary functions of accounting

Why It’s Important

To ensure effective financial management, knowledge and skills in accounting are essential.

Aspects of Financial Management Financial management practices are

both the glue that holds a business together and the oil that helps it run smoothly

Accounting: The Backbone of Financial Management

Accounting is the systematic process of recording and reporting the financial position of a business.

The financial position depends on the transactions that occur in the daily operation of the business.

A transaction is any activity that has an effect on the financial situation of a business. Buying supplies, selling merchandise, buying a

photocopier, or paying utility bills…etc

Accounting: The Backbone of Financial Management continued

Accounting is often referred to as the “language of business.” Words like assets, liabilities, expenses, revenue, and

inventory are commonplace but they are all accounting terms.

Business owners, bookkeepers, and accountants must use a standard set of guidelines…generally accepted accounting principles (GAAP) If companies reported their finances in different ways,

no one could compare companies…Which one is more stable? Which one is growing the fastest? Which one had the highest percentage profit?

Accounting: The Backbone of Financial Management continued

Today, computer software programs are used to handle a lot of the accounting work for most businesses…owners and managers have more time for analyzing their finances and planning for the future.

Some of the most essential functions of accounting include:1. Budgeting2. Inventory3. Payroll4. Cash flow5. Investments

Budget

A budget for a business is a formal, written statement of expected income and expenses for a future period of time.

To be of value, a budget should be compared periodically with actual income and expenses.

Inventory

Merchandise is the goods you buy with the intent to resell to customers.

The merchandise you have on hand is referred to as inventory.

By tracking inventory businesses know:1. How much merchandise is sold2. What merchandise is selling well3. When to reorder merchandise4. Which merchandise should not be

reordered

Inventory

The wrong level of inventory can be costly for a business: Too little inventory means that the business

may not be able to satisfy its customers’ wants.

If inventory is too high, it means that too much money has been spent on inventory and isn’t available for other things.

Both are signs of poor management Most stores use some form of computer

program to monitor their inventory

Payroll

While merchandise is usually the largest asset of a business, payroll is usually the largest expense.

Because payroll involves so much cash, it is regulated by state and federal laws and must be prepared according to generally accepted accounting principles. Most companies use computers to process

payroll checks, complete payroll reports, and examine payroll information

Payroll continued

Efficient payroll management involves two important activities:1. You must determine whether you have the

proper number of employees working at the proper times.

Too many employees, or employees working at the wrong times, means you are paying more in wages and salaries than you should

If you don’t have enough employees or are understaffed at certain times, your business risks losing sales

Payroll continued

Efficient payroll management involves two important activities:2. Generally accepted accounting principles

must be used in preparing payrolls. Pay checks must be issued on time and all payroll taxes and voluntary deductions must be paid.

All payroll records should also be available for managers and owners to evaluate.

Cash Flow

Every person and business needs cash…available cash often determines what a business can and can’t do.

Personal “cash flow” is the money that actually goes in an out of your pockets.

For a business, cash flow is the amount of cash that is available at any given time. Money goes in. Money goes out. A business’s cash flow statement is very similar to a personal cash flow statement.

Cash Flow continued

When a business spends more money than it receives, it experiences a condition known as a negative cash flow, also called a cash crunch.

In a business’s statement of cash flow, first you add together sources of income, or cash receipts. Then you add together payments or expenses. Finally you subtract payments from receipts to find net cash flows.

Does the following business have a positive or negative cash flow? How do you know?

Cash Flow continued

Johnson & Son Heating and AirStatement of Cash Flow

For the Year Ended December 31, 20—

Cash Flows from Operating ActivitiesCash Receipts from:

Sales to Customers $95, 877.00Interest Income 3,200.00

Total Cash Receipts from Operating Activities $99,077.00

Cash Payments for:Purchases of Merchandise $(63,443.00)Operating Expenses (12,350.00)

Total Cash Payments for Operating Expenses (75,793.00)Net Cash Flows from Operating Activities $23,284.00

Investments

Successful businesses invest for the future. As profits increase, money should be set aside or invested for future business needs. The reserve cash may be needed to purchase new equipment, relocate a business operation, sell a new line of merchandise, or emergencies or unexpected costs.

Cash should be carefully invested and closely monitored

Section 16.2 Assessment Questions On your own paper, write your name,

today’s date, Period, and Assessment 16.2. From page 543, answer the following questions using complete sentences: Check Your Understanding #3 Think Critically #4 Using Math Skills #5