Chapter 12.1 - financial planning Flashcards
a cash budget will determine if a business has adequate financial resources on hand to pay bills as they become due or if they will need to ____ money
borrow
how is a business budget similar to a personal or family budget?
- has same goals - spending money, where money is going and how it is coming in
- both try to come out with a profit
costs of operating a business
expenses
to develop an effective _____, information to predict income and expenses is needed
to develop an effective budget, information to predict income and expenses is needed
a _____ identifies where a business is going
budget
true or false
financial planning is needed by a small business only until it begins to make a profit
false
needed by all businesses
what things are included in the cash budget?
sales, rent, electricity, bills, income
What are the 2 main purposes of a business budget?
- anticipate sources and amounts of income for a business
- predict the types and amounts of expenses for a specific business activity or the entire business
_____ requires an understanding of financial info, computer skills, mathematical abilities and effective communication skills
budgeting
when planning an _____ budget, income and expenses from previous budgets are reviewed. planners look for possible changes that could increase or decrease income and expenses.
operating
What else happens during the business expansion phase?
(think of the areas of business)
- research
- locate new markets
- new factories, equipment, employees
- marketing
- all of these things cost a lot of money
- a lot of plannign is required
- have to predict how much money will be made when you expand
in a large business, each ____ will be resposible for one or more budgets in his/her area of operation
manager
the most important step in financial plannign is developing a ____
budget
the basic financial equation is
- revenue - profit = loss
- expenses + revenue = profit or loss
- profit - loss = revenue and expenses
- revenue - expenses = profit or loss
revenue - expenses = profit or loss
ongoing _____ require that employees be paid, supplies and materials ordered and buildings maintained
ongoing operations require that employees be paid, supplies and materials ordered and buildings maintained
for businesss that have operated for several years, identifying sources of income and types of expenses is ____ difficult
NOT difficult because the business has financial records from previous years to help
financial plan for ongoing operations of the business for a specific period
operating budget
What are 3 types of budgets?
- start-up budget
- operating budget
- cash budget
why is it so important for a business to manage its finances?
- finances are a key part of the operations of all businesses
- every business activity costs money
- without careful planning and management, those costs can grow to a level where the business income cannot cover the expenses
if revenue is greater then expenses, the business will make a _____
profit
what skills and people are necessary for preparing a business budget?
- person that understand financial info
- computer skills
- mathematic ability
- good communication skills
the costs of _____ are some of the highest expenses for most businesses
the costs of personnel are some of the highest expenses for most businesses
what are the goals of a budget?
- to determine the sources and amounts of income
- to identify the types of expenses and predict their costs
- to determine how income will be distributed to cover those expenses
- to reward investors if there is a profit
why is budgeting difficult for new businesses?
it’s difficult because you have no previous records to look at
for a business to succeed, enough ____ must be available to pay all expenses
for a business to succeed, enough revenue must be available to pay for expenses
how is a budget like a GPS or road map?
it allows you to see where you are going
ex. showing you the right turn to take
a _____ business will have many specialized budgets
a larget business will have many specialized budgets
If the financial planning for an expansion is not correct what could happen?
the expansion could result in large losses rather than profits and even a successful business could fail
even profitable businesses may have times when adequate (enough) cash is not available due to high ____ or delay in receiving payment from customers
even profitable businesses may have times when adequate cash is not available due to high expenses or a delay in receiving customer payments
plans income and expenses from the beginning of a new business or a major business expansion until it becomes profitable
start-up budget
determine the profit or loss for following:
revenue $85,695; expenses $72,624
profit $13,071
a ____ budget anticipates that cash will come into a business and that cash will be paid out during each week or month of operation
cash
a cash budget can show when there is a lot of cash on hand that some of it can be ______
invested
budgeting is difficult for new businesses because ______
no financial records exist to help as a guide
provides detailed plans for the financial needs of individuals, families and businesses
budget
Many new businesses _____ due to poor financial planning
many new businesses fail due to poor financial planning
what financial questions must a new business answer?
- how much money will be needed to start the business?
- where will that financing come from?
What is the basic financial equation? Why is it important?
