Budgets and Managing Money ©

Workshop Learning Objectives At the conclusion of this presentation you should be able to assess the financial performance and health of your firm have an understanding of basic financial terminology enhance your decision-making skills by integrating financial management concepts into your thinking Review various software applications for managing finances Control the flow of money through your department Understand the budgeting process and forecasting techniques Manage your own budget, inventory and petty cash ©

At the conclusion of this presentation

you should be able to assess the financial performance and health of your firm

have an understanding of basic financial terminology

enhance your decision-making skills by integrating financial management concepts into your thinking

Review various software applications for managing finances

Control the flow of money through your department

Understand the budgeting process and forecasting techniques

Manage your own budget, inventory and petty cash

Take a moment to write your responses to the following questions What is your personal learning objectives from this presentation? What will success look like to you? ©

Take a moment to write your responses to the following questions

What is your personal learning objectives from this presentation?

What will success look like to you?

What is Finance? Finance is the art of raising, managing and making money in business. It’s not a synonym for accounting, nor is it interchangeable with banking. ©

What is Finance? cont. Finance is a process that involves three essential steps: Assessing the financial health of your firm Using that information to plan for future performance Executing that plan ©

Finance is a process that involves three essential steps:

Assessing the financial health of your firm

Using that information to plan for future performance

Executing that plan

How are you, as an employee, affected by your company’s finances? What is Finance? cont. Once a company finishes step 3 - executing its plan - it goes back and reassesses its performance again, and this cycle of finance repeats itself in a continuous loop. ©

How are you, as an employee, affected by your company’s finances?

Once a company finishes step 3 - executing its plan - it goes back and reassesses its performance again, and this cycle of finance repeats itself in a continuous loop.

Getting to Know the Players The CFO, or Chief Financial Officer of a company, is its second most important figure, just behind the CEO, or Chief Executive Officer. Understanding the cycle of finance will help you figure out where you fit into your company’s financial structure. You will also want to figure out what the key financial players in your company really do. ©

The CFO, or Chief Financial Officer of a company, is its second most important figure, just behind the CEO, or Chief Executive Officer.

Then there are the measurers and the managers. Who’s on the Measurers’ Team? Accountants Tax Accountants Cost Accountants Internal Auditors Budget Officers Measurers are focused on assessing and planning. ©

Who’s on the Measurers’ Team?

Accountants

Tax Accountants

Cost Accountants

Internal Auditors

Budget Officers

Then there are the measurers and the managers. Who’s on the Managers’ Team? Credit Managers Inventory Managers Plant Managers Capital Budgeting Staff Budget Officers Sales Staff Managers are focused on planning and execution ©

Who’s on the Managers’ Team?

Credit Managers

Inventory Managers

Plant Managers

Capital Budgeting Staff

Budget Officers

Sales Staff

Organizational Chart ©

Record-Keeping Terminology Accounting is the art of identifying, measuring, recording, interpreting and communicating the results of economic activities. Accounting concepts and standards are called G enerally A ccepted A ccounting P rinciples (GAAP). ©

Accounting is the art of identifying, measuring, recording, interpreting and communicating the results of economic activities.

Accounting concepts and standards are called G enerally A ccepted A ccounting P rinciples (GAAP).

comparability (among different companies) reliability (of the information) the business entity concept the cost principle the going-concern principle the objectivity principle the stable-dollar assumption concept of adequate disclosure GAAP includes the following principles: ©

comparability (among different companies)

reliability (of the information)

the business entity concept

the cost principle

the going-concern principle

the objectivity principle

the stable-dollar assumption

concept of adequate disclosure

What is Bookkeeping? Bookkeeping is the record keeping aspect of accounting. Each financial event or transaction has to be entered. The transactions entered during the bookkeeping process usually fit into one of the six following classifications. ©

Bookkeeping is the record keeping aspect of accounting. Each financial event or transaction has to be entered.

The transactions entered during the bookkeeping process usually fit into one of the six following classifications.

