Chapter 14 – Basic Financial Planning
14-1
CHAPTER
Basic Financial Planning
CHAPTER CONTENTS
Learning Objectives 14.2
Chapter Overview 14.2
Brief Chapter Outline 14.2
14
Chapter 14 – Basic Financial Planning
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LEARNING OBJECTIVES
After studying the material in this chapter, the student will be able to:
1. Explain the need for profit planning for a small business.
2. Discuss what causes changes in the financial position of a company.
CHAPTER OVERVIEW
Chapter 14 takes us into financial planning and control: learn the importance of financial man-
agement, to understand financial relationships, and to understand the time, energy, and initiative it takes
to turn this activity into business profits.
BRIEF CHAPTER OUTLINE
I. WHAT IS PROFIT PLANNING?
II. HOW A BUSINESS’S FINANCIAL POSITION CHANGES
A. Tracing Changes in a Company’s Financial Position
B. Importance of Accounting
III. WHAT IS THE FINANCIAL STRUCTURE OF A BUSINESS?
Chapter 14 – Basic Financial Planning
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IV. PROFIT-MAKING ACTIVITIES OF A BUSINESS
A. Revenue and Expenses
B. Profit
V. HOW TO PLAN FOR PROFIT IN A SMALL BUSINESS
A. Need for Profit Planning
VI. PROFIT PLANNING APPLIED IN A TYPICAL SMALL BUSINESS
A. Step 1: Establish the Profit Goal
B. Step 2: Determine the Planned Sales Volume
C. Step 3: Estimate Expenses for Planned Sales Volume
CHAPTER OUTLINE AND TEACHING NOTES
CHAPTER OPENING PROFILE:
Carpe Diem
The opening profile for this chapter features Tommy Sue Rusling, owner of Carpe Diem, a
specialty coffee shop. Before actually opening her business, Tommy Sue worked in a friend’s shop
to learn the business. She developed a financial plan based on how many cups of coffee were
I. WHAT IS PROFIT PLANNING?
Learning Objective 1.
Explain the need for profit planning for a small business.
A. Profit cannot be left to chance.
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
1. Small business owners tend to know
little about financial planning and con-
trol.
2. Small business efforts are often inad-
4. Profit planning is difficult for new en-
trepreneurs who have given up well-
paying jobs to go out on their own.
B. PROFIT PLANNING is a series of pre
scribed steps to be taken to ensure that a
profit will be made.
1. The important thing to remember at
2. Chapter 14 will help you:
a. Determine how much profit you
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
c. Evaluate, or estimate your firm’s
financial position.
II. HOW A BUSINESS’S FINANCIAL POSITION
CHANGES
Learning Objective 2.
Discuss what causes changes in the financial position of a
company.
A. As decisions are made and operations oc-
cur: cash received increases bank bal-
ties are used. .
B. Tracing Changes in a Company’s Fi-
nancial Position
1. Is your business making a profit?
a. Profits are not always cash.
2. Trace the changes in your company.
3. BENCHMARKING is setting up
standards (for reference) and then
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
C. Importance of Accounting
1. Without accounting the owner would
2. ACCOUNTING RECORDS are rec-
ords of a firm’s financial position that
reflect any changes in that position:
3. Accounting records must accurately
4. Often small business owners fail to
monitor all aspects of their business
and don’t realize their businesses are
in trouble until it is too late.
III. WHAT IS THE FINANCIAL STRUCTURE OF
A BUSINESS?
Learning Objective 3.
Understand the financial structure of a business.
A. The FINANCIAL STRUCTURE describes
the relative proportions of a firm’s assets,
liabilities, and owners’ equity.
1. The total liabilities plus owners’ equity
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
a. The balance sheet shows how
B. ASSETS are the things a business owns.
1. Current assets are expected to
change from one form to another
within a year.
a. Cash includes the bills, coins,
nue.
b. ACCOUNTS RECEIVABLE are
current assets resulting from sell-
ing a product on credit.
(1) Accounts receivables are
created by giving credit to
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
C. LIABILITIES are the financial obliga–
tions of the business.
1. A business can obtain funds through
owner investment and by borrowing,
which is creating an obligation to pay.
a. Owner investment, which is nec–
2. ACCOUNTS PAYABLE are the obli-
gations to pay, resulting from pur-
chase of goods and services.
a. Accounts payable are usually
due within 30 or 60 days, de-
D. OWNERS’ EQUITY is the owners’ share
of (or net worth in) the business, after lia-
bilities are subtracted from assets.
1. Owners receive income from profits:
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
a. In the form of dividends, or
IV. PROFIT-MAKING ACTIVITIES OF A BUSI-
NESS
Learning Objective 4.
Learn how to plan to make a profit in a small business.
A. An INCOME STATEMENT (PROFIT AND
LOSS STATEMENT) periodically shows
revenues, expenses, and profits from a
firm’s operation.
B. Revenue and Expenses
1. REVENUE (SALES INCOME) is the
value received by a firm in return for
C. PROFIT (INCOME) is the difference be–
tween revenues earned and expenses in-
curred.
1. Profit may be called gross income,
operating profit, net income before
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
V. HOW TO PLAN FOR PROFIT IN A SMALL
BUSINESS
Learning Objective 5.
Plan for a profit for an actual small business.
A. Dun & Bradstreet says that a well-man-
aged small business has the following
characteristics:
1. It is more liquid than a badly man-
aged company.
4. Long-range planning is important.
B. Need for Profit Planning
1. The income statement shows past
performance.(See Figure 14.2.)
C. Steps in profit planning to achieve goals:
1. Establish a profit goal.
2. Determine the volume of sales
needed to make that profit.
Chapter 14 – Basic Financial Planning
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CHAPTER OUTLINE AND TEACHING NOTES
(Doing steps 6-10 may help your under
standing of how changes in operation
can help your profit planning goal.)
6. List possible alternatives that can be
D. Need for Realism in Profit Planning
1. Be realistic when going through these
steps.
2. The greater the uncertainty, the
greater the need for planning.
VI. PROFIT PLANNING APPLIED IN A TYPICAL
SMALL BUSINESS
A. This section uses steps in planning for
The Model Company, shown in Figure
14.9.
Step 1: Establishing the Profit Goal
1. A PROFIT GOAL is the specific
Chapter 14 – Basic Financial Planning
CHAPTER OUTLINE AND TEACHING NOTES
3. After you have set this goal deter-
Step 2: Determine the Planned Sales Vol-
ume
1. A SALES FORECAST is an estimate
of the amount of revenue expected
from sales for a given period in the
future.
Step 3: Estimate Expenses for Planned
Sales Volume
1. To estimate expenses for the coming
year, track expenses closely for a
month or two.
2. Then record last year’s and adjust for
Step 4: Determine the Estimated Profit by
deducting estimated expenses from the
estimated sales income, then adding any
other income.