1. Financial Management BM007: Analyze financial data in order to make short-term and long-term decisions.

2. Records Used in Business Accounting Records: Financial records of the transactions of the business

3. Purpose of Record Keeping:  Identify the source of receipts  Identify expenses paid or owed  Determine the kinds and value of assets  Prepare financial records  Prepare and support tax returns  Check the progress of the business  Plan the future direction of the business

4. Needs for Specific Records  Cash accounting Cash receipts-used to record all cash received Cash payments-used to record all cash payments Petty Cash-used for small disbursements Suggestions for the safe handling of cash

5. Needs for Specific Records Continued  Accounts receivable: to record amounts owed by customers  Accounts payable: to record amounts owed to creditors.  Asset records: Fixed asset Depreciation Asset book value

6. Needs for Specific Records Continued  Payroll records Earnings record (hours worked, wages, overtime wages, and all deductions) Regular reports (filed with state and federal government)  Tax records Federal government requires every business to report its income and expenses. Government requires each employee fill out a W-4 form.

7. Record Systems  Small businesses Manual systems/cash register Popular software (QuickBooks) for small to medium-sized companies  Large businesses More complex equipment and software Outsourcing-use of outside firms for specialized tasks. Separate accounting department

8. Business Budgets and How They are Used  Sales budget-forecasting sales revenue for a specified time.  Merchandising budget-forecasting the amount of goods the company expects to sell to customers over a specified time.  Advertising budget-forecasting the amount of money for advertising, based on sales of merchandise (planned together with merchandising budget)

9. Business Budgets and How They are Used continued  Cash budget-estimating the cash flow (cash into and out of the business) Primary sources of incoming cash—cash receipts and borrowing.  Capital budget-plan to replace fixed assets or buy new ones.

10. Business Budgets and How They are Used continued  Income statement budget-a plan showing projected sales, costs, expenses, and profits for a future period. By subtracting its total costs and expenses from the projected sales, a business can estimate its profit.

11. Evaluate the Budget  Compare actual figures to the estimated figures on the budget  Identify the variance (the difference between the two figures)  Make necessary changes (used as a control tool)

12. Data Shown on Financial Statements Financial statements-reports to summarize financial data.  Balance Sheet Assets, Liabilities, Capital (Owner’s Equity) Accounting equation (A=L+O)  Income Statement Revenue-income earned Expenses-all costs incurred in operating the business Profit or Loss-the difference between total revenue and expenses

13. Analysis of financial data  Cash Flow-the movement of cash into and out of a business.  Working Capital-the difference between current assets and current liabilities.  Ratio Analysis-a comparison between two numbers showing how many times one number exceeds the other

14. Analysis of financial data  Continued  Types of Ratio Analysis: Liquidity Leverage Activities Profitability

15. Financial Advice  Accountants  Banks  Consultants  Small Business Administration (SBA)

16. Obtaining Capital  Methods of obtaining capital: Equity or owner’s equity Retained earnings Debt capital or creditor capital Factors to consider when obtaining credit The cost Interest rates Power of lenders/creditors

17. Sources of Outside Capital  Banks and financial firms  Small loan companies  Venture capital firms  Current credit companies  Sales finance companies  Insurance companies  Individual investors/investment groups  Pension funds  Investment banking  Equipment manufacturers

18. Minimizing and Managing Risks  Establish a credit system Credit Sales –Work with a national credit card co. –Offer its own credit card –Offer consumers other credit plans Determine credit standing –Creditworthiness-a measure of a person’s ability and willingness to repay a loan. –Obtain credit information from applicant –Obtain information from credit agencies

19. Minimizing and Managing Risks Continued  Federal and state credit law Equal Credit Opportunity Act-illegal to deny credit because of age, sex, marital status, race, national origin, religion, or public assistance Truth-in Lending law-requires business to reveal on the form the cost of obtaining credit (including interest rate)

20. Minimizing and Managing Risks Continued  Federal and state credit law Fair Credit Reporting Act-cardholders have rights to see their agency reports and to correct errors on reports. Fair Debt Collection Practices Act-forbids debt collector to use abusive, deceptive, or unfair collection methods.

21. Analyzing Credit Sales  Aging the Accounts Receivable: analyzing customers’ account balances based upon the number of days the balance remains unpaid.  Minimizing Uncollectible Accounts: analyze credit sales to determine which collection procedure is the most effective. Goal is to increase sales while keeping bad debts to a minimum.

22. Insurance and Risk Reduction  One-third of all small business failures result from significant business theft.  Companies spend up to $10 million per year protecting against copyright losses.  Companies lose $1-25 billion to employee theft each year.  The average company loses $1.3 million each year to credit card fraud.  Bad checks written by customers cost business an estimated $5 billion per year.  The average cost to settle a liability claim brought against a company is $1 million. Source: Business Risks International (www.businessrisks.com)

23. Insurance Terms  Insurer  Policyholder  Policy  Insured  Insurance  Peril  Risk  Premium  Deductible

24. Types of Business Insurance  Property: fire, theft, etc.  Vehicle: collision, comprehensive, etc.  Personal: health, disability, etc.  Liability: injury to others  Bonding: loss from negligence or dishonesty

25. Non-insurable Risks- those risks which are not covered by insurance.  Examples of Non-insurable Risks: Changes in economic conditions Changes in weather and environmental developments Changes in customers’ tastes