0 Business and Personal Finance Unit 5 Chapter 17 © 2007 Glencoe/McGraw-Hill

Business and Personal Finance Unit 5 Chapter 17 © 2007 Glencoe/McGraw-Hill 1


Chapter 17Developing a Business Plan

What You’ll Learn Section 17.1

• Discuss the importance of financial management for a business.

• Explain the components of a business plan.• Describe the aspects of a financial plan.

Section 17.2• Explain the importance of accounting in financial

management.• Identify the primary functions of accounting.


Business Plan

Q: My older sister and I are running a very successful business making children’s birthday cakes. Since we are already doing well, why do we need a business plan?

A: Just because your business is successful now does not mean that it will remain successful. By creating a business plan, you can define clear goals for things like sales and profitability that will help you keep your business on track. Your business plan can help you to assess how inflation may affect your business over time.

Go to finance07.glencoe.com to complete the Standard &

Poor’s Financial Focus activity.

2Business and Personal Finance Unit 5 Chapter 17 © 2007 Glencoe/McGraw-Hill


What might be included in a business plan?


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

Section 17.1 A Plan for Business



The Business EnvironmentBusinesses in a free enterprise system must compete to attract customers.

One of the main measurements of success for a business is the amount of profit it generates.

To survive, businesses must: Operate at a profit with effective financial

management Attract and keep individuals who will run

the business

free enterprise system

an economic system in which people can choose what they buy, what they produce and sell, and where they work

profit

the amount of money earned over and above the amount spent to keep the business operating



Developing a Business PlanWhether you are starting your own business or taking over a family business, you must first develop a business plan.

A business plan helps you focus on: What you want to do How you will do it What you expect to accomplish

business plan

a written proposal that describes a new business and strategies to launch that business



Components of a Business PlanThree basic parts of a business plan focus on:

A strategic plan A marketing plan A financial plan

strategic plan

a written outline of the business goals and the steps to take to achieve them

marketing plan

a written outline of how the business will be promoted to increase customers and sales

financial plan

a written outline of how the business will get money to start up and operate, and how the business will maintain financial operations and business records



The Strategic PlanEvery person and every business needs:

Goals A specific course of action to achieve

those goals

The first step in writing a strategic plan is to set goals.




Setting Goals

Goals for businesses have the same guidelines as goals you might establish for your personal finances:

They should be realistic. They should be specific. They should have a clear time frame. They should help you decide what type of

action to take.



Identify Steps to Achieve Your Goals

When developing a strategic plan for your business, you should:

Identify your short-term and long-term goals.

Create a plan that consists of specific steps toward each goal.



The Marketing PlanA marketing plan outlines the ways in which you will promote your business. Promotional activities include:

Advertising Promotions

Promotion is any form of communication a business uses to inform, persuade, or remind people about its products or to enhance its image.



Questions about Your Marketing Plan

Some of the questions you will need to address about your marketing plan are:

If you have something to sell, how do you sell it?

How do you reach people in an efficient manner?

What promotions or advertising can you afford?

To begin to answer these questions, you should research the existing market for your goods or services.



The Financial PlanSound 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 develop


The Advertising DollarMany businesses, large and small, plan to spend a certain amount of their budgets (about 5 percent or more of their net sales) on promotional activities, such as advertising promotions. This expense pays off with more customers and profits.If a surf and skateboard shop earns $35,000 a month in net sales, what might be a good annual advertising budget for the store?

Business and Personal Finance Unit 5 Chapter 17 © 2007 Glencoe/McGraw-Hill



Aspects of a Financial Plan

A financial plan outlines the essential financial elements for starting and running a business.

An effective plan addresses three aspects of operating your business:

Assets needed Purchasing methods Daily financial operations



Purchasing Assets

Even in personal finances, if you are purchasing an expensive item, you should consider some of the following questions:

Do you really need it? What is the most you can spend? How much money do you have right

now? Is there anything else you might need?

By considering these questions, you are performing a financial analysis of your purchase.



Recording and Reporting Business Finances

The recording and handling of financial information is essential. You will need to:

Use accepted accounting procedures. Analyze financial statements. Control cash. Pay debts.

Thousands of small businesses close each year due to poor financial decisions.


What do you think the term cash flow means?


