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Student Workbook

Budgets and Managing Money

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Budgets and Managing Money

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Student Workbook

Copyright

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All rights reserved world-wide under International and Pan-American copyright

agreements. No part of this document can be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without the prior written permission of Velsoft.

Table of Contents

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Session One: Introduction and Course Overview........................................................................................... 1

Session Two: Finance Jeopardy ..................................................................................................................... 2
Session Three: Your Role in Company Finances ........................................................................................... 4
Session Four: What is Finance?...................................................................................................................... 6
Session Five: Getting to Know the Players .................................................................................................... 7
Session Six: Record Keeping Terminology.................................................................................................... 9
Session Seven: The Balance Sheet ............................................................................................................... 11
Balance Sheet Overview ..................................................................................................................... 11
Assets = Liabilities................................................................................................................................ 1
Assets = Debts + Equity........................................................................................................................ 1
Equity = Assets - Debts......................................................................................................................... 1
Sample Balance Sheet......................................................................................................................... 14
Session Eight: Liabilities and Equity............................................................................................................ 16
Smiths Gourmet Foods ...................................................................................................................... 16
Galvez Manufacturing Company ........................................................................................................ 17
Session Nine: Profit and Loss Statement (AKA Income Statement)........................................................... 19
Session Ten: Tracking Business Expenses ................................................................................................... 21
Ways to Track Expenses ..................................................................................................................... 21
Session Eleven: Analyzing Financial Statements......................................................................................... 22
Session Twelve: Almanac ............................................................................................................................ 26
Session Thirteen: Using Accounting Software............................................................................................. 27
Things to Consider.............................................................................................................................. 27
Small Group Exercise ......................................................................................................................... 29
Session Fourteen: The Importance of Bookkeeping.................................................................................... 31
Session Fifteen: Pre-Assignment Review..................................................................................................... 36
Session Sixteen: Budget Basics.................................................................................................................... 37
Defining a Budget ............................................................................................................................... 37
Preparing a Budget.............................................................................................................................. 40
Case Study .......................................................................................................................................... 42
Types of Budgets ................................................................................................................................ 43
Session Seventeen: Managing Profit Performance....................................................................................... 45
Session Eighteen: Comparing Investment Opportunities ............................................................................. 47
Session Nineteen: The Human Aspect ......................................................................................................... 48
Session Twenty: Credits vs. Debits .............................................................................................................. 50
Session Twenty-One: ISO 9000 ................................................................................................................... 52
What is ISO 9000? .............................................................................................................................. 52
Small Group Exercise ......................................................................................................................... 53
Session Twenty-Two: Decision Making ...................................................................................................... 56
Task Explanation ................................................................................................................................ 56
Decision 1: Office Relocation............................................................................................................. 60
Decision 2: Reproduction Backlog ..................................................................................................... 62
Decision 3: Improving Supervision .................................................................................................... 64
Decision 4: Job Enrichment ................................................................................................................ 66
Decision 5: Staff Expansion................................................................................................................ 68
A Personal Action Plan ................................................................................................................................ 69
Recommended Reading List......................................................................................................................... 70

Budgets and Managing Money |

Session One: Introduction and Course Overview

Course Overview

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For managers in todays business world, its essential to have a working knowledge of
finance. We all play a role in our organizations financial health, whether we realize it or
not. If you dont have training or a background in finances, you may be at a disadvantage
as you sit around the management table. Understanding the cycle of finance will help you
figure out where you fit into your companys financial structure, and how to keep your
department out of the red. This two-day workshop will familiarize you with the key
concepts of finance and accounting and help you prepare budgets with more confidence.

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Learning Objectives

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Personal Objectives

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At the conclusion of this workshop, you should be able to:

Understand basic financial terminology.
Enhance your decision-making skills by integrating financial management
concepts into your thinking.
Review various software applications for managing finances.
Control the flow of money through your department.
Understand the budgeting process and forecasting techniques.

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Budgets and Managing Money |

Session Two: Finance Jeopardy

Question

Answer

True or False: Understanding the cycle of

finance will help you figure out where you
fit into your companys financial structure.
True or False: The assets of a company are
money owed to the business.

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Which of the following are assets?

Cash
Prepaid expenses
Accounts payable
Equipment
Accounts receivable
Raw materials inventory
Land and buildings
Wages payable

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True or False: Bookkeeping principles

dictate that computer accounting software
must be used.

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What is one approach to preparing a

budget?

