1. Understanding the role of finance in business.
Essential Standard 4.00
Understanding the role of finance in business.

2. Understand financial management.
Objective 4.01
Understand financial management.

3. Topics Financial planning Business budgets
Financial records and statements
Financial performance ratios

4. Financial planning

5. Financial Planning Why should a business do financial planning?
Reduces financial uncertainties
Increases control of financial activities
Provides a ‘map of finances’ for business
Makes it easier to ‘stick’ to financial processes and goals.

6. Financial Planning continued
Phases of business
Start-up
Financial planning includes determining the amount of money needed to start and operate the business until a profit is made. Also the major sales and expenses are determined.
Operation
Financial planning includes determining whether they are making enough money to operate. The basic formula used is Revenue – Expenses = Profit or Loss.
Expansion
Financial planning includes determining whether enough money is made to cover growth opportunities.

7. Business budgets

8. Business Budgets Types of business budgets:
Start-up budget used by a new business or during expansion of a business until profits are made.
Operating budget used for ongoing business operations for a specific period.
Cash budget used to estimate cash flow in and out of a business.

9. Business Budgets continued
Steps for preparing a business budget:
Prepare a list of income and expense items.
Gather accurate information from business records.
Create the budget.
Clearly communicate the budget to key employees in order to make sound business decisions.

10. Financial records and statements

11. Financial Records and Statements
What is the purpose of financial records?
Financial records used by businesses:
Asset records
Depreciation records
Inventory records
Records of accounts
Cash records
Payroll records
Tax records
What is the purpose of financial records?
Financial records provide specific information about business activities that is used to analyze the financial performance of a business.

12. Financial Records and Statements continued
What are financial statements?
What is the difference between a balance sheet and an income statement?
What are financial statements?
Financial statements provide a picture of the financial performance of a business.
What is the difference between a balance sheet and an income statement?
A balance sheet includes assets, liabilities, and owner’s equity. An income statement includes sales, expenses, and net profit or loss.

13. Financial performance ratios

14. Financial Performance Ratios
Financial performance ratios are comparisons using a company’s financial data to determine how well a business is performing.
The four main types of financial ratios:
Current ratio
Debt to equity ratio
Return on equity ratio
Net income ratio

15. Financial Performance Ratios continued
Current ratio
Equals current assets/current liabilities
Represents assets that the business could convert into cash in < 1 year compared to liabilities that it must pay in < 1 year; shows ability of company to pay debts as they become due. Ideally, this ratio should be over 1.0.
Normally, the higher the ratio, the more favorable it is for the company.

16. Financial Performance Ratios continued
Debit to equity ratio
Equals total liabilities/owner’s equity
Shows how much the business relies on money borrowed externally versus money from within the business. Ideally, this ratio should be less than 2.0.
Normally, the lower this ratio, the more favorable it is for the company.

17. Financial Performance Ratios continued
Return on equity ratio
Equals net profit/owner’s equity
Indicates the rate of return the owners/stockholders are receiving on their investments. There is not an ideal ratio; however, it is used to compare with other types of investments to see if there may be another investment that is more desirable.
Normally, the higher the ratio, the more favorable it is for the company.

18. Financial Performance Ratios continued
Net income ratio
Equals total sales/net income
Shows the amount of sales needed for each dollar of net income. While there is not an ideal ratio, managers use this number to compare to past periods to determine how changes in sales affect net income.
Normally, the lower the ratio, the more favorable it is for the company, as it takes less in sales to generate net income.