I’m studying for my Business class and need an explanation.

BUS 508 Explore Activity Week 4 Discussion How You see It income statement or balance The Big Picture

The Big Picture

The Big Picture

The Big Picture

You may not realize it, but you already know quite a bit about finance. You deal with it every day in your personal life. Every time you think about making a big purchase, create a budget for a vacation, or consider taking out a loan or getting a credit card, you’re thinking about finance. You also probably recognize it in your work life: tracking a project budget, estimating how much a project will cost, calculating return-on-investment (ROI), or making a financial case for adding a person to your team.

Managing money can be a complicated topic, but it doesn’t have to be. At the end of the day, finance is really about attention to detail and smart planning. Shaun and Rachel Moss of SunsTruck Sunglasses have learned how to keep it simple by focusing on a few key parts of finance, which we’ll learn about this week. As a result, they’ve been able to turn their small business into a retail business with three stores—one mobile truck and two brick-and-mortar locations. Their success provides us with a great opportunity to explore what you need to know about finance.

The SunsTruck story starts with financial planning. When Shaun and Rachel were planning to leave their jobs to pursue their dream of starting their business, they didn’t just quit overnight. First, they had to think about where they were going to get the money they needed to bring their idea to the world. In order to know how much money they needed, Shaun and Rachel had to create budgets and make forecasts about how the business would operate. They had to figure out how much it would cost to stock sunglasses in their mobile store. They also had to think about how

much it would cost to keep the store open—paying for the truck loan, gasoline, insurance, advertising, and more. Lastly, they also had to think about how much they needed to make each month if this was going to be their only source of income.

Once Shaun and Rachel had a good understanding of how much it would cost to run the business, they were able to accurately estimate how much money they needed to get the business up and running—and more importantly, to determine where that initial investment was going to come from. Finding the best source of money is an important decision for any business. The best option varies from business to business, and it may even change over time for the same business. That’s why good businesses like SunsTruck rely heavily on financial information to help them determine the right moves for the business.

As you can see, there are a lot of important aspects to finance. However, like each of the other topics in this course, we will focus on a few core ideas to keep us focused. Let’s take a look at the Most Important Things we’ll be covering this week:

• Finance refers to two important parts of business: (1) how a business’s money is managed; and (2) how businesses get the money they need to operate and grow.
• There are a few key terms that are important for understanding finance and accounting. They are revenue, expense, net income, cash, assets, and liabilities.
• Businesses use budgets to predict what revenue and expenses will be in the future. These predictions help them to make decisions about how to effectively use money and other assets.
• When a business needs money in order to grow, it can find that money from three primary sources, known as financing options: (1) self-financing, (2) debt-financing, and (3) equity-financing.

At the end of this week, you will know how to apply these important concepts in everyday business situations.

Why Is This Important?

Finance is all about ensuring you have enough money to run your business and effectively managing the money you do have. It’s how people and businesses manage their day-to-day lives. Without knowing where money is coming from and how it’s being used, it’s hard to know how much money you’ll have—and how much you’ll need—on any given day, in order to pay bills, purchase what you need to run your business, or invest in new ideas. And not knowing how much money you have and need to have can be a disaster for both individuals and companies.

It’s increasingly important to have a solid financial background in order to move up in the business world. Even if your role is not directly related to finance, it’s important for you to know the financial impact of your marketing departments work, for example. Finance is useful for informing all types of decision making, and is a great way to make your case to senior leaders about why a certain project or initiative merits attention.

It seems obvious enough, but businesses close their doors every day for reasons that could have been avoided through better financial planning.

Quick Question:

How effectively does your company manage its finances? How do you know? Do the managers and leaders speak about decisions in financial terms? If so, can you recall a recent example? Do projects mostly stay on-budget? Have you reviewed the company’s financial statements?

How Does This Connect to the Other Parts of Business?

Finance is all about managing the financial resources you have in order to operate the business. No money, no operations. It’s really that simple. A great idea for a product is not enough if you don’t have the financial health to make that product and generate enough money from selling it to keep the business going. You also need to have enough money in the business to hire a team, market the product, and continue to pursue innovative ideas that will keep the company going strong.

In order to start exploring finance and its importance to business, we need to understand a few key terms that will be useful this week and in Week 5, when we take a close look at accounting.

Term	Definition	In Context
Revenue	The amount of money a company earns over a certain period of time. You can think of revenue as total sales of the business. Most businesses registered in the U.S. are set up this way.	When a business sells a good or service to a customer, it records that sale as revenue in the time period in which the transaction occurred. Sometimes customers pay cash at the time of sale. Other times, they buy on credit and the business has to wait awhile to collect that cash. Revenue is determined by the selling price of each product or service times the number of products sold or services rendered.
Expense	The costs companies incur in order to stay in business.	There is a saying that says “you have to spend money to make money.” A business incurs costs in order to deliver its goods and services. These costs are known as expenses. Expenses include the costs of materials needed to make products, salaries to employees, shipping costs, and the costs of marketing and advertising, among other things. Expenses are put into two groups. The “cost of goods sold” (or “COGS”) involves the costs to buy inventory, ship it to the store, and wages/commissions for sales personnel. Administrative expenses are costs that are not directly related to an individual product or service. These involve management salaries, rent, utilities, and advertising.
Net Income	The total amount a business earns or is left over after expenses are deducted from revenue. Net income is also known as profit.	Net income is simply total revenue minus total expenses. To determine this number, you look at the total amount of sales and subtract the costs the business incurred during the same time period. This number indicates how profitable a business is. If it’s a positive number, the business is making a profit.
Cash	The amount of money a business actually has on hand that it can use for day-to-day operations.	When a business makes a sale, typically the customer pays the business immediately. But that’s not always the case. The company may allow the customer to pay for the product at a later date or pay it off in installments. While the business will record the revenue at the time the product is sold, it may not receive the “cash” until a later date. Businesses have to make sure the timing of payments they receive aligns with the payments they need to make to suppliers, lenders, or investors.
Asset	The things of value that a business owns or controls.	Asset is a broad term that covers many types of things that a business owns or controls. Some assets are pretty obvious, such as equipment and patents, the desks and computers in the office, and the products it has created that it has not yet sold. Assets also refer to things like “accounts receivable” which is money that customers have not yet paid the business.
Liability	The amounts a business owes to others, or its financial debts and obligations.	Liabilities are things like loans, bonds, warranties, or payments left on equipment that the business purchased.

These terms will be used throughout this course. Be sure to return to the Most Important Things in Weeks 4 and 5 for a quick reference, if you need to remind yourself about what each one means or how it’s commonly used.

Now, let’s dive into the content for this week with an Explore Activity.

Explore Activity

HOW YOU SEE IT

DUE DATE:

Week 4

PART 1

Think about a financial decision you made regarding the purchase of a big-ticket item within the last five years. Provide a summary on the discussion thread, answering the following questions:

1. What decision did you make?

2. How prepared were you to make the decision?

3. What was your thought process as you were making the decision?

4. What financial information did you need to make the decision and why?

5. What lessons have you learned that you will apply to future financial decisions?

PART 2

Read a post by one of your peers and respond, making sure to extend the conversation by asking questions, offering rich ideas, or sharing personal connections.