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Chapter 2Financial Management and Planning
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What is management?
The process of working with or through others to achieve an individual or business goal by efficiently and effectively using resources.
Five basic functions› Planning› Organizing› Staffing› Directing› Controlling operations.
http://www.youtube.com/watch?feature=player_detailpage&v=vjyy33KpL6k
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Management Functions Planning is a systematic process that takes us from some
current state to some future desired state. › Strategic planning involves establishing an overall plan for the business.
– Where do we want our business to be at some time in the future?› Functional planning is driven by strategic plans and is related to
specific functional areas of a business such as accounting, marketing, or human resources.
– Financial planning– The reason so many businesses fail is because of a lack of adequate
financial planning.
Nobody begins a business with a plan for failure, but too many businesses have been started with a failure to plan.
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Management Functions (continued)
Goal setting is precursor to establishing a plan.› Goals must be measurable, achievable, and have a time frame.› Basic financial goals of a for-profit organization:
– To maximize the wealth of the business owners (investors) over the life of the business
– To meet interest payments on debt
– To grow
Goals vs Objectives› Goals are normally considered to be long term› Objectives are intermediate goals that measure progress toward the
overall long- term goal.
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Management Functions (continued)
Organizing is the second function of the manager and defines the structure of the business. › Who will do it? › What skills do they need? › What is the time frame that we have set in which to have it
accomplished? › Where will it be accomplished? › How do we get it accomplished?
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Staffing requires that the manager obtain the most capable personnel to implement the business plans. › Determine job requirements.› Develop a job description.
Directing (leading). Providing proper guidance and direction to others to accomplish the organization’s mission.
Management Functions (continued)
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Controlling is a three-step process:1) Establishing a standard of measurement
2) Measuring actual performance against the standard
3) Taking corrective action when actual performance varies from the established standard
1) Mgt vs Leadership1) http://www.youtube.com/watch?
feature=player_detailpage&v=lnaOz1TWENQ
2) Leadership styles1) http://www.youtube.com/watch?
feature=player_detailpage&v=X3rzcZTlVwg
Management Functions (continued)
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Forms of Business Ownership
United States Business Forms
Proprietorship71.91%
Public0.06%
C Corp7.35%S Corp
12.16%
Partnership8.52%
SOURCE: Internal Revenue Service, SOI Bulletin, Historical Table, Fall 2007. Excel ver. 4. August 2005. Securities & Exchange Commission filings.
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Forms of Business Ownership (continued)
A sole proprietorship is operated by an individual for profit.
A partnership is an association of two or more persons who carry out a business as co-owners for a profit.
A corporation is a legal entity with most of the rights of individuals
A limited liability corporation is a hybrid of a partnership and a corporation.
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Forms of Business Ownership (continued)
A sole proprietorship is operated by an individual for profit.› Advantages
– No formal legal requirements– Title to property is in owner’s name– No formal organizational style– All that is needed to start is an idea and a desire
› Disadvantages– Capital structure limited– Unlimited liability– Life of business = life of business owner– May lack managerial skills– May be difficult to hire long-term employees or employees with
specific skill sets• Accountant
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Forms of Business Ownership (continued)
A partnership is an association of two or more persons who carry out a business as co-owners for a profit.
– Advantages over sole proprietorship lies in the number of people involved.
› General partnership› Limited partnership
– Requires one general partner– “silent partners”
• Cannot participate in business
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Terms
Liability› Who pays?› Where does the money come from?
Taxes› Who pays?› What rate?
Buy-sell agreements› Stops the sale of interest to unknown people› Important because of liability issues
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The corporation is a legal entity according to U.S. law. › Incorporated in one of the fifty states or territories of the United States.
– Public Corporation: stock is sold to the public.– Private Corporation: Stock is not sold to the public.– All corporations are formed as C corporations unless they meet the
requirements of and request Subchapter S tax status.• Subchapter S corporation: Private corporation with special tax
status granted by Internal Revenue Service (IRS)• Maximum of 100 shareholders• No double taxation
Taxes› Who pays? What rate?
