14-1McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

14-2

Budgeting And Controlling Operations And Taxes

Small Business ControlSmall Business ControlTypes Of BudgetsTypes Of BudgetsObtaining Information Obtaining Information & Ratios& RatiosTaxes & Tax SystemTaxes & Tax SystemRecord Keeping & Tax ReportingRecord Keeping & Tax ReportingFactors/Problems In Getting Factors/Problems In Getting CreditCredit

Ch

apte

r

14

Photodisc Collection/Getty Images

14-3McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

ControlControl

“…“…the process of the process of ensuring that ensuring that

organizational goals organizational goals are achieved.”are achieved.”

14-4McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Control ProcessControl Process1. Setup Standards1. Setup Standards

2. Measure Performance2. Measure Performance

3. Actual vs. Planned3. Actual vs. Planned

4. Deviations Excessive?4. Deviations Excessive?

5. Take Corrective Action5. Take Corrective Action

14-5McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Set StandardsSet StandardsUnits Consumer/ProducedUnits Consumer/Produced

Standard Hours Per UnitStandard Hours Per UnitMiles Per GallonMiles Per Gallon

Price Paid/Charged- Price Price Paid/Charged- Price Per UnitPer Unit

RequiresRequiresIntuitionIntuitionPast PerformancePast PerformanceMeasurementMeasurementComparisonComparisonCommunicationCommunication

Keith Brofsky/Getty Images

14-6McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Effective ControlsEffective ControlsTimelyTimelyCost EffectiveCost EffectiveAccurateAccurateQuantifiableQuantifiableMeasurableMeasurableIndicate Cause/EffectIndicate Cause/EffectResponsibilityResponsibilityAcceptableAcceptable

PhotoDisc Imaging/Getty Images

14-7McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

BudgetBudget

“…“…a detailed statement a detailed statement of financial results of financial results

expected for a given expected for a given future period.”future period.”

14-8McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Types Of BudgetsTypes Of Budgets

CapitalCapital

OperatingOperating

Cash FlowCash FlowSteve Cole/Getty Images

14-9McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Operating BudgetOperating Budget

•SalesSales

•ProductionProduction

•PersonnelPersonnelRoyalty-Free/CORBIS

14-10McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Cash Flow BudgetCash Flow Budget$

$

$

$$ Plan Daily/Weekly Cash NeedsPlan Daily/Weekly Cash Needs$

$

$

$$ Plan Monthly Cash NeedsPlan Monthly Cash Needs$

$

$

$$ Prepare For Cash Flow CrisisPrepare For Cash Flow Crisis• Establish/Maintain Good CreditEstablish/Maintain Good Credit

• Set Aside Funds To Earn InterestSet Aside Funds To Earn Interest

• Schedule PaymentsSchedule Payments

• Keep Fixed Costs Low & Tie Variable Keep Fixed Costs Low & Tie Variable Costs To RevenueCosts To Revenue

14-11McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Cash Budget FormatCash Budget Format

BudgetBudget ActualActual

Expected Cash ReceiptsExpected Cash Receipts $$$$$$$$ $$$$$$$$

Expected Cash PaymentsExpected Cash Payments $$$$$$$$ $$$$$$$$

Cash BalancesCash Balances $$$$$$$$ $$$$$$$$

Cash- Capital InvestmentCash- Capital Investment $$$$$$$$ $$$$$$$$

14-12McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Cash BalanceCash Balance

Beg. Of Month- Balance

+ Total Cash Receipts

- Total Cash Payments

End Of Month- Balance

14-13McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Budgetary ControlBudgetary Control

“…“…the system of the system of budgets used to control budgets used to control a company’s financial a company’s financial

activities.”activities.”

14-14McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Credit/Collections ControlCredit/Collections Control

Identify Slow PayersIdentify Slow Payers

Investigate Customer’s Ability Investigate Customer’s Ability & Willingness To Pay& Willingness To Pay

Monitor Past DueMonitor Past Due

Write-Off UncollectiblesWrite-Off UncollectiblesSteve Cole/Getty Images

14-15McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

AuditAudit“…“…a formalized a formalized

examination and/or examination and/or review of a review of a

company’s financial company’s financial records.”records.”

14-16McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Types Of AuditsTypes Of Audits

FinancialFinancial

InternalInternal

OperationsOperations

14-17McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

FeedbackFeedback

Obtain InformationObtain InformationObservationObservation

Oral ReportsOral Reports

Written Memos/ReportsWritten Memos/Reports

Compare Actual vs. StandardsCompare Actual vs. Standards

Jacobs Stock Photography/Getty Images

14-18McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Causes OfCauses OfPoor PerformancePoor Performance

Wrong ObjectivesWrong ObjectivesCustomers Not BuyingCustomers Not BuyingPoor SchedulingPoor SchedulingTheft/SpoilageTheft/SpoilageToo Many EmployeesToo Many EmployeesLost OpportunitiesLost OpportunitiesToo Much Free Service/DonationsToo Much Free Service/Donations

14-19McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

RatiosRatios

“…“…relationships relationships between two or more between two or more

variables.variables.