The transactions take place between the business and: Customers – who buy products and services sold by the business Employees – who are paid wages and provided benefits Vendors – who sell services, equipment and supplies to the business Government agencies – who collect taxes from the business Sources of equity capital – investors or owners who put money in and take it out of the business Sources of debt capital – banks and lending institutions What is Bookkeeping?, cont. ©

The transactions take place between the business and:

Customers – who buy products and services sold by the business

Employees – who are paid wages and provided benefits

Vendors – who sell services, equipment and supplies to the business

Government agencies – who collect taxes from the business

Sources of equity capital – investors or owners who put money in and take it out of the business

Sources of debt capital – banks and lending institutions

Reporting There are two standard reports which are the main sources of business financial information: the balance sheet the profit and loss statement ©

There are two standard reports which are the main sources of business financial information:

the balance sheet

the profit and loss statement

The Balance Sheet Purpose is to show what a company owns and owes on a specific date Provides this information by laying out the value of the assets and the liabilities of the business ©

Purpose is to show what a company owns and owes on a specific date

Provides this information by laying out the value of the assets and the liabilities of the business

The Balance Sheet, cont. The assets of a company are anything that the business owns. (cash on hand, office equipment, vehicles, tools, real estate, buildings) Accounts receivable is money which is owed to a business. The liabilities of a business are anything the business owes to others. ©

The assets of a company are anything that the business owns. (cash on hand, office equipment, vehicles, tools, real estate, buildings)

Accounts receivable is money which is owed to a business.

The liabilities of a business are anything the business owes to others.

Income Types Income can be broken into two types: service income With service income , the profit can be determined simply by deducting expenses associated with performing the service. Service income is derived from performing a service while sales income With sales income, inventory costs also must be taken into consideration. This inventory cost is referred to as the cost of goods sold. sales income is derived from selling a product of some type. ©

Income can be broken into two types:

service income

With service income , the profit can be determined simply by deducting expenses associated with performing the service.

Service income is derived from performing a service while

sales income

With sales income, inventory costs also must be taken into consideration. This inventory cost is referred to as the cost of goods sold.

sales income is derived from selling a product of some type.

cash method: a system which records income when it is received and records expenses when they are paid. Cash accounting is not widely used accrual method : counts income and expenses when they are due to the business. Income is recorded when the business has the right to receive the income, and expenses are recorded and considered when they are due, even if they haven’t yet been paid. Recording Transactions ©

cash method:

a system which records income when it is received and records expenses when they are paid. Cash accounting is not widely used

accrual method :

counts income and expenses when they are due to the business. Income is recorded when the business has the right to receive the income, and expenses are recorded and considered when they are due, even if they haven’t yet been paid.

Accounting Systems In addition, there are two types of record-keeping systems: Both types can be used to keep accurate records single entry double entry double entry has more ways available to double-check calculations, although more difficult to master many accountants insist that only double entry is acceptable. ©

In addition, there are two types of record-keeping systems:

Both types can be used to keep accurate records

single entry

double entry

double entry has more ways available to double-check calculations, although more difficult to master

many accountants insist that only double entry is acceptable.

Accounting Periods A business is allowed to choose between: a fiscal year accounting period twelve consecutive months that do not end on December 31 st calendar year period which is twelve consecutive months that do end on December 31 st ©

A business is allowed to choose between:

a fiscal year accounting period

twelve consecutive months that do not end on December 31 st

calendar year period

which is twelve consecutive months that do end on December 31 st

Tracking Business Expenses often your greatest responsibility most expenses are tax deductible clear system to see where the business money is being spent This will allow you to see if certain expenses are out of line, if certain expenses are increasing, or decreasing, and if your business expenses make clear business sense. ©

often your greatest responsibility

most expenses are tax deductible

clear system to see where the business money is being spent

This will allow you to see if certain expenses are out of line, if certain expenses are increasing, or decreasing, and if your business expenses make clear business sense.

Tracking Business Expenses What are some of the expenses you will want to track in this category? What type of documentation will be sufficient to support your claims? ©

What are some of the expenses you will want to track in this category?

What type of documentation will be sufficient to support your claims?

Purchase Orders A purchase order is used for placing orders for business merchandise where a credit account has been established with a company in advance. Each time you prepare a purchase order, enter the information in a Purchase Order Record, or compile a total of all purchase orders on a weekly or monthly basis so you always know how much you or your department is spending. ©

The Pricing Decision ©

Net Profit Margin To figure out net profit margin we must look at three figures: Gross sales Interest expenses Net profit (before taxes) (Net Profit – Interest)/gross sales = Net Profit Margin The higher the Net Profit Margin = the more profitable the business. ©

To figure out net profit margin we must look at three figures:

Gross sales

Interest expenses

Net profit (before taxes)

(Net Profit – Interest)/gross sales = Net Profit Margin

The higher the Net Profit Margin = the more profitable the business.

