* * * * * * Part 5: Basic Financial Planning and Control

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* * * * * * Part 5: Basic Financial Planning and Control

  1. 1. Part 5: Basic Financial Planning and Control <ul><li>Basic Financial Planning </li></ul><ul><li>Budgeting and Controlling Taxes </li></ul><ul><li>Using Computer Technology in Small Businesses </li></ul><ul><li>Risk Management, Insurance, and Crime Prevention </li></ul>
  2. 2. Chapter 14 Basic Financial Planning McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved .
  3. 3. Basic Financial Planning <ul><li>Need For Profit Planning </li></ul><ul><li>Changes In Company Financial Position </li></ul><ul><li>Financial Structure </li></ul><ul><li>Planning For Profit </li></ul>14 - Nick Rowe/Getty Images
  4. 4. Profit Planning <ul><li>“… a series of prescribed steps to be taken to ensure that a profit will be made.” </li></ul>McGraw-Hill/Irwin Profit planning must precede other activities
  5. 5. Drop In Financial Position <ul><li>Uncollectible A/R </li></ul><ul><li>Too Many Assets </li></ul>Negative Cash Flow
  6. 6. Benchmarking <ul><li>“… setting up standards (for reference) and then measuring performance against them.” </li></ul>
  7. 7. Accounting Records <ul><li>“… records of a firm’s financial position that reflect any changes in that position.” </li></ul>
  8. 8. Accounting Equation Owners’ Equity +Liabilities Total Assets
  9. 9. Assets <ul><li>“… things a business owns.” </li></ul>
  10. 10. Liabilities <ul><li>“… the financial obligations of a business.” </li></ul>
  11. 11. Owner’s Equity <ul><li>“… owners’ share of (or net worth in) the business after liabilities are subtracted from assets.” </li></ul>
  12. 12. Balance Sheet
  13. 13. Current Assets <ul><li>Cash </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Inventory </li></ul><ul><li>Short-Term Investments </li></ul><ul><li>Prepaid Expenses </li></ul>PhotoLink/Getty Images
  14. 14. Total Liabilities <ul><li>Current Liabilities </li></ul><ul><ul><li>Accounts Payable </li></ul></ul><ul><ul><li>Notes Payable </li></ul></ul><ul><li>Long-Term Liabilities </li></ul><ul><ul><li>Long-Term Loans (non-mortgage) </li></ul></ul><ul><ul><li>Mortgage Payable </li></ul></ul>Royalty-Free/CORBIS
  15. 15. Owners’ Equity <ul><li>Capital Stock </li></ul><ul><li>Retained Earnings </li></ul>(c) Duncan Smith/Getty Images
  16. 16. Income Statement
  17. 17. Revenue <ul><li>Cash </li></ul><ul><li>Accounts Receivable </li></ul>Royalty-Free/CORBIS
  18. 18. Expenses <ul><li>Materials </li></ul><ul><li>Salaries </li></ul><ul><li>Utilities </li></ul><ul><li>Depreciation </li></ul><ul><li>Rent </li></ul><ul><li>Building Services </li></ul><ul><li>Insurance </li></ul><ul><li>Interest </li></ul><ul><li>Office & Supplies </li></ul><ul><li>Sales Promotion </li></ul><ul><li>Taxes & Licenses </li></ul><ul><li>Maintenance </li></ul><ul><li>Delivery </li></ul><ul><li>Miscellaneous </li></ul>
  19. 19. Profit (Income) <ul><li>“… the difference between revenue earned and expenses incurred.” </li></ul>
  20. 20. Well-Managed Small Business <ul><li>Liquid </li></ul><ul><li>Balance Sheet Important </li></ul><ul><li>Stability vs. Growth </li></ul><ul><li>Long-Range Planning </li></ul>Royalty-Free/CORBIS
  21. 21. Initial Steps In Profit Planning <ul><li>Establish Goal </li></ul><ul><li>Determine Volume For Profit </li></ul><ul><li>Estimate Expenses </li></ul><ul><li>Determine Estimated Profit </li></ul><ul><li>Compare Estimate With Goal </li></ul>Ryan McVay/Getty Images
  22. 22. Action Steps In Profit Planning <ul><li>List Alternatives </li></ul><ul><li>Determine Expenses </li></ul><ul><li>Determine Profits </li></ul><ul><li>Analyze Alternatives </li></ul><ul><li>Select & Implement </li></ul>Lawrence Lawry/Getty Images
  23. 23. Need For Realism in Profit Planning <ul><li>Uncertainty </li></ul><ul><li>Planning </li></ul>=
  24. 24. Planning For Profit <ul><li>Establish Profit Goal $ 52,000 </li></ul><ul><li>Determine Sales Volume 530,000 </li></ul><ul><li>Estimate Expenses 490,000 </li></ul><ul><li>Determine Profit Est. $ 40,000 </li></ul><ul><li>Compare Profit To Goal -$12,000 </li></ul><ul><li>List Alternatives </li></ul><ul><ul><ul><li>Change Sales Volume </li></ul></ul></ul><ul><ul><ul><li>Decrease Expenses </li></ul></ul></ul><ul><ul><ul><li>Add Products/Services </li></ul></ul></ul><ul><ul><ul><li>Subcontract </li></ul></ul></ul>
  25. 25. Action Steps In Profit Plan <ul><li>Expenses Vary With Volume </li></ul><ul><li> Sales Expenses </li></ul><ul><ul><ul><li>$364,000 $364,000 </li></ul></ul></ul><ul><ul><ul><li>$530,000 $490,000 </li></ul></ul></ul><ul><ul><ul><li>$700,000 $618,700 </li></ul></ul></ul><ul><li>Volume Profit </li></ul><ul><ul><ul><li>$364,000 $ -0- </li></ul></ul></ul><ul><ul><ul><li>$530,000 $ 40,000 </li></ul></ul></ul><ul><ul><ul><li>$700,000 $ 81,300 </li></ul></ul></ul><ul><li>Analyze Alternatives </li></ul><ul><li>Select/Implement Plan </li></ul>
  26. 26. Breakeven Chart
  27. 27. Pro Forma Income Statement

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