14-20McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Ratio Comparison ValuesRatio Comparison Values

Firm’sFirm’s•Current ValueCurrent Value•Past ValuePast Value

Firm’sFirm’s•Current ValueCurrent Value• Industry ValuesIndustry Values

Can Be InterrelatedCan Be Interrelated

14-21McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Financial RatiosFinancial Ratios

14-22McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Profits Satisfactory?Profits Satisfactory?

Net Profit To Net Profit To Owners’ EquityOwners’ Equity

Net Profit To Net Profit To Net Sales Net Sales

14-23McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Assets Productive?Assets Productive?

Net Sales To Net Sales To Fixed AssetsFixed Assets

Net Sales To Net Sales To Owners’ EquityOwners’ Equity

Ryan McVay/Getty Images

14-24McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Debt Payments?Debt Payments?CurrentCurrent

Acid Test (Quick)Acid Test (Quick)

Working CapitalWorking Capital

Accounts Receivable To Accounts Receivable To Working CapitalWorking Capital

Inventory To Working CapitalInventory To Working Capital

14-25McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Business Assets?Business Assets?

Collection PeriodCollection Period

Net Sales To Inventory Net Sales To Inventory (Inventory Turnover)(Inventory Turnover)

Net Sales To Working Net Sales To Working CapitalCapital

Royalty-Free/CORBIS

14-26McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Equity Satisfactory?Equity Satisfactory?Long-Term Liabilities To Long-Term Liabilities To

Working CapitalWorking CapitalDebt To Owners’ EquityDebt To Owners’ EquityCurrent Liabilities To Current Liabilities To

Owners’ EquityOwners’ EquityFixed Assets To Owners’ Fixed Assets To Owners’

EquityEquity

14-27McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

U.S. Tax SystemU.S. Tax SystemDetermines Taxes Determines Taxes

& Who Will Pay & Who Will Pay

Collection Of TaxesCollection Of Taxes

Internal Revenue Service- Internal Revenue Service- www.irs.ustreas.govwww.irs.ustreas.gov

14-28McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

TaxesTaxes

IndirectIndirect

DirectDirect

14-29McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Selected Direct TaxesSelected Direct Taxes

14-30McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Tax EffectsTax EffectsIncome Tax On ProfitsIncome Tax On ProfitsEmployer Withhold/MatchEmployer Withhold/MatchOwner Personal TaxesOwner Personal TaxesTransfer Of OwnershipTransfer Of OwnershipBusiness DecisionsBusiness DecisionsGovernment Administrative Cost Government Administrative Cost Of CollectionOf Collection

14-31McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Types Of TaxesTypes Of Taxes

Excise/Intangible Excise/Intangible PropertyProperty

Sales & UseSales & Use

Federal, State, & Federal, State, & Local Income Local Income S. Meltzer/PhotoLink/Getty Images

14-32McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Licenses, PermitsLicenses, Permits& Registrations& Registrations

FederalFederalBusiness LicenseBusiness LicenseEmployer’s Federal Tax Employer’s Federal Tax

ID Number ID NumberMailing PermitsMailing Permits

StateStateIncorporation/PartnershipIncorporation/PartnershipTrade Name RegistrationTrade Name RegistrationProfessional RegistrationsProfessional Registrations

City/CountyCity/CountyZoning PermitsZoning PermitsBuilding PermitsBuilding Permits

Royalty-Free/CORBIS

14-33McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Taxable IncomeTaxable Income

“…“…total revenues total revenues minus deductible minus deductible

expenses.”expenses.”

14-34McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Deductible ExpensesDeductible ExpensesCost Of Goods SoldCost Of Goods Sold

SellingSelling

AdministrativeAdministrativePhotoDisc/Getty Images

14-35McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Cost of Goods SoldCost of Goods Sold& Inventory Valuation& Inventory Valuation

First-In, First-Out First-In, First-Out (FIFO)(FIFO)

Last-In, First-Out Last-In, First-Out (LIFO)(LIFO)

Average CostAverage CostKim Steele/Getty Images

14-36McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Employment-Related TaxesEmployment-Related Taxes

Income Tax WithholdingIncome Tax WithholdingSocial Security/MedicareSocial Security/MedicareUnemployment Unemployment CompensationCompensationFederal AdministrationFederal AdministrationStateState

Workers’ CompensationWorkers’ Compensation

14-37McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Owners’ Personal TaxesOwners’ Personal TaxesSalaries & Bonuses Withdrawn Salaries & Bonuses Withdrawn From CompanyFrom Company

DividendsDividendsContract For Business Contract For Business SaleSaleNoncompete ClauseNoncompete ClauseSeller Warranties & RepresentationsSeller Warranties & RepresentationsPurchase PricePurchase Price

Retro Americana

14-38McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Credit ManagementCredit ManagementDecide Method Of Customer Decide Method Of Customer

PaymentPaymentCashCashCheck/DebitCheck/DebitCreditCredit

Set Credit Policies & PracticesSet Credit Policies & PracticesAdminister Credit OperationsAdminister Credit Operations

Jack Star/PhotoLink/Getty Images

14-39McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Credit vs. Debit Card UseCredit vs. Debit Card Use