Download - Financial Management Back to Table of Contents. Financial Management 2 Chapter 21 Financial Management Analyzing Your Finances Managing Your Finances

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Chapter 21

Financial ManagementFinancial Management

Analyzing Your FinancesAnalyzing Your Finances

Managing Your FinancesManaging Your Finances

21.1

21.2


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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


4

By maintaining and analyzing financial records and reports, business owners and other interested parties have the information necessary to make sound business decisions.


21.1


5

comparative financial statement

ratio analysis

current ratio

working capital


21.1

debt ratio

net profit on sales ratio

operating ratio

quick ratio


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 owner’s equity accounts.


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



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



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



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



11

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



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



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



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



15

Management Decision Making

Business owners must analyze the vital information provided in financial statements, identify problem areas, and make decisions.



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.



17

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.

21.1


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2. Describe how operating ratios are calculated.


Each expense is divided by total sales for the period.

21.1


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3. Explain why financial statements are essential for decision making.


The reports provide vital financial information. This information is the basis of all financial decisions.

21.1


20

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


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Careful management of your business finances is an essential element of running a successful business.


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variable expenses

fixed expenses

budget


22.2

capital expenditures

credit bureaus


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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.


Planning for Profits

24

Planfor

Profits

Forecastsales

Evaluateprofit potential

BudgetControlcosts



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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


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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


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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


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



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.



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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.


Improving Your Cash Flow

Section 21.2 Managing Your Finances 31

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 .


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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



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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.


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.


Granting Credit

Section 21.2 Managing Your Finances 35

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.


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



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Collecting Accounts

A business can collect accounts internally or hire a collection agency.

The most effective internal collection procedures involve progressively forceful steps.



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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.

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2. 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.

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3. 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.

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4. 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.

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5. 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.

21.2


43Section 21.2 Managing Your Finances 43

Our society depends on signed documents.

Digital signatures can be used to validate the authenticity of documents and their sources.

Digital Signatures



Tech Termsdecryption

the process of converting from code into readable text

digital certificate

an e-commerce security feature that establishes the certificate holder’s identity and that proves companies are who they say they are

digital signature

a method of authenticating digital information



Tech Termsencryption

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



Tech Termspublic 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


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Download - Financial Management Back to Table of Contents. Financial Management 2 Chapter 21 Financial Management Analyzing Your Finances Managing Your Finances

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