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Financial Management

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Title: Financial Management


1
(No Transcript)
2
Chapter 21
Financial Management
Analyzing Your Finances
21.1
Managing Your Finances
21.2
3
21.1
  • Describe the purpose of comparative financial
    statements.
  • Describe how different ratios are calculated.
  • Explain why financial statements are essential
    for decision making.

Section 21.1 Analyzing Your Finances
4
21.1
  • By maintaining and analyzing financial records
    and reports, business owners and other interested
    parties have the information necessary to make
    sound business decisions.

Section 21.1 Analyzing Your Finances
5
21.1
  • comparative financial statement
  • ratio analysis
  • current ratio
  • working capital

debt ratio net profit on sales ratio operating
ratio quick ratio
Section 21.1 Analyzing Your Finances
6
Using Financial Statements
  • Every business prepare two primary financial
    statements
  1. The income statement, also called the statement
    of operations and earnings, reports the revenue,
    expenses, and net income or loss for the period.
  2. The balance sheet reports the assets,
    liabilities, and owners equity accounts.

Section 21.1 Analyzing Your Finances
7
Comparative Financial Statements
  • A comparative financial statement can allow a
    business owner to compare from different
    accounting periods in order to evaluate the
    financial health of the business.

comparative financial statement a financial
statement with financial data from two accounting
periods used as an analysis tool by a business
owner
Section 21.1 Analyzing Your Finances
8
Ratio Analysis
  • Owners, lenders, and creditors use ratio analysis
    to determine the financial strength, activity, or
    bill-paying ability of a business.

ratio analysis the comparison of two or more
amounts on a financial statement and the
evaluation of the relationship between these two
amounts
Section 21.1 Analyzing Your Finances
9
Current Ratio
  • The current ratio indicates the ability of a
    business to pay its bills.

current ration the comparison of current
assents (cash or other items that can be
converted to cash quickly) and current
liabilities (debts due within a year), used to
indicate the ability of a business to pay its
bills
Section 21.1 Analyzing Your Finances
10
Working Capital
  • Businesses information from the balance sheet to
    calculate working capital.

working capital the capital available to a
business to carry out its daily operations
Section 21.1 Analyzing Your Finances
11
Debt Ratio
  • If a businesss debt ratio is high, a large
    portion of the business operation is being
    financed by creditors.

debt ratio the measurement of the percentage of
total dollars in a business that is provided by
creditors
Section 21.1 Analyzing Your Finances
12
Net Profit on Sales Ratio
  • Net profit on sales ratio is calculated using
    information from the income statement.

net profit on sales ratio the number of cents
left from each dollar of sales after expenses and
income taxes are paid
Section 21.1 Analyzing Your Finances
13
Operating Ratio
  • Operating ratio gives the business owner a sense
    of whether expenses are in line with similar
    businesses.

operating ratio the relationship between each
expense and total sales as reported on the income
statement
Section 21.1 Analyzing Your Finances
14
Quick Ratio
  • The higher the quick ratio, the better.

quick ratio a measure of the relationship
between short-term liquid assets, which include
cash and accounts receivable, and current
liabilities
Section 21.1 Analyzing Your Finances
15
Management Decision Making
  • Business owners must analyze the vital
    information provided in financial statements,
    identify problem areas, and make decisions.
  •  

Section 21.1 Analyzing Your Finances
16
Management Decision Making
  • Many businesses prefer to use accountants to
    assure their financial records are kept according
    to accounting standards, all reports are
    completed and analyzed, and taxes calculated and
    paid.
  •  

Section 21.1 Analyzing Your Finances
17
21.1
  1. Describe the purpose of comparative financial
    statements.

Comparative financial statements provide an
analysis that shows increases and decreases in
various accounts from one period to the next.
Section 21.1 Analyzing Your Finances
18
21.1
  1. Describe how operating ratios are calculated.

Each expense is divided by total sales for the
period.
Section 21.1 Analyzing Your Finances
19
21.1
  1. Explain why financial statements are essential
    for decision making.

The reports provide vital financial information.
This information is the basis of all financial
decisions.
Section 21.1 Analyzing Your Finances
20
22.2
  • Describe why evaluating profit potential is a
    useful technique to plan for profits.
  • Describe ways to help manage your cash flow.
  • Explain the importance of controlling capital
    expenditures.
  • Describe ways to control your taxes.
  • Describe how you can manage credit offered to
    customers.

Section 21.2 Managing Your Finances
21
22.2
  • Careful management of your business finances is
    an essential element of running a successful
    business.

Section 21.2 Managing Your Finances
22
22.2
  • variable expenses
  • fixed expenses
  • budget

capital expenditures credit bureaus
Section 21.2 Managing Your Finances
23
Planning for Profits
  • The main goal of a business is to make a profit.
  •  
  • Business owners must plan for profits because
    they do not just happen.

