Financial Planning

Video Transcription

Hello, and welcome to this tutorial on financial planning. Now as always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you'll spend here.

So let me ask you a question. How do we know where we are financially? Now in my day, we had something called the checkbook-- this little thing that we kept track of how much money we had, and how much money was going in and out. Well, as a business, what are the tools that we can use to make sure that we're where we need to be financially? Well during this tutorial, we're going to be talking about having a plan-- the importance of planning for your financial future. And also, we'll be taking a look at some common reports that are out there.

The key terms for this lesson, are going to be a balance sheet; income statement-- or revenue minus expenses equals profit or loss; statement of cash flows; the accounting equation-- assets equals liabilities plus owner's equity-- we'll get to that in a minute; assets; liability; owner's equity; and revenue.

So let's go ahead and get started with talking about having a plan. Now having a financial plan is something that financial managers spend a lot of their time doing. Now what they're going to be doing is taking a look at current financials, or things that are happening right now, as compared to one's goals or organization's goals. And they're going to be using that to anticipate requirements for finances or cash, and also looking at possible risk that we may be exposed to along the way. And not having a realistic financial plan is one of the key reasons that small businesses fail all the time.

Now, there are three different types of reports, called financial statements, that are created during a financial planning process. They are the balance sheet, the income statement, and the statement of cash flows. And this helps a business see their finances from different angles.

Now a balance sheet is a ledger that compiles the holdings, liabilities, and funds, laying out the income and expenditures of an organization during a specific point in time. So we're taking almost a snapshot of a business at a single point in time.

Now balance sheet, like I said, is a snapshot of a company's financial condition and it's useful because it gives current and short term information. Now some of the details it has on it are for one, assets. Now assets are items that are solid-- such as a building, or abstract-- such as a brand, that can produce value and/or add monetary value to a business, for instance.

Assets can be current like cash, or anything that could be converted quickly into cash within a year. This is something known as liquidity, or having a liquid asset-- something that can be converted rather quickly. Also fixed-- land, building equipment, long term value-- but these things can decrease, because they wear out. So this is called depreciation.

Also, we have intangible assets-- that brand, we mentioned in the key term definition. This could be feature expected monetary value of assets coming from assets such as patents, copyright, something called goodwill, or brand recognition.

We also have something called liabilities. And this is an item that is a present burden. Now you can have current liabilities-- debts that are payable within a year; and also long term liabilities-- debts that are payable in longer than a year. And also, we have something on a balance sheet called the owner's equity, and this is a mathematical formula indicating the owners contributions to the organization, minus the liabilities of the organization. And this is something that is going to be handled through the accounting equation. We'll cover that here in just a second.

But first, let's take a look at a typical balance sheet. Now a balance sheet, as you'll see, has assets on one side, and liabilities on the other. You see the assets are listed as fixed assets, those long term, or permanent things, and also current assets, things are short term like cash, and accounts receivable. And at the bottom there, you'll see your total assets for that column. And in this case, we're looking at it for one year, ending December 31, 2013.

On the other side, we have liabilities-- current liabilities, such as accounts payable, or short term notes, long term liabilities, like our mortgage. And everything else is owner's equity. And you'll notice that the left side-- assets and liabilities-- always match, they're always the same. In this case, it's $390,000. And you'll notice, also, that the assets, minus the liability, and owner, or this case, shareholder equity, is the accounting equation.

Assets is equal to the liability and owner's equity, and that's the definition of the accounting equation. You can see that in practice on the balance sheet. Now an income statement is something a little different. Sometimes it's referred to as r minus c equals p or l, which stands for revenue minus expenses equals profit or loss. And this is a report reflecting the income-- r, or revenue, minus the expenses-- e, for a set period of time-- say a year, or a quarter.

Now an income statement will include things like revenue-- the money acquired by an organization during a specific period of time. The cost of goods sold, or COGS-- and this is all the costs that are associated with getting a good to market. And the operating expenses are OE. These are additional costs, besides production of an actual item that a company incurs.

Now essentially a income statement is the profit and loss statement that shows the bottom line for that particular period of time, say a year. You may want to look at it to see how we're doing today, and also, how we did compared to last year or last quarter. Have we gotten better or have we gotten worse?

Here's an example an income statement. You'll see at the top here, we have revenue of $500,000, less returns and allowances, equals net sales of $300,000. Now here we have the cost of the goods-- and this is everything it takes to get the goods to market directly. And then we have operating expenses, like salaries and commissions for sales, or administrative expenses, and payroll taxes, and rent, and things like that. And what it all comes down to the bottom, we can see our year to date net income or loss, and our current month net income or loss.

Now next I'm going to talk about the statement of cash flows. And this is really how much cash we have on hand at any given time. Profit or net income or loss can be very, very different than the amount of cash that we have. Now a case statement of cash flows is a report reflecting the amount of revenue created and spent during a specified period of time. And investors want to see this to see what the health of the company is. And it's required by the Securities and Exchange Commission for any company that has their stock publicly traded.

Negative cash flows refer to as being in the red, and this demonstrates concern. That means the business maybe failing or you have a season flex or have a seasonal item like Christmas trees, for instance. Basically, negative cash flow means that you are laying out more cash than you're bringing in, and your bank account is getting smaller and smaller. Now positive cash flows refer to as being a black. And this is generally considered good, but may not always indicate a company making or exceeding its financial goals.

Yes, we're making money, but are we doing it in the same rate that we wanted to according to our plan? And we're looking at cash from three different areas. One, we're looking at cash flows from operation. This is money using buying and selling goods and services. Next, we're looking at cash flow from investing-- buying and selling the long term assets such as equipment, building, maybe stocks or bonds that the company benefits from. And we're looking at cash from financing-- borrowing and issuing one's own stock, or paying dividends, maybe repurchasing shares of stock within the company.

So let's take a look at a quick statement of cash flows. And we see here this was for January 1 through December 31 of 2013. And we see operating expenses, investment activities, and financing activities-- cash flows from these things, things like cash received from customers, or cash paid for capital assets, things like cash received from issuing stock. And we can see for this particular company, the cash balance at the end of the period was positive. We started off with $100,000 and at the end of the period, we had $194,000. So we essentially doubled our cash during this period.

So what have we talked about today? Well, we looked at having a plan, and why that's important for a business. We also talked about those common reports-- the balance sheet, the income statement, and the statement of cash flows that are vital for a business to understand where it is. Now as always, I want to thank you for spending some time with me today. And you folks have a great day.