Gross Profit Margin An indication of the mark-up on goods that are sold to customers It is only useful for companies selling goods from inventory For this calculation you will need: Gross margin Gross Sales Gross Profit/Gross Sales = Gross Profit Margin The higher the Gross Profit Margin the better the business. ©

An indication of the mark-up on goods that are sold to customers

It is only useful for companies selling goods from inventory

For this calculation you will need:

Gross margin

Gross Sales

Gross Profit/Gross Sales = Gross Profit Margin

The higher the Gross Profit Margin the better the business.

Return on Sales Ratio allows a business to determine how much net profit was derived from its gross sales very similar to the Net Profit Margin but it factors in all expenses, including interest provides an indication of whether your expenses are under control also whether your business is generating enough income from sales to pay for its costs ©

allows a business to determine how much net profit was derived from its gross sales

very similar to the Net Profit Margin but it factors in all expenses, including interest

provides an indication of whether your expenses are under control

also whether your business is generating enough income from sales to pay for its costs

For this calculation you will need: Gross Sales Net Profit before taxes Net Profit/Gross Sales = Return on Sales Ratio The higher the return on Sales Ratio the better for business. Return on Sales Ratio, cont. ©

For this calculation you will need:

Gross Sales

Net Profit before taxes

Net Profit/Gross Sales = Return on Sales Ratio

The higher the return on Sales Ratio the better for business.

Current Ratio The ability of a company to meet its short-term obligations Measures how many times a company’s current debt could be paid off by using its current assets A general rule of thumb is that current assets should be about 2 times current debt. Too high a ratio may mean that the business is too short on cash and may be unable to make timely payments to suppliers ©

The ability of a company to meet its short-term obligations

Measures how many times a company’s current debt could be paid off by using its current assets

A general rule of thumb is that current assets should be about 2 times current debt. Too high a ratio may mean that the business is too short on cash and may be unable to make timely payments to suppliers

Current Ratio, cont. For this calculation you will need: Total Current Assets Total Current Liabilities Current Assets/Current Liabilities = Current Ratio Current Ratio should be around 2 on average. ©

For this calculation you will need:

Total Current Assets

Total Current Liabilities

Current Assets/Current Liabilities = Current Ratio

Current Ratio should be around 2 on average.

Debt to net Worth Ratio indicates the relationship between a business net worth and the debt which a business carries indication to banks and other creditors whether a business can handle additional debt also an indication of business risk ©

indicates the relationship between a business net worth and the debt which a business carries

indication to banks and other creditors whether a business can handle additional debt

also an indication of business risk

a high debt to net worth ratio may indicate that the business is overly burdened by interest payments and hampered in its ability to borrow any additional funds which may be necessary Too low a ratio, however, may indicate that a business is too conservative and could effectively borrow more money to generate more profits. Debt to net Worth Ratio, cont. ©

a high debt to net worth ratio may indicate that the business is overly burdened by interest payments and hampered in its ability to borrow any additional funds which may be necessary

Too low a ratio, however, may indicate that a business is too conservative and could effectively borrow more money to generate more profits.

Debt to net Worth Ratio, cont. For this calculation you will need: Total Liabilities Net Worth Total Debt/Net Worth = Total Debt Ratio Over 1 indicates too much debt for net worth ©

For this calculation you will need:

Total Liabilities

Net Worth

Total Debt/Net Worth = Total Debt Ratio

Over 1 indicates too much debt for net worth

Cash Turnover Ratio provides an indication of how often cash flow turns over to finance your sales Your working cash is the amount of money which you need daily to operate your business: pay salaries, utilities, supplies, inventory, etc. If your cash supply is too tight this can restrict your ability to meet your current obligations. ©

provides an indication of how often cash flow turns over to finance your sales

Your working cash is the amount of money which you need daily to operate your business: pay salaries, utilities, supplies, inventory, etc. If your cash supply is too tight this can restrict your ability to meet your current obligations.

