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Chapter 17: Managing Business Finances

Financial Management

The Purpose of the Financial Plan

  • When starting a new business or project at an existing firm, managers must determine if it is likely to be financially viable.

  • financial plan is a set of documents that outline the essential financial facts about the new venture

    • A financial plan can also be used to attract investors

  • 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

  • A financial plan estimates the amount of capital the business will need.

    • Capital is money supplied by investors, banks, or owners of a business.

    • Start-up capital is the money used to pay for the various assets and expenses of a new venture or business.

  • A financial plan explains how a business will manage its records

  • A financial plan includes financial forecasts.

    • financial forecast is an estimate of a business’s financial outlook for each of the next few years

  • Planned growth can be very rewarding.

  • Unplanned growth can be chaotic.

  • The financial plan should explain the company’s plans for financial growth.

Budgets

  • Financial statements indicate the financial condition of a firm in a past period.

  • However, a budget helps guide its future.

  • A budget is a plan specifying how money will be used or spent during a particular period.

    • Budgeting helps business owners predict how much money the business will need.

  • There are three main types of budgets.

    • A start-up budget is a plan for your income and expenses from the time you start a business to estimated time it will make a profit.

    • A cash budget is a plan for the actual money the business owner spends on a daily, weekly, or monthly basis.

    • An operating budget is a plan for the amount expected to be spent and earned over a given period of time, usually six months or a year.

Accounting

Accounting for Business

  • Accounting is the systematic process of recording and reporting the financial position of a person or an organization.

    • The accounting system is designed to collect, record, and report financial transactions that affect the operation of a business.

  • An accountant maintains and reviews business records.

  • However, many larger companies hire accounting firms to manage or audit their financial records.

    • An audit is a review of accounting records and procedures.

  • The biggest accounting firms are known as the “Big Four.”

    • PricewaterhouseCoopers®, Deloitte Touche Tohmatsu®, Ernst & Young®, and KPMG® are accounting firms that operate worldwide.

  • All accountants use the same set of rules, called generally accepted accounting principles, or GAAP (pronounced gap), to prepare reports.

  • Financial reports are summarized information about the financial status of a business

Property Ownership and Control

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

  • Property is anything of value that is owned or controlled.

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

  • Assets are property and other items of value owned by a business.

  • They are either current or fixed.

  • Current assets are assets that are either used up or converted to cash during the normal cycle of the business.

    • The normal cycle is usually one year.

    • Cash, supplies, merchandise, and accounts receivable are all current assets.

      • Accounts receivable is the total amount of money owed to a business.

        • It represents money to be received in payments after goods or services are sold on credit.

  • Fixed assets are items of value that will be held for more than one year.

    • These include equipment and buildings.

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

      • Equity is the present value of an asset less all claims against it.

      • Liabilities are creditors’ claims to the assets of a business.

        • They are the debts of a company

  • Accounts payable represents the short-term liabilities that a business owes to creditors.

  • Owner’s equity is an owner’s claim to the assets of the business.

  • It is also referred to as the owner’s capital in the business.

The Accounting Equation

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

  • The accounting equation is a rule that states that assets must always equal the sum of liabilities and owner’s equity.

  • The assets side of the equation shows the value of everything that the business owns or possesses.

  • The other side shows the rights to those assets.

  • Liabilities are the rights that creditors have to the assets.

  • Owner’s equity shows the rights that the owner has to the assets.

Financial Statements

  • The accounting system is designed to generate financial statements and reports.

  • Financial statements are documents that summarize the changes resulting from business transactions that occur during an accounting period.

    • An accounting period is the period of time reflected by an accounting report.

  • The income statement is a report of the revenue, expenses, and net income or net loss over an accounting period.

    • It is sometimes called a profit and loss statement.

    • Income statements for different types of business operations vary in content.

      • A service business would have sales, expenses, and net income.

      • A merchandising business would also include the cost of merchandise purchased for resale.

  • A balance sheet is a report of the balances in all assets, liability, and owner’s equity accounts at the end of an accounting period.

  • Cash flows are the money that is available to a business at any given time.

  • The statement of cash flows is a financial report that shows incoming and outgoing money during an accounting period (often a month, quarter, or year).

    • One reason that a cash flow statement is very important is that firms can run out of cash even when they make a profit.

  • Today, most companies use computer programs to simplify their accounting procedures.

  • Microsoft Excel is a spreadsheet application that is commonly used in business.

  • Accounting software such as Peachtree Accounting and QuickBooks are programs that help people and businesses manage their finances.

