Chapter 17 Managing Business Finances Section 17.1 Financial Management

Chapter 17

Managing BusinessFinances

Section 17.1

Financial Management

The Main Idea

A financial plan outlines the essential financial facts about a new business or venture. Businesspeople use a financial plan to help them make decisions about the future. This plan shows the amount of money a business will need to start and operate. It also explains how the business will acquire money to expand.

The Purpose of the Financial Plan

A financial plan can be used to attract investors.

financial plana set of documents that outlines the essential financial facts about a new ventureFinancial plans project

the viability of a new business or a project at an existing firm.

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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.

capitalmoney 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.

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Examples of Start-Up Expenses

Examples ofOperating Expenses

Business assets Remodeling costs Security deposits Advertising Insurance Supplies Legal permits Licenses

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.

financial forecastan estimate of a business’s financial outlook for each of the next few years

A forecast should consider changes in the economy.

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.

budgeta plan specifying how money will be used or spent during a particular period

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Three Types of Budgets

Start-Up Budget

CashBudget

OperatingBudget

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

You work as the purchasing agent for a small chain of restaurants. One of your duties is deciding where to purchase supplies, staples, and food items. A coffee purveyor sends you a free case of coffee beans. The coffee came with a message thanking you for purchasing from him in the past.

Decision Making Would you consider the case of coffee a bribe? Explain how you would make the determination.

Answer

The message indicates the coffee is not a bribe. Since the supplier’s business is coffee, sending a case as a sample seems appropriate. Remind students that the real determination about whether to accept the gift should come from the company’s code of conduct.

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.

The Main Idea

Accounting provides financial information about an organization. It also helps guide business decisions regarding operations and finances. Balance sheets, income statements, and statements of cash flows show the financial position of a business.

Accounting for Business

Many companies hire accounting firms to manage or audit their financial records.

accountingthe systematic process of recording and reporting the financial position of a person or an organization


An accountant maintains and reviews business records.

An audit is a review of accounting records and procedures.


Accounting is often called the “language of business.”

Everyone involved in a business should understand the basics of accounting.

Accounting Software

There are software categories for all levels of accounting, from home use to high-end corporate use.

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.

Rules for Accountants

Each company sets up an accounting system according to its specific needs, but all businesses follow generally accepted accounting principles (GAAP).

generally accepted accounting principles (GAAP)the set of accounting rules used by accountants to prepare reports

Property Ownership and Control

The right to own property is basic to a free enterprise system.

propertyanything of value that is owned or controlled

Accounting provides financial information about property and rights to it.

Property Ownership and Control

In accounting, property and financial claims are measured in dollar amounts.

Dollar amounts measure the cost of property and the property rights, or financial claims to the property.

Financial Claims in Accounting

Land and equipment are examples of assets.

assetsproperty and other items of value owned by a business


Current assets include cash, supplies, merchandise, and accounts receivable.

current assetsassets that are either used up or converted to cash during the normal cycle of the business

accounts receivablethe total amount of money owed to a business


Equipment and buildings are examples of fixed assets.

fixed assetsitems of value that will be held for more than one year


The accounting term for the financial claims to all assets is equity.

equitythe present value of an asset less all claims against it


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.


Liabilities are measured by the amount of money a business owes its creditors.

liabilitiescreditors’ claims to the assets of a business


Owner’s equity is also referred to as the owner’s capital.

owner’s equityan owner’s claim to the assets of a business

The Accounting Equation

The accounting equation ensures that all accounting records will be correct.

accounting equationa rule that states that assets must always equal the sum of liabilities and owner’s equity

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Assets Liabilities Owner’s Equity= +

The Accounting Equation

Example

Company Assets:$100,000

Liabilities:$40,000

Owner’s Equity:$60,000= +

The owner’s rights to the assets that the owner possesses.

Financial Statements

The accounting system is designed to generate financial statements.

financial statementsdocuments that summarize the changes resulting from business transactions that occur during an accounting period


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


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.

Income Statements

The income statement is sometimes called a profit and loss statement.

income statementa report of the revenue, expenses, and net income or net loss over an accounting period

Income Statements

Total revenue is greater than total expenses

Total revenue is less than total expenses

Net income

Net loss

$

$

Balance Sheet

A balance sheet is like a photograph of a business’s finances at a specific moment.

balance sheeta 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.

Statement of Cash Flows

Cash flows are not indicated in the income statement or the balance sheet.

cash flowsthe money that is available to a business at any given time


The statement of cash flows helps managers ensure that the business does not run out of money.

statement of cash flowsa financial report that shows incoming and outgoing money during an accounting period


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

Computerized Accounting

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

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In a spreadsheet,

rows are identified by

numbers.

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In a spreadsheet, columns are identified by

letters.

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Cells are the small boxes

in a spreadsheet.

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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 QuickBooks® 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 the three main financial statements used in business?

balance sheet, income statement, and statement of cash flows

Documents

Chapter 17 Managing Business Finances Section 17.1 Financial Management