True or False: Finance is the art of raising,

managing, and making money.
Define GAAP.
Which of the following are liabilities?
Taxes
Loans payable
Accounts payable
Unearned sales
Income equipment
Wages payable

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Budgets and Managing Money |

True or False: Over the short term, the cash

balance of a company has very few
fluctuations.
Finance is a process that involves three
essential steps. Name one.
True or False: All of the debts of a business
and its equity are together referred to as a
business liability.

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What is one of the parts of the cash flow

statement?

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What are the two types of assets?

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True or False: Sunk costs are also referred

to as out-of-pocket costs.

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What is another name for the profit and loss

statement?

What currency does Canada use?

What is the ISO slogan?

What is a common way of tracking

purchases?

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What is one of the major components to a

companys financial results?
What is the role of a controller?
What currency does Japan use?
True or False: The best way to plan your
budget is to make a copy of last years
budget and add $10,000 to each item.
Name two types of budgets.
Which ISO standard applies to
manufacturing?
What is the advantage to a cash budget?

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Budgets and Managing Money |

Session Three: Your Role in Company Finances

If you are a sales manager or an ad manager, you can influence the speed with which
your company makes its sales and converts its inventory into cash. Obviously this has an
effect on the way your company manages its finances. If sales are strong, your company
can buy more goods, and if sales are slow, you may be able to influence more sales. If
you are a computer programmer or a shipping clerk, you play a role in the process too.
You influence the speed with which information and goods flow into and out of your
company. If information flows faster than normal, costs are reduced. If they move slower,
expenses rise. So this too has an impact on how company finances must be managed.

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In fact, there isnt a single department, division, work unit, or employee who doesnt
come into contact with a companys finances. Assets and liabilities, revenues and
expenses, are affected every time an employee is hired, merchandise is moved, or
paperwork is pushed.

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What you do matters. Lets say you are a sales representative for a wholesale bakery,
with $10 million in accounts. It takes some bakeries as long as 30 days to collect their
money. Others get their clients to pay up in about 25 days. If you could convince your
clients to do the same, you could save your company nearly $36,000 a month or $140,000
a year.

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How is that possible?

What if you work in the companys payroll department? According to the American
Institute of Certified Public Accountants, the average large American company spends
$1.91 to process each weekly pay check. Efficient companies can do it for just 36 cents
per check. If you could save $1.41 per employee check, per payday, how much could you
save your company over the course of a year?

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Budgets and Managing Money |

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Typical Financial Structure of a Company

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Note that even people at the bottom of the diagram are affected by finances.

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How they you, as an employee, affected by your companys finances?

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Budgets and Managing Money |

Session Four: What is Finance?

Finance is the art of raising, managing, and making money in business. Its not a
synonym for accounting, nor is it interchangeable with banking. Finance is a process that
involves three essential steps:
1) Assessing the financial health of your firm
2) Using that information to plan for future performance
3) Executing that plan

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Once a company finishes the third stepexecuting its planit goes back and reassesses
its performance again, and this cycle of finance repeats itself in a continuous loop.

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What are some of the obstacles and pitfalls faced by large corporations and by small
businesses?

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How are they different?

How are they the same?

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Budgets and Managing Money |

Session Five: Getting to Know the Players

Understanding the cycle of finance will help you figure out where you fit into your
companys financial structure. You will also want to figure out what the key financial
players in your company really do.
The CFO, or Chief Financial Officer of a company, is its second most important figure,
just behind the CEO, or Chief Executive Officer. They, like CEOs, should have a
companywide perspective.

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Measurers are focused on assessing and planning.

Controller/comptroller*
Accountants
Tax Accountants
Cost Accountants
Internal Auditors
Budget Officers

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Then there are the measurers and the managers.

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Managers are focused on planning and execution.

Credit Managers
Inventory Managers
Plant Managers
Capital Budgeting Staff
Budget Officers
Sales Staff

*The Controller is the chief accountant for the company. The word controller comes from
the fact that one of the chief uses of accounting data is to control the operations of a
business.

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Budgets and Managing Money |

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Budgets and Managing Money |

Session Six: Record Keeping Terminology

Now, lets get some of the terminology clarified. For anyone unfamiliar with the terms
and concepts of accounting, grasping these basic ideas may be the most difficult part of
financial management.
Accounting

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Accounting is described as the art of identifying, measuring, recording, interpreting and

communicating the results of economic activities. Accounting is a set of guidelines.
These guidelines govern how businesses record transactions and the design of the recordkeeping system which a business uses, and the preparation of reports, based on the
information gathered and put into the system.

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GAAP

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Accounting forces people to measure things in a relatively consistent manner. These

accounting concepts and standards are called generally accepted accounting principles
(GAAP).