Financial Management

The Purpose of the Financial Plan

  • When starting a new business or project at an existing firm, managers must determine if it is likely to be financially viable.

  • financial plan is a set of documents that outline the essential financial facts about the new venture

    • A financial plan can also be used to attract investors

  • 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

  • A financial plan estimates the amount of capital the business will need.

    • Capital is money supplied by investors, banks, or owners of a business.

    • Start-up capital is the money used to pay for the various assets and expenses of a new venture or business.

  • A financial plan explains how a business will manage its records

  • A financial plan includes financial forecasts.

    • financial forecast is an estimate of a business’s financial outlook for each of the next few years

  • Planned growth can be very rewarding.

  • Unplanned growth can be chaotic.

  • The financial plan should explain the company’s plans for financial growth.

Budgets

  • Financial statements indicate the financial condition of a firm in a past period.

  • However, a budget helps guide its future.

  • A budget is a plan specifying how money will be used or spent during a particular period.

    • Budgeting helps business owners predict how much money the business will need.

  • There are three main types of budgets.

    • A start-up budget is a plan for your income and expenses from the time you start a business to estimated time it will make a profit.

    • A cash budget is a plan for the actual money the business owner spends on a daily, weekly, or monthly basis.

    • An operating budget is a plan for the amount expected to be spent and earned over a given period of time, usually six months or a year.

Accounting

Accounting for Business

  • Accounting is the systematic process of recording and reporting the financial position of a person or an organization.

    • The accounting system is designed to collect, record, and report financial transactions that affect the operation of a business.

  • An accountant maintains and reviews business records.

  • However, many larger companies hire accounting firms to manage or audit their financial records.

    • An audit is a review of accounting records and procedures.

  • The biggest accounting firms are known as the “Big Four.”

    • PricewaterhouseCoopers®, Deloitte Touche Tohmatsu®, Ernst & Young®, and KPMG® are accounting firms that operate worldwide.

  • All accountants use the same set of rules, called generally accepted accounting principles, or GAAP (pronounced gap), to prepare reports.

  • Financial reports are summarized information about the financial status of a business

Property Ownership and Control

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

  • Property is anything of value that is owned or controlled.

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

  • Assets are property and other items of value owned by a business.

  • They are either current or fixed.

  • Current assets are assets that are either used up or converted to cash during the normal cycle of the business.

    • The normal cycle is usually one year.

    • Cash, supplies, merchandise, and accounts receivable are all current assets.

      • Accounts receivable is the total amount of money owed to a business.

        • It represents money to be received in payments after goods or services are sold on credit.

  • Fixed assets are items of value that will be held for more than one year.

    • These include equipment and buildings.

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

      • Equity is the present value of an asset less all claims against it.

      • Liabilities are creditors’ claims to the assets of a business.

        • They are the debts of a company

  • Accounts payable represents the short-term liabilities that a business owes to creditors.

  • Owner’s equity is an owner’s claim to the assets of the business.

  • It is also referred to as the owner’s capital in the business.

The Accounting Equation

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

  • The accounting equation is a rule that states that assets must always equal the sum of liabilities and owner’s equity.

  • The assets side of the equation shows the value of everything that the business owns or possesses.

  • The other side shows the rights to those assets.

  • Liabilities are the rights that creditors have to the assets.

  • Owner’s equity shows the rights that the owner has to the assets.

Financial Statements

  • The accounting system is designed to generate financial statements and reports.

  • Financial statements are documents that summarize the changes resulting from business transactions that occur during an accounting period.

    • An accounting period is the period of time reflected by an accounting report.

  • The income statement is a report of the revenue, expenses, and net income or net loss over an accounting period.

    • It is sometimes called a profit and loss statement.

    • Income statements for different types of business operations vary in content.

      • A service business would have sales, expenses, and net income.

      • A merchandising business would also include the cost of merchandise purchased for resale.

  • A balance sheet is a report of the balances in all assets, liability, and owner’s equity accounts at the end of an accounting period.

  • Cash flows are the money that is available to a business at any given time.

  • The statement of cash flows is a financial report that shows incoming and outgoing money during an accounting period (often a month, quarter, or year).

    • One reason that a cash flow statement is very important is that firms can run out of cash even when they make a profit.

  • Today, most companies use computer programs to simplify their accounting procedures.

  • Microsoft Excel is a spreadsheet application that is commonly used in business.

  • Accounting software such as Peachtree Accounting and QuickBooks are programs that help people and businesses manage their finances.