Financial Management Back to Table of Contents

Financial Management 2 Chapter 21 Financial Management Analyzing Your Finances Managing Your Finances

Financial Management 3 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 21.1

Financial Management 4 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 21.1

Financial Management 5 Using Financial Statements Every business prepare two primary financial statements: Section 21.1 Analyzing Your Finances 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 owner’s equity accounts.

Financial Management 6 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

Financial Management 7 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

Financial Management 8 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

Financial Management 9 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

Financial Management 10 Debt Ratio If a business’s 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

Financial Management 11 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

Financial Management 12 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

Financial Management 13 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

Financial Management 14 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

Financial Management 15 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

Financial Management 16 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 22.2

Financial Management 17 Careful management of your business finances is an essential element of running a successful business. Section 21.2 Managing Your Finances 22.2

Financial Management 18 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

Planning for Profits 19 Plan for Profits Forecast sales Evaluate profit potential Budget Control costs Section 21.2 Managing Your Finances

Financial Management 20 Forecasting Sales You can base projections of sales on: Section 21.2 Managing Your Finances sales records of previous periods current rate of sales growth in your field or geographic area rate of growth of the gross national product

Financial Management 21 Evaluating Profit Potential If you want to improve your profit, you can make certain changes to your profit planning, such as: Section 21.2 Managing Your Finances increasing sales revenue by pursuing market share adding new products raising prices increasing advertising

Financial Management 22 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 Section 21.2 Managing Your Finances variable expenses business expenses that change with each unit of product produced, such as supplies, wages, and production materials

Financial Management 23 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

Financial Management 24 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

Financial Management 25 Using a Cash Budget A cash budget helps monitor your business’s 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

Improving Your Cash Flow Section 21.2 Managing Your Finances 26 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.

Financial Management 27 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

Financial Management 28 Managing Taxes These tips will help you manage your taxes. Section 21.2 Managing Your Finances 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.

Financial Management 29 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

Granting Credit Section 21.2 Managing Your Finances 30 The Five Steps of Granting Credit 1.Obtain information. 2.Check credit and background. 3.Evaluate credit applications. 4.Make your decision. 5.Inform the customer.

Financial Management 31 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

Financial Management 32 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