Essential Standard 4.00

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Nov 10, 2013 (3 years and 8 months ago)

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Essential Standard 4.00

Understanding the role of finance in
business.

1

Objective 4.01

Understand financial management.

2

Topics


Financial planning


Business budgets


Financial records and statements


Financial performance ratios

3

Financial planning

4

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.

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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.

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Business budgets

7

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.

8

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.

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Financial

records and statements

10

Financial Records and Statements


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

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Financial Records and Statements


Financial records used by businesses:


Asset records


Depreciation records


Inventory records


Records of accounts


Cash records


Payroll records


Tax records


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Financial Records and Statements
continued


What are 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

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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.



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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.



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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.


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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.


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