Section 21.2 Managing Your Finances
24
Planning for Profits
Forecastsales
Evaluateprofit potential
PlanforProfits
Controlcosts
Budget
Section 21.2 Managing Your Finances
24
25
Forecasting Sales
  • You can base projections of sales on
  • sales records of previous periods
  • current rate of sales growth in your field or
    geographic area
  • rate of growth of the gross national product

Section 21.2 Managing Your Finances
26
Evaluating Profit Potential
  • If you want to improve your profit, you can make
    certain changes to your profit planning, such as
  • increasing sales revenue by pursuing market
    share
  • adding new products
  • raising prices
  • increasing advertising

Section 21.2 Managing Your Finances
27
Evaluating Profit Potential
  • To understand your profit potential, you must
    know your fixed expenses and variable expenses.

fixed expenses business expenses that do not
change with number of units produced, such as
insurance and rent
variable expenses business expenses that change
with each unit of product produced, such as
supplies, wages, and production materials
Section 21.2 Managing Your Finances
28
Budgeting
  • To be of value, your budget should be compared
    periodically with actual income and expenses.

budget a formal, written statement of expected
revenue and expenses for a future period of time
Section 21.2 Managing Your Finances
29
Managing Cash Flow
  • For a business to be successful, a constant flow
    of cash is essential.
  •  
  • If sufficient cash is not available, business
    owners cannot buy merchandise, pay bills, or
    invest funds for future growth.

Section 21.2 Managing Your Finances
30
Using a Cash Budget
  • A cash budget helps monitor your businesss cash
    flow by recording estimated cash flow, actual
    cash flow, and the difference between the two.
  •  
  • By recording and analyzing line items each month,
    business owners can address any significant
    changes from the budgeted amounts.

Section 21.2 Managing Your Finances
31
Improving Your Cash Flow
Monitor credit and collections.
Take advantage of credit terms.
Manage inventory.
Offer cash discounts.
Set up a cash reserve.
Monitor payroll expenses.
Put cash surpluses to work.
Reduce expenses .
Section 21.2 Managing Your Finances
31
32
Planning for Capital Expenditures
  • Before making capital expenditures, you first
    should determine if you can pay for them, how
    much revenue they will generate, and how long
    they will take to pay for themselves.

capital expenses long-term commitments of large
sums of money to buy new equipment or replace old
equipment
Section 21.2 Managing Your Finances
33
Managing Taxes
  • These tips will help you manage your taxes.
  • Time income so you can control taxes.
  • Time deductions.
  • Choose the most beneficial depreciation method.
  • Write off uncollectibles.
  • Claim research and development expenses.
  • Keep all expense records.
  • Keep up-to-date on tax laws.

Section 21.2 Managing Your Finances
34
Managing Credit
  • The main advantage of offering credit to
    customers is increased sales volume.
  •  
  • The main disadvantage is collection of the money
    owed in a timely manner.

Section 21.2 Managing Your Finances
35
Granting Credit
The Five Steps of Granting Credit
  1. Inform the customer.
  1. Make your decision.
  1. Evaluate credit applications.
  1. Check credit and background.
  1. Obtain information.

Section 21.2 Managing Your Finances
35
36
Granting Credit
  • Credit bureaus provide important information to
    businesses who are considering loan or credit
    applications.

credit bureaus agencies that collect and sell
information on how promptly people and businesses
pay their bills
Section 21.2 Managing Your Finances
37
Collecting Accounts
  • A business can collect accounts internally or
    hire a collection agency.
  •  
  • The most effective internal collection procedures
    involve progressively forceful steps.

Section 21.2 Managing Your Finances
38
21.2
  1. Describe why evaluating profit potential is a
    useful technique to plan for profits.

Evaluating profit potential allows a business
owner to decide whether to invest in a change.
One way to increase profits is to venture into
new markets.
Section 21.2 Managing Your Finances
39
21.2
  1. Describe ways to help manage your cash flow.

Ways to manage cash flow include using a cash
budget and improving cash flow by monitoring
credit and collections, taking advantage of
credit terms, managing inventory, offering cash
discounts, setting up a cash reserve for
uncollected accounts, monitoring payroll
expenses, putting cash surpluses to work, and
reducing expenses.
Section 21.2 Managing Your Finances
40
21.2
  1. Explain the importance of controlling capital
    expenditures.

Capital expenditures are long-term commitments of
large sums of money. A company must control
capital expenditures so as not to tie up too much
cash or incur too much debt.
Section 21.2 Managing Your Finances
41
21.2
  1. Describe ways to control your taxes.

You can control taxes by timing income so that
you control when it is taxed, timing your
deductions, choosing the most beneficial method
of depreciation, writing off uncollectible
accounts, claiming research and development
expenses, keeping records of all expenses, and
keeping up-to-date on tax laws.
Section 21.2 Managing Your Finances
42
21.2
  1. Describe how you can manage credit offered to
    customers.

You should gather financial information about
customers, check their credit records, evaluate
credit applications, make your decision, and
inform the customers.
Section 21.2 Managing Your Finances
43
Digital Signatures
  • Our society depends on signed documents.
  • Digital signatures can be used to validate the
    authenticity of documents and their sources.

Section 21.2 Managing Your Finances
43
44
Tech Terms
decryption the process of converting from code
into readable text   digital certificate an
e-commerce security feature that establishes the
certificate holders identity and that proves
companies are who they say they are   digital
signature a method of authenticating digital
information
Section 21.2 Managing Your Finances
44
45
Tech Terms
encryption the process of converting a text
message into code   private key a password that
unscrambles or decrypts an electronic message a
private key is kept secret
Section 21.2 Managing Your Finances
45
46
Tech Terms
public key a password that scrambles or encrypts
an electronic message so that if it is
intercepted it will be unreadable a public key
is shared   public key encryption a
message-encoding system that uses two digital
keys a public key and a private key
Section 21.2 Managing Your Finances
46
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