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

Section 17.2 Financial Management



Aspects of Financial ManagementYou should have the financial knowledge and skills to be able to:

Collect financial data. Summarize financial data. Analyze financial data.

Sound financial management is critical to the survival of any business.



Accounting: The Backbone of Financial ManagementAccounting:

Plays a vital role in the day-to-day activities of every business

Is often referred to as the “language of business”

Your business’s financial position depends on the transactions that occur in the daily operation of the business.

accounting

the systematic process of recording and reporting the financial position of a business

transaction

any activity that has an effect on the financial situation of a business



GAAPUsing generally accepted accounting principles (GAAP) allows investors, banks, suppliers, and government agencies to make comparisons of the financial condition of various companies.

GAAP allows you to determine which businesses:

Are financially stable Have the highest percentage of profit Are growing the fastest

generally accepted accounting principles (GAAP)

a standard set of guidelines for recording and reporting financial changes in a business



BudgetingOne important function of accounting is budgeting. Budgeting will:

Give you a glimpse into the financial future of your business

Provide the information you will need to make decisions

You should regularly compare a budget with actual income and expenses.

budget (business)

a formal, written statement of expected income and expenses for a future period of time



InventoryThe largest asset of many businesses is the merchandise they have on hand to sell.

By tracking inventory, businesses know the following facts about their merchandise:

Amount of merchandise sold Merchandise that is selling well When to reorder merchandise Merchandise that should not be

reordered

merchandise

the goods retailers buy with the intent to resell to customers

inventory

the merchandise retailers have for sale



PayrollPayroll is usually the largest expense of a business. Efficient payroll management involves two important activities:

Determining number of employees Using GAAP

Because payroll involves so much cash, it is regulated by state and federal laws.



Cash FlowA goal of effective financial management is to maintain a constant cash flow through the business. This is not always easy to do, since:

Economic and financial conditions constantly change.

Expenses may vary.

When you have a negative cash flow, your business will suffer.

cash flow

the amount of cash that is available at any given time

negative cash flow

a condition in which a business spends more money than it receives



InvestmentsSuccessful businesses invest for the future.

Reserve cash may be needed to: Purchase new equipment. Relocate the business operation. Sell a new line of merchandise.



Investments and Reserve FundsBusinesses need reserve cash for:

Emergencies Unexpected costs

Cash reserves could save your business when any type of disaster strikes.



The Importance of Financial ManagementBusinesses must:

Make a profit. Invest part of that profit for future use.

Making and monitoring investments is an important part of financial management.



Key Term Review free enterprise system profit business plan strategic plan marketing plan financial plan accounting transaction generally accepted accounting principles (GAAP) budget

merchandise inventory cash flow negative cash flow



Reviewing Key Concepts1. Explain how financial management is the basic foundation for

business success.

A financial plan outlines the essential financial elements for

starting and running a business.



Reviewing Key Concepts2. Describe specific items you would include in your business’s

strategic, marketing, and financial plans.

A strategic plan is a written outline of: The business goals The steps to take to achieve them

A marketing plan is a written outline of how the business will be promoted to increase customers and sales.

A financial plan is a written outline of: How the business will get money to start up and operate How the business will maintain financial operations and

business records



Reviewing Key Concepts3. Identify the three aspects of a financial plan.

An effective financial plan addresses three aspects of operating

your business: Assets needed Purchasing methods Daily financial operations



Reviewing Key Concepts4. List three examples of accounting transactions.

Your business is making a transaction whenever you: Buy supplies. Sell merchandise. Buy a photocopier. Pay utility bills.



Reviewing Key Concepts5. Explain why a business needs to follow generally accepted

accounting principles (GAAP).

Using generally accepted accounting principles (GAAP) allows

investors, banks, suppliers, and government agencies to make

comparisons of the financial condition of various companies.

GAAP allows you to determine which businesses: Are financially stable Have the highest percentage of profit Are growing the fastest


Newsclip: A Shaky Ship?Despite a weak economy, a company can succeed if it adheres to

a comprehensive business plan.

Log On Go to finance07.glencoe.com and open Chapter 17.

Learn all of the elements of a business plan. Choose a

corporation featured in the news. Write a sample business plan

for it.

Documents

0 Business and Personal Finance Unit 5 Chapter 17 © 2007 Glencoe/McGraw-Hill