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Building a financial budget






 

Key Words and Phrases:

 

payroll Ò платіжна відомість
fire Ò включення
to enable Ò надавати можливість
short/ long-range Ò короткостроковий/довгостроковий
ample time Ò достатній час
to adjust Ò вивіряти
occurrence Ò подія
upward Ò спрямований (що рухається) вгору
ongoing planning tool Ò постійний механізм планування
vital Ò життєво важливий
to pertain Ò належати, стосуватися
product line Ò асортимент виробів
impact Ò вплив
inventory purchase Ò покупка обладнання
debt service Ò обслуговування боргу
assumptions Ò орієнтовні розрахунки
facilities Ò можливості
unemployment tax Ò податок у фонд допомоги безробітним
additional Ò додатковий
subsequent Ò наступний, той, що є результатом
collateral Ò застава
forecast Ò прогноз
cumbersome Ò обтяжливий; громіздкий
gross profit margin Ò коефіцієнт валового прибутку
accounts receivable Ò дебіторська заборгованість, рахунки дебіторів
intangible asset Ò нематеріальний актив
paid-in-capital Ò оплачувана частина акціонерного капіталу; оплачена частка акціонерного капіталу; оплачений пай; оплачуваний пай
retained earnings Ò нерозподілений прибуток
wide-ranging changes Ò широкомасштабні зміни
pro forma Ò приблизний, орієнтовний
plugged Ò тут: включений
background Ò основа
input Ò введення даних

 

For many small-business owners, the process of budgeting is limited to figuring out where to get the cash to meet next week's payroll. There are so many financial fires to put out in a given week that it's hard to find the time to do any short- or long-range financial planning. But failing to plan financially might mean that you are unknowingly planning to fail.

Business budgeting is one of the most powerful financial tools available to any small-business owner. Put simply, maintaining a good short- and long-range financial plan enables you to control your cash flow instead of having it control you.

The most effective financial budget includes both a short-range month-to-month plan for at least a calendar year and a quarter-to-quarter long-range plan you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year-end to allow ample time for sufficient information-gathering.

The long-range plan should cover a period of at least three years (some go up to five years) on a quarterly basis, or even an annual basis. The long-term budget should be updated when the short-range plan is prepared.

While some owners prefer to leave the one-year budget unchanged for the year for which it provides projections, others adjust the budget during the year based on certain financial occurrences, such as an unplanned equipment purchase or a larger-than-expected upward sales trend. Using the budget as an ongoing planning tool during a given year certainly is recommended. However, here is a word to the wise: Financial budgeting is vital, but it is important to avoid getting so caught up in the budget process that you forget to keep doing business.

What Do You Budget?

Many financial budgets provide a plan only for the income statement; however, it is important to budget both the income statement and balance sheet. This enables you to consider potential cash flow needs for your entire operation, not just as they pertain to income and expenses. For instance, if you had already been in business for a couple of years and were adding a new product line, you would need to consider the impact of inventory purchases on cash flow.

Budgeting the income statement only also doesn't allow a full analysis of potential capital expenditures on your financial picture. For instance, if you are planning to purchase real estate for your operation, you need to budget the effect the debt service will have on cash flow. In the future, a budget can also help you determine the potential effects of expanding your facilities and the resulting higher rent payments or debt service.

How Do You Budget?
In the start-up phase, you will have to make reasonable assumptions about your business in establishing your budget. You will need to ask questions such as:

· How much can be sold in year one?

· How much will sales grow in the following years?

· How will the products and/or services you are selling be priced?

· How much will it cost to produce your product? How much inventory will you need?

· What will your operating expenses be?

· How many employees will you need? How much will you pay them? How much will you pay yourself? What benefits will you offer? What will your payroll and unemployment taxes be?

· What will the income tax rate be? Will your business be an S corporation or a C corporation?

· What will your facilities needs be? How much will it cost you in rent or debt service for these facilities?

· What equipment will be needed to start the business? How much will it cost? Will there be additional equipment needs in subsequent years?

· What payment terms will you offer customers if you will sell on credit? What payment terms will your suppliers give you?

· How much will you need to borrow? What will the collateral be? What will the interest rate be?

As for the actual preparation of the budget, you can create it manually or with the budgeting function that comes with most bookkeeping software packages. You can also purchase separate budgeting software.

Yes, this seems like a lot of information to forecast. But it is not as cumbersome as it looks. The first step is to set up a plan for the following year on a month-to-month basis. Starting with the first month, establish specific budgeted dollar levels for each category of the budget. The sales numbers will be critical since they will be used to compute gross profit margin and will help determine operating expenses, as well as the accounts receivable and inventory levels necessary to support the business. In determining how much of your product or service you can sell, study the market in which you will operate, your competition, potential demand that you might already have seen, and economic conditions. For cost of goods sold, you will need to calculate the actual costs associated with producing each item on a percentage basis.

For operating expenses, consider items such as advertising, auto, depreciation, insurance, etc. Then factor in a tax rate based on actual business tax rates that you can obtain from your accountant. On the balance sheet, break down inventory by category. For instance, a clothing manufacturer has raw materials, work-in-process and finished goods. For inventory, accounts receivable and accounts payable, you will figure the total amounts based on a projected number of days on hand.

Consider each specific item in fixed assets broken out for real estate, equipment, investments, etc. If your new business requires a franchise fee or copyrights or patents, this will be reflected as an intangible asset. On the liability side, break down each bank loan separately. Do the same for the stockholders' equity-common stock, preferred stock, paid-in-capital, treasury stock and retained earnings.