- every business is guided by the basic financial equation: revenue minus expenses equals profit or loss
- the difference between revenue and expenses determines whether a business makes a profit or loss
- if revenue is greater than expenses, the business will make a profit
- if expenses exceed revenue, the business will suffer a loss
What are managers responsible for?
they are responsible for the cost of the businesss they manage
why is financial planning so important?
- from the first day you begin plannign the business and each day it operates, financing questions must be addressed
- even the most successsful businesses are continually active in financial planning
what time period does a cash budget cover?
each week or month
if expenses exceed revenue, the business will suffer a ____
loss
a budget allows the owner to determine if the business is making progress towards its _____ destination
financial
Employees are needed to do the ____ of the business
employees are needed to do the work of the business
true or false
a cash budget is an estimate of the actual money received and paid out for a specific period
true
shows money that comes in and out
what period of time is a start-up budget covered?
until the business becomes profitable
by comparing the business’ financial performance to the budget, the owner can determine if the budget ____ are being met
goals
the most important step in financial planning is developing a _____
budget
What are some expenses incurred with new employees?
- training employees
- hiring employees
- trying to make sure employees do a good job
provides detailed plans for the financial needs of individuals, families and businesses
budget
Without careful planning and ______, costs can grow to a level where the business income cannot cover the expenses
without careful planning and management, costs can grow to a level where the business income cannot cover the expenses
When a business expansion is anticipated, financial planning must be completed. What must the planning anticipate?
- must anticipate the costs associated with the expansion
- the source of the funds to pay for the expansion
- the source of the funds to pay for the expansion
- the expected income that will result from the new plans
What are the 4 steps in the budgeting process?
- prepare a list of each type of income and expense that will be a part of the budget
- gather accurate info from business records and other info sources for each type of income and expense
- create the budget by calculating each type of income, expense and the amount of net income or loss
- explain the budget to people who need financial info to make decisions
what are the steps in preparing a business budget?
- prepare a list of each type of income and expense that will be part of the budget
- gather accurate info from business records or other sources for each income and expense
- figure out net income or loss based on info gathered
- explain the budget to people how need the financial info to make decisions
why do new businesses fail?
- many new businesses fail due to poor financial planning
- experts in business finance should be consulted to help the new business with its financial planning
even though a new business might not be making a profit, it still must have enough _____ on hand to pay current expenses
cash
a business must be able to identify and predict the ____ of each source of income and each type of expense
a business must be able to identify and predict the amount of each source of income and each type of expense
successful businesses ____ to be able to serve more customers, reach unserved markets and sell new products
successful businesses expand to be able to serve more customers, reach unserved markets and sell new products
how does a business develop its budget?
- the business must be able to identify and predict the amount of each source of income and each type of expenses
- in addition, the business will need to determine when each expense must be paid and when income will be received
- for business to succeed, enough revenue must be available to pay all expenses
investing cash on hand provides another source of business _____
income
all income that a business receives over a period of time
revenue
what things are included in a start-up budget?
buildings, inventory, employees, training, supplies, utilities, transportation
where and how do businesses gather sources of budget info?
- Small Business Administration (SBA)
- Dunn and Bradstreet (private business that collects and shares public business info)
- business magazines
- professional associations
Why and when do businesses expand?
- successful businesses expand to be able to serve more customers, reach unserved markets, and sell new products
- expansion costs money though
- the hope is that the income generated by the expansion will be far greater than the cost
- a more profitable business is the result
what period of time does an operating budget cover?
3 months, 6 months or 1 year
an estimate of the actual money received and paid out for a specific period
cash budget
What do employees do?
- needed to do work
- ex. walmart employees stock shelves, work the registers
employees that are well trained, motivated and efficient will be ____ productive than those that are not
employees that are well trained, motivated and efficient will be more productive than those that are not
2 main purposes of a business budget
- anticipate sources and amounts of income for a business
- predict the types and amounts of expenses for a specific business activity or the entire business
determine the profit or loss for the following
revenue $1,824,300; expenses $2,183,680
loss -$362,380
what things are included in operating budget?
income and expenses