Cash Turnover Ratio, cont. For this calculation you will need: Current Assets Current Debt Gross Sales Gross Sales/ (Current Assets – Current Debt) = Cash Turnover Ratio Generally, your cash turnover should be between 4 and 7. ©

For this calculation you will need:

Current Assets

Current Debt

Gross Sales

Gross Sales/ (Current Assets – Current Debt) = Cash Turnover Ratio

Generally, your cash turnover should be between 4 and 7.

Collection Ratio A clear indication of the average period of time that it takes to collect your accounts receivable or credit sales Shows the average number of days it takes for your business to get paid for credit sales This figure should be near the point at which you declare an account overdue. Too long a period and you are overextending your credit and basically becoming a banker for your slow-paying customers. ©

A clear indication of the average period of time that it takes to collect your accounts receivable or credit sales

Shows the average number of days it takes for your business to get paid for credit sales

This figure should be near the point at which you declare an account overdue. Too long a period and you are overextending your credit and basically becoming a banker for your slow-paying customers.

Collection Ratio, cont. For this calculation you will need: Accounts Receivable Gross Sales Accounts Receivable X 365/Gross Sales = Average Collection Period The period should be no more than 1.5 times your credit overdue period. ©

For this calculation you will need:

Accounts Receivable

Gross Sales

Accounts Receivable X 365/Gross Sales = Average Collection Period

The period should be no more than 1.5 times your credit overdue period.

Investment Turnover Ratio Indicates the ability of a business to use its assets to generate sales income. The ability to generate greater and greater sales from a stable asset base is a good indication of business health. If the ratio is going down, this may indicate that the growth of the business is not being met with a growth in sales proportionate to the investment in assets. ©

Indicates the ability of a business to use its assets to generate sales income.

The ability to generate greater and greater sales from a stable asset base is a good indication of business health. If the ratio is going down, this may indicate that the growth of the business is not being met with a growth in sales proportionate to the investment in assets.

Investment Turnover Ratio, cont. For this calculation you will need: Gross Sales Fixed Assets Gross Sales/Fixed Assets = ITR In general, the higher the ratio, the stronger the business. ©

For this calculation you will need:

Gross Sales

Fixed Assets

Gross Sales/Fixed Assets = ITR

In general, the higher the ratio, the stronger the business.

Return on Investment provides a clear indication of business profitability shows how much profit a business is able to generate in proportion to its net worth This will show what level of actual return you are getting on the money which you have invested in your company. You should strive for a healthy return on your business investment or your business has little chance to grow. ©

provides a clear indication of business profitability

shows how much profit a business is able to generate in proportion to its net worth

For this calculation you will need: Net Profit Net Worth Net Profit/Net Worth = Return on Investment Your business should strive for at least a 12% return to be healthy. Return on Investment ©

For this calculation you will need:

Net Profit

Net Worth

Net Profit/Net Worth = Return on Investment

Your business should strive for at least a 12% return to be healthy.

Budgets & the Budgeting Process Budgets provide the baseline of expected performance against which manager’s measure actual performance A budget is much more than slap-dashing together a few figures. A budget is an integrated financial plan put down on paper, or entered in computer spreadsheets. Planning is the key characteristic of budgeting. ©

Budgets provide the baseline of expected performance against which manager’s measure actual performance

A budget is much more than slap-dashing together a few figures.

A budget is an integrated financial plan put down on paper, or entered in computer spreadsheets.

Planning is the key characteristic of budgeting.

Budget Planning Write down: What are some good reasons to be able to budget? ©

Write down:

What are some good reasons to be able to budget?

The Budgeting Process Depending on the size of your organization, the budgeting process might be quite simple or alternatively quite complex. Regardless of the size of the organization, you can budget almost anything in it. ©

Sample Budget Labor budget: A labor budget is made up of the number and name of all the various positions in a company, along with the salary or wages budgeted for each position. Sales budget: The sales budget is an estimate of the total number of products or services that will be sold in a given period. Total revenues are determined by multiplying the number of units by the price per unit. ©

Labor budget: A labor budget is made up of the number and name of all the various positions in a company, along with the salary or wages budgeted for each position.

Sales budget: The sales budget is an estimate of the total number of products or services that will be sold in a given period. Total revenues are determined by multiplying the number of units by the price per unit.