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GAAP includes the following principles:

Comparability among different companies
Reliability of the information
The business entity concept: A business is a separate distinct entity from its
owner/owners.
The cost principle: Assets and service, and the resulting liability are taken into the
accounting records at cost.
The going-concern principle: The business will continue to operate, using its
assets to carry on its operations and, with the exception of merchandise, not
offering the assets for sale.
The objectivity principle: A rule requiring that whenever possible the amounts
used in recording transactions be based upon objective evidence rather than on
subjective judgments.
The stable-dollar assumption: The idea that the purchasing power of the unit of
measure used in accounting, the dollar, does not change
The realization principle: This principle defines revenue as an inflow of assets,
not necessarily cash, in exchange for goods or services. It requires the revenue to
be recognized at the time, but not before it is earned.

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Budgets and Managing Money |

Bookkeeping

Bookkeeping is the record keeping aspect of accounting. Each financial event or

transaction has to be entered.

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The transactions entered during the bookkeeping process usually fit into one of the six
following classifications. The transactions take place between the business and:
Customers, who buy products and services sold by the business
Employees, who are paid wages and provided benefits
Vendors, who sell services, equipment and supplies to the business
Government agencies, who collect taxes from the business
Sources of equity capital, investors or owners who put money in and take it out of
the business
Sources of debt capital, banks and lending institutions

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Certain accounting principles and terms have been adopted as standard over the years to
make it easier to understand a wide range of business transactions. There are two
standard reports which are the main sources of business financial information: the
balance sheet and the profit and loss statement or income statement.

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Budgets and Managing Money |

Session Seven: The Balance Sheet

Balance Sheet Overview

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The purpose of a balance sheet is to show what a company owns and owes on a specific
date. By seeing what a business owns and owes, anyone looking at a balance sheet can
tell the relative financial position of the business at that point in time. If a business owns
more than it owes, its probably in good shape financially. On the other hand, if a
company owes more than it owns, the business may be in trouble. The balance sheet is
the universal financial document used to view this aspect of a business.

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Balance Sheet Terms

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It provides this information by laying out the value of the assets and the liabilities of the
business. One of the simplest accounting tenets remains one of the most important: the
balance sheet must balance. No one account can change independently.

The assets of a company are anything that the business owns. These can be cash on hand,
or in a bank account, personal property like office equipment, vehicles, tools, real estate,
buildings, and land.
Money which is owed to a business is called accounts receivable, basically the money the
company hopes to receive in return for goods or services it has provided

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The liabilities of a business are anything the business owes to others, like long-term loans
such as mortgages or short-term debts such as bills to suppliers. Money which a company
owes in the short term, to others, usually to suppliers is called accounts payable. These
are also referred to as trade payables.
In addition to the money owed to others, the equity of a company is also considered a
liability. In a partnership or sole proprietorship, the business equity is referred to as the
net worth of the business. If the business is a corporation, the owners equity is called the
capital surplus or retained capital. All of the debts of a business and its equity are
together referred to as a business liabilities.

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Budgets and Managing Money |

Assets and Liabilities

The basic relationship between the assets and liabilities can be shown in a simple
equation:

Assets = Liabilities

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This simple equation is the basis of business accounting. When the books of a business
are said to balance, it is this equation which is in balance. The assets of a business equal
the liabilities of a business. Since the liabilities of a business consist of both equity and
debts, the equation can be expanded to read:

Assets = Debts + Equity

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Rearranging the equation another way, you can say that the value of a business is:

Equity = Assets - Debts

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A basic tenet of record-keeping is that both sides of this financial equation must always
be equal. The formal statement of the assets and liabilities of a specific business on a
specific date is called a balance sheet. It is usually prepared on the last day of the month,
the quarter, or the year.
Current vs. Fixed Assets

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On a balance sheet, the assets of a business are generally broken down into two groups:
current assets and fixed assets.
Current assets are generally considered to be anything that can be converted into cash
within one year, such as cash, accounts receivable, and inventory. Current assets
continually revolve through the firm. A business uses cash to purchase inventory, pay for
goods and services, and pay employees.
Fixed assets are more permanent type assets, and include vehicles, equipment,
machinery, land, and buildings. They represent a permanent investment that enables a
company to carry on its operations. Fixed assets can also revolveto purchase new
equipment or update technology, for examplebut usually they revolve very slowly, and
thus at a particular time, accountants consider these assets permanent.
Liquidity provides a relative measure of how quickly a company can convert its assets
into cash, in order to meet its obligations. The easier the conversion, the more liquid the
asset.

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