Chapter 17 Managing Business Finances Section 17 1

Chapter 17 Managing Business Finances Section 17. 1 Financial Management

Read to Learn Identify the six reasons for creating a financial plan. Explain what a budget is and how it is used.

Key Concepts The Purpose of the Financial Plan Budgets

The Purpose of the Financial Plan A financial plan can be used to attract investors. Financial plans project the viability of a new business or a project at an existing firm. financial plan a set of documents that outlines the essential financial facts about a new venture

Characteristics of an Effective Financial Plan Identifies the assets that need to be purchased Describes the amount of money a business needs to start and operate Describes the expenses the business will incur and explains how a business will cover its expenses Describes how the business will document and report financial records Forecasts finances to project future profitability Explains how the business will acquire money to grow or expand

Identifying Business Assets Information about assets might show that buying used items instead of new ones, or renting them, would be best. Examples of Assets Cash Equipment Buildings Supplies Inventory Land

Determining Needed Capital A financial plan estimates that amount of capital a business will need. capital money supplied by investors, banks, or owners of a business

Determining Needed Capital Start-up capital is the money used to pay for the various assets and expenses of a new venture or business. A start-up may have a hard time attracting investors because it has no track record.

Describing Start-Up and Operating Expenses Start-up expenses often require a large amount of cash.

Examples of Start-Up Expenses Business assets Remodeling costs Security deposits Advertising Insurance Supplies Legal permits Licenses Examples of Operating Expenses Payroll Rent Utility bills Delivery charges Bank fees

Describing Financial Records Management A financial plan describes who will maintain the financial records and why. A financial plan also describes any legal agreements that influence the way records are kept. Special accounting software is available to businesses.

Forecasting Future Finances A financial forecast should be conservative in its outlook. A forecast should consider changes in the economy. financial forecast an estimate of a business’s financial outlook for each of the next few years

Describing Growth Financing Planned growth can be rewarding, while unplanned growth can be chaotic. Investors want to know that a business has thoughtfully developed strategies to finance controlled growth.

Budgets A budget helps guide a company’s future. budget a plan specifying how money will be used or spent during a particular period

Graphic Organizer Three Types of Budgets Start-Up Budget Cash Budget Operating Budget A plan for your income and expenses from the time you start a business to estimated time it will make a profit A plan for the actual money the business owner spends on a daily, weekly, or monthly basis A plan for the amount expected to be spent and earned over a given period of time, usually six months or a year

1. What is the purpose of the financial plan? It is used as an outline of essential financial facts about a new business and to guide a business as well as to secure funding.

2. What does an effective financial plan do? An effective plan identifies assets, determines needed capital, describes start-up and operating expenses, and describes financial records management, forecasts future finances, and describes growth financing.

3. Why do business owners use a budget? Budgets help business owners to predict the amount of money the business will need. They also help them to keep track of and control spending.

Key Term a set of documents that outlines the financial essential financial facts about a new plan venture capital money supplied by investors, banks, or owners of a business

Key Term financial an estimate of a business’s financial forecast outlook for each of the next few years budget a plan specifying how money will be used or spent during a particular period

Read to Learn Explain the purpose of accounting. Describe how property rights are measured. Define three components of the accounting equation. Describe three main financial statements used by businesses.

Key Concepts Accounting for Business Property Ownership and Control Financial Statements

Accounting for Business Many companies hire accounting firms to manage or audit their financial records. accounting the systematic process of recording and reporting the financial position of a person or an organization

Accounting for Business Accounting is often called the “language of business. ” Everyone involved in a business should understand the basics of accounting.

Accounting for Business An accountant maintains and reviews business records. An audit is a review of accounting records and procedures.

Rules for Accountants Each company sets up an accounting system according to its specific needs, but all businesses follow generally accepted accounting principles (GAAP) the set of accounting rules used by accountants to prepare reports

Questionable Accounting Some companies have gotten into legal trouble for committing accounting fraud. Fraud is the crime of intentionally deceiving others for financial gain or some other benefit.

Enron: The Fall of a Wall Street Darling Enron Clip

Enron: The Fall of a Wall Street Darling

Enron: The Fall of a Wall Street Darling

Enron: The Fall of a Wall Street Darling

Enron: The Fall of a Wall Street Darling

Financial Statements The accounting system is designed to generate financial statements documents that summarize the changes resulting from business transactions that occur during an accounting period

Financial Statements Financial statements provide information that business owners use to make financial decisions.