Do this for each month for the first 12 months. Then, prepare the quarter-to-quarter budgets for years two and three. For the first year's budget, you will want to consider seasonality factors. For example, most retailers experience heavy sales from October to December. If your business will be highly seasonal, you will have wide-ranging changes in cash flow needs. For this reason, you will want to consider seasonality in the budget rather than take your annual projected year-one sales level and divide by 12.

As for the process, you will need to prepare the income statement budgets first, then balance sheet, then cash flow. You will need to know the net income figure before you can prepare a pro forma balance sheet because the profit number must be plugged into retained earnings. And for the cash flow projection, you will need both income statement and balance sheet numbers.

No matter whether you will budget manually or using software, it is advisable to seek input from your CPA in preparing your initial budget. His or her role will depend on the internal resources available to you and your background in finance. You may want to hire your CPA to prepare the financial plan for you, or you may simply involve him or her in an advisory role. Regardless of the level of involvement, your CPA's input will prove invaluable in providing an independent review of your short- and long-term financial plan. In future years, your monthly financial statements and accountant-prepared year-end statements will be very useful in preparing a budget.

NOTE:

CPA (certified public accountant) -дипломований незалежний бухгалтер вищої кваліфікації (У США).

TEXT V

Investment Strategy

Key Words and Phrases:

 

long-term goals Ò довгострокові цілі
ongoing challenge Ò постійний сумнів
estimate Ò оцінка
return on investment Ò дохід на інвестиції; дохід на вкладений капітал; дохід на капіталовкладення
trade-off Ò тут: обмін
to attempt Ò робити спробу, намагатися
equity market Ò фондовий ринок
volatile Ò нестійкий
transaction costs Ò трансакційні витрати
market timing Ò вибір часу для операцій на ринку
beneficial Ò вигідний
real estate Ò нерухоме майно, нерухомість
holding period Ò період володіння
lifespan Ò строк, тривалість
market index Ò індекс ринку
to denote Ò визначати
rigid Ò суворий
excessive Ò надмірний
stifle Ò душити
mutual fund Ò взаємний фонд
capital appreciation Ò приріст капіталу
capital gain distribution Ò розподіл доходів від приросту основного капіталу
renewable Ò відновлюваний
to apply Ò застосовуватися

 

A well-planned investment strategy is essential before having any investment decisions. A business strategy is generally based upon long-run period. Formation of business strategy is largely dependent upon the factors such as long-term goals and risk on the investment. As the return on investment is not always clear, so the investors prepare the strategy so as to face the ongoing challenges in investment. A balanced investment strategy is generally required in the process of investment, which possesses long time period and some risk tolerance.

In the case, when a strategy is aggressive the chance of attaining a higher goal is higher. An efficient strategy can be obtained from portfolio theory, which shows good estimates on risk and return.
Investment Strategy is usually considered to be more of a branch of finance than economics. It is defined as set of rules, a definite behavior or procedure guiding an investor to choose his investment portfolio. For example, investing in mutual funds has recently emerged as a very favorable investment strategy.

An investment strategy is centered on a risk-return trade-off for a potential investor. High return investment instruments such as real estate and mutual funds usually have more risks associated with it than low return-low risk investment opportunities. Return on investment can be calculated on past or current investment or on the estimated return on future investment.

Types of investment strategies can be defined as follows:
A passive investment strategy attempted to minimize transaction costs.
An active investment strategy guide used to maximize returns based on moves such as proper market timing. This usually mean, “buying in the lows and selling in the highs” or buying investment instruments when they are cheap and selling them off when their price appreciates. This strategy, however, is not very beneficial for small time investors.

Small time investors can adopt the buy and hold investment strategy to invest in equities, which although volatile in nature, give favorable long-run returns. Investing in equity markets for small time investors is associated with the investors holding on for very long periods. In the case of real estate, the holding period extends the lifespan of the mortgage. Notably, in case of this strategy, indexing or buying a small proportion of all the shares in market index or a mutual fund is a purely passive variant of the above strategy.

The strategy of value investing, a classic investment strategy propagated by Benjamin Graham simply concentrates on the strategy that an investor buys shares of a company as if he was buying off the whole company without paying any attention to the stock market scenario or any exterior conditions such as the political climate. At the end of the day, if he can buy the stock at less than that its actual future worth to the buyer, the person is said to have discovered a “value investment.”

Investment strategies can also denote the investment strategies a national or federal government should follow to bring about economic growth in a country. This can only be achieved by domestic investment as well as significant FDI (Foreign Direct Investment) flows to particular sectors of countries, especially the less developed ones of Asia and Africa.

In case of India, infrastructural problems, excessive government intervention, rigid labor laws and corruption are stifling the flow of FDI in the critical sectors. Less developed countries such as those in the Asia-Pacific region and Africa can bring about much needed development in these economies.

An investment strategy in mutual funds is probably the best bet for a profitable investment. Mutual fund is defined as a pool of money supplied by different investors and in turn used by the mutual fund company to invest in various assets such as stocks and bonds. However, a detailed research has to be conducted for choosing the mutual fund companies and only those should be considered which have a professional investment manger. This will ensure that the funds get channeled towards the right investments. This also applies for investing in stock markets where a decision to invest should follow a through research about the past and current trends of the stock prices and their Net Asset Values (NAV). Analyses from market researchers about the predicted future trends should also be considered otherwise gains from capital appreciation; capital gain distribution (in case of mutual funds) and dividends might not be realized.

Lastly, investment strategies leading to green investments or investments in renewable sources of energy will be the next big thing in the investment spectrum.

NOTE:

FDI (Foreign Direct Investment) - прямі іноземні інвестиції; прямі іноземні капіталовкладення.

Net Asset Values (NAV) -вартість чистих активів. Value of a company’s assets after the company’s liabilities have been deducted. It is used as an indicator of how much the company is worth to the buyer.


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