Forms of Business Ownership(continued)
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A Limited Liability Company (LLC) is a hybrid business entity having features of both partnerships and corporations.› Taxed as a partnership› Has limited liability for all owners› Flows through income and losses to individual owner’s tax returns › Not legal in all states
Forms of Business Ownership (continued)
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Forms of Business Ownership (continued)
Franchise not an actual form of ownership. A franchise is a business in which the buyer, who is the franchisee, purchases the right to sell the goods or services of the seller, who is the franchiser.
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Forms of Business Ownership (continued)
What form to choose?› Liability› tax advantages› financial support› the owner’s desires› the type and location of the business.
Three types of business owners› http://www.youtube.com/watch?
feature=player_detailpage&v=uhSEVjTciA0
Where to form the business› http://www.youtube.com/watch?
feature=player_detailpage&v=gRV6xx4BftQ
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Starting a Business
Run a SWOT analysis› Strengths are the core competencies of a business. They are those factors
that will make your business succeed because you perform in these areas better than your competitor.
› Weaknesses are those areas of your company that definitely need improvement.
› Opportunities are factors that exist outside of your business, but that if taken advantage of, will help your business to grow and prosper (e.g., low interest rates for business loans).
› Threats are factors that exist in the environment that may impede the growth of your business, directly or indirectly (e.g., new competition).
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Development of a Business Plan
Executive summary: Part of business plan that investors review to determine if they want to read further. Two pages or fewer, the executive summary should contain:› Business strategy for success› Brief description of the market and what makes your business unique› Brief description of the product or service› Brief description of management teams’ qualifications› Summary of revenue and expense projections› Estimate of how much money is needed and how it will be used
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General Company Description:› Mission Statement:
– Company goals– Company objectives– Business philosophy
› Form or forms of business ownership› Products and services› Marketing plan
– 4 Ps: Price, Product, Promotion, Place.– Government contracts as source of revenue
› Operational plan› Management and organization› Personal financial statement of each owner or major stockholder› Startup expenses and capitalization› Financial plan; a 4-year projection of profit
Development of a Business Plan (continued)
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Development of a Business Plan (continued)
Appendices› Brochures, advertising materials, business cards› Industry studies› Maps and photos of location› List of equipment owned or purchased› Copies of leases or contracts› Letters of support from suppliers and future customers› Market research studies› List of assets available for a loan
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Business Succession Plans Determine who will take the business if owner is unable to
function. Succession Planning
› Buy-sell agreement is overt› Owner and spouse on same page› Heirs receive ownership rights directly, or in trust› Ownership by family members only or do we include non-family members?› Gather information from spouse and children when formulating a buy-sell
agreement or succession plan.› Consult with attorney and other professionals.
http://www.youtube.com/watch?feature=player_detailpage&v=vITv-jjve9Y
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Financing a Business or Raising Capital
Suppliers of funds include lenders and investors› Lenders increase debt and include banks and any other lender
– The amount of the loan.
– How the funds are used.
– What the loan will accomplish and how it makes the business stronger.
– How many years to repay the loan
– What collateral is being offered for the loan.
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Sources of Financing Sources of financing typically include
› Personal assets: savings, investments, credit cards and home equity lines.
› Equity financing: retained earnings, fixed assets (buildings, equipment and inventory) as collateral.
› Small Business Administration:– Not a lender but a guarantor of a percentage of the laon
amount.– 504-Major machinery or building construction or expansion.– 7(a)-Guarantee Loan Program.– Other programs: Micro-loan Technical Assistance Grants,
SBA Micro-loan and Patriot Express Pilot Loan Initiative.
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Investors and Grants
› Investors increase company equity and expect a positive return on their investment:
– Company owners
– Angel investors provide seed money and mentoring to start-up businesses
– Venture capitalist normally invests in companies with proven track record
› Grants are monies provided to the firm which do not have to be paid back as long as grantee provides services for which the grant was approved.
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Steve jopbs and Management http://www.youtube.com/watch?
feature=player_detailpage&v=39mXMv8MyNI Gates and rules http://www.youtube.com/watch?
feature=player_detailpage&v=NSaCxGTuBng