Financial Statements Stockholders, employees, banks, and investment companies use financial statements to learn about the financial conditions of a business. Corporations must release their financial statements to the public.

Property Ownership and Control The right to own property is basic to a free enterprise system. Accounting provides financial information about property and rights to it. property anything of value that is owned or controlled

Financial Claims in Accounting Land equipment are examples of assets property and other items of value owned by a business

Financial Claims in Accounting Current assets include cash, supplies, merchandise, and accounts receivable. current assets that are either used up or converted to cash during the normal cycle of the business accounts receivable the total amount of money owed to a business

Financial Claims in Accounting Equipment and buildings are examples of fixed assets items of value that will be held for more than one year

Financial Claims in Accounting The accounting term for the financial claims to all assets is equity the present value of an asset less all claims against it

Financial Claims in Accounting When a person or business buys property and agrees to pay for it later, they are buying on credit. The business or person selling the property is called the creditor.

Financial Claims in Accounting Liabilities are measured by the amount of money a business owes its creditors. liabilities creditors’ claims to the assets of a business

Financial Claims in Accounting Owner’s equity is also referred to as the owner’s capital. owner’s equity an owner’s claim to the assets of a business

The Accounting Equation The accounting equation ensures that all accounting records will be correct. accounting equation a rule that states that assets must always equal the sum of liabilities and owner’s equity

Graphic Organizer The Accounting Equation = Assets Liabilities + Owner’s Equity: $60, 000 Example Company Assets: $100, 000 = Liabilities: $40, 000 The owner’s rights to the assets that the owner possesses.

Balance Sheet A balance sheet is like a photograph of a business’s finances at a specific moment. balance sheet a report of the balances in all assets, liabilities, and owner’s equity accounts at the end of an accounting period

Balance Sheet The balance sheet applies the accounting equation. When added up, the two sides of the equation are equal, or in balance.

Balance Sheet Assets Liabilities Owner’s Equity

Income Statements The income statement is sometimes called a profit and loss statement. income statement a report of the revenue, expenses, and net income or net loss over an accounting period

Income Statements Total revenue is greater than total expenses Net income $ Total revenue is less than total expenses Net loss $

Income Statement Revenues Expenses Net Income Net Loss

Statement of Cash Flows Cash flows are not indicated in the income statement or the balance sheet. cash flows the money that is available to a business at any given time

Statement of Cash Flows The statement of cash flows helps managers ensure that the business does not run out of money. statement of cash flows a financial report that shows incoming and outgoing money during an accounting period

Statement of Cash Flows Lenders and investors expect business loan applicants to be able to show a consistently positive cash flow.

Statement of Cash Flows Operating Investing Financing

Computerized Accounting Most companies use computer programs to simplify their accounting procedures because they are efficient at organizing and analyzing data.

Graphic Organizer As you create a spreadsheet, you enter numbers, labels, and formulas into cells.

Figure 17. 1 Income Statement Using Peachtree Software

Figure 17. 2 Balance Sheet Using Quick. Books® Software

1. How does accounting help a business? Accounting keeps track of money and shows how a business is doing.

2. Discuss property ownership and control. How are they related to the accounting equation? The person who owns property has a financial claim to it. The accounting equation indicates the amounts of financial claims to property.

3. What are three main financial statements used in business? balance sheet, income statement, and statement of cash flows

Key Terms the systematic process of recording accounting and reporting the financial position of a person or an organization generally accepted accounting principles (GAAP) the set of accounting rules used by accountants to prepare reports

Key Term property anything of value that is owned or controlled assets property and other items of value owned by a business

Key Term current assets that are either used up or converted to cash during the normal cycle of the business accounts receivable the total amount of money owed to a business

Key Term fixed assets items of value that will be held for more than one year equity the present value of an asset less all claims against it

Key Term liabilities creditors’ claims to the assets of a business accounts the short-term liabilities that a business payable owes to creditors

Key Term owner’s equity an owner’s claim to the assets of the business a rule that states that assets must accounting always equal the sum of liabilities and equation owner’s equity

Key Term documents that summarize the financial changes resulting from business statements transactions that occur during an accounting period income statement a report of the revenue, expenses, and net income or net loss of an accounting period

Key Term a report of the balances in all assets, balance liabilities, and owner’s equity accounts at sheet the end of an accounting period cash flows the money that is available to a business at any given time

Key Term statement of cash flows a financial report that shows incoming and outgoing money during an accounting period