Sample Budget, cont. Production Budget : The production budget takes the sales budget and its estimate of quantities of units to be sold and translates these figures into the cost of labor, materials and other expenses required to produce them. Expense budget: Expense budgets contain all the different expenses that a department may incur during the normal course of operations. You budget travel, training, office supplied and more as expenses. ©

Production Budget : The production budget takes the sales budget and its estimate of quantities of units to be sold and translates these figures into the cost of labor, materials and other expenses required to produce them.

Expense budget: Expense budgets contain all the different expenses that a department may incur during the normal course of operations. You budget travel, training, office supplied and more as expenses.

Sample Budget, cont. Capital budget: this is the manager’s plan to acquire fixed assets such as furniture, computers, and office space, to support the operations of a business. One Year at a Time: a company generally prepares budgets one year at a time. While a company may do long-term strategic planning to develop five- year strategies, trying to forecast further down the road than 12 months for budgeting purposes is very iffy. ©

Capital budget: this is the manager’s plan to acquire fixed assets such as furniture, computers, and office space, to support the operations of a business.

One Year at a Time: a company generally prepares budgets one year at a time. While a company may do long-term strategic planning to develop five- year strategies, trying to forecast further down the road than 12 months for budgeting purposes is very iffy.

The Reasons for Budgeting Developing a detailed financial plan for the period coming up helps establish financial objectives and identifies exactly what must be done to meet these objectives. Budgeting also encourages a business to articulate its vision, strategy and goals. Budgeting imposes discipline and deadlines on the planning process. Budgets can serve as benchmarks against which to measure actual performance for a business. Budgeting forces managers to do better forecasting Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance and for setting compensation when goals are achieved. ©

Developing a detailed financial plan for the period coming up helps establish financial objectives and identifies exactly what must be done to meet these objectives.

Budgeting also encourages a business to articulate its vision, strategy and goals.

Budgeting imposes discipline and deadlines on the planning process.

Budgets can serve as benchmarks against which to measure actual performance for a business.

Budgeting forces managers to do better forecasting

Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance and for setting compensation when goals are achieved.

Doing a Budget: Steps to keep in mind Closely review your budgeting documents and instructions Meet with staff Gather data Apply your judgment Run the numbers Recheck results and if necessary, run the budget again ©

Closely review your budgeting documents and instructions

Meet with staff

Gather data

Apply your judgment

Run the numbers

Recheck results and if necessary, run the budget again

3 main approaches to developing a budget: Build it from scratch Use historical figures Use the combination approach ©

Build it from scratch

Use historical figures

Use the combination approach

Top Ten Excuses for Being Over Budget The accounting reports must be wrong. Didn’t you get my revised budget? How was I suppose to know that it would rain ( insert your own excuse here ) this year? You’re not going to quibble over a measly couple of million dollars, are you? Don’t worry; we’ll make it up next year. ©

The accounting reports must be wrong.

Didn’t you get my revised budget?

How was I suppose to know that it would rain ( insert your own excuse here ) this year?

You’re not going to quibble over a measly couple of million dollars, are you?

Don’t worry; we’ll make it up next year.

My assistant worked up that budget – s/he must have messed up. It’s an investment in our future. Peter’s (insert name of another manager here ) department didn’t come through with the support that I was promised. We’re doing better than last year! Well, two years out of three isn’t bad, is it? Top Ten Excuses for Being Over Budget, cont. ©

My assistant worked up that budget – s/he must have messed up.

It’s an investment in our future.

Peter’s (insert name of another manager here ) department didn’t come through with the support that I was promised.

We’re doing better than last year!

Well, two years out of three isn’t bad, is it?

Up-front Budget Maneuvers: Do some selective padding Tie your budget requests to your organization’s values Create more requests than you need and give them up freely Shift the time frame Be prepared ©

Do some selective padding

Tie your budget requests to your organization’s values

Create more requests than you need and give them up freely

Shift the time frame

Be prepared

A Personal Action Plan The key ideas that I heard at this workshop that I’d like to act on are: These are the changes I want to make in my department over the next six weeks? What specific things must I do to bring about these changes? Within the next 72 hours, I’ll set this plan in motion by: ©

The key ideas that I heard at this workshop that I’d like to act on are:

These are the changes I want to make in my department over the next six weeks?

What specific things must I do to bring about these changes?

Within the next 72 hours, I’ll set this plan in motion by:

Thank you www.wired2lead.com ©