Financial
Management
Back to Table of Contents
Chapter 21
Financial Management
Financial Management
21.1
Analyzing Your Finances
21.2
Managing Your Finances
2
Financial Management
21.1
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
3
Financial Management
21.1
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
4
Financial Management
21.1
comparative financial statement
ratio analysis
current ratio
working capital
Section 21.1 Analyzing Your Finances
debt ratio
net profit on sales ratio
operating ratio
quick ratio
5
Financial Management
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.
Section 21.1 Analyzing Your Finances
6
Financial Management
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.
Section 21.1 Analyzing Your Finances
comparative financial
statement a financial
statement with financial
data from two
accounting periods used
as an analysis tool by a
business owner
7
Financial Management
Ratio Analysis
Owners, lenders, and
creditors use ratio
analysis to determine the
financial strength, activity,
or bill-paying ability of a
business.
Section 21.1 Analyzing Your Finances
ratio analysis the
comparison of two or
more amounts on a
financial statement and
the evaluation of the
relationship between
these two amounts
8
Financial Management
Current Ratio
The current ratio indicates
the ability of a business to
pay its bills.
Section 21.1 Analyzing Your Finances
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
9
Financial Management
Working Capital
Businesses information from
the balance sheet to
calculate working capital.
Section 21.1 Analyzing Your Finances
working capital the
capital available to a
business to carry out its
daily operations
10
Financial Management
Debt Ratio
If a business’s debt ratio is
high, a large portion of the
business operation is being
financed by creditors.
Section 21.1 Analyzing Your Finances
debt ratio the
measurement of the
percentage of total dollars
in a business that is
provided by creditors
11
Financial Management
Net Profit on Sales Ratio
Net profit on sales ratio is
calculated using information
from the income statement.
Section 21.1 Analyzing Your Finances
net profit on sales ratio
the number of cents left
from each dollar of sales
after expenses and
income taxes are paid
12
Financial Management
Operating Ratio
Operating ratio gives the
business owner a sense of
whether expenses are in
line with similar businesses.
Section 21.1 Analyzing Your Finances
operating ratio the
relationship between each
expense and total sales
as reported on the income
statement
13
Financial Management
Quick Ratio
The higher the quick ratio,
the better.
Section 21.1 Analyzing Your Finances
quick ratio a measure
of the relationship
between short-term liquid
assets, which include
cash and accounts
receivable, and current
liabilities
14
Financial Management
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
15
Financial Management
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
16
Financial Management
21.1
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.
Section 21.1 Analyzing Your Finances
17
Financial Management
21.1
2. Describe how operating ratios are calculated.
Each expense is divided by total sales for the
period.
Section 21.1 Analyzing Your Finances
18
Financial Management
21.1
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.
Section 21.1 Analyzing Your Finances
19
Financial Management
22.2
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
20
Financial Management
22.2
Careful management of your business
finances is an essential element of running a
successful business.
Section 21.2 Managing Your Finances
21
Financial Management
22.2
variable expenses
fixed expenses
budget
Section 21.2 Managing Your Finances
capital expenditures
credit bureaus
22
Financial Management
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
23
Planning for Profits
Forecast
sales
Evaluate
profit potential
Plan
for
Profits
Budget
Section 21.2 Managing Your Finances
Control
costs
24
Financial Management
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
Section 21.2 Managing Your Finances
25
Financial Management
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
Section 21.2 Managing Your Finances
26
Financial Management
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
Section 21.2 Managing Your Finances
27
Financial Management
Budgeting
To be of value, your budget
should be compared
periodically with actual
income and expenses.
Section 21.2 Managing Your Finances
budget a formal, written
statement of expected
revenue and expenses for
a future period of time
28
Financial Management
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
29
Financial Management
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
30
Improving Your Cash Flow
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 .
Section 21.2 Managing Your Finances
31
Financial Management
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.
Section 21.2 Managing Your Finances
capital expenses longterm commitments of
large sums of money to
buy new equipment or
replace old equipment
32
Financial Management
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.
Section 21.2 Managing Your Finances
33
Financial Management
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
34
Granting Credit
The Five Steps of Granting Credit
5. Inform the customer.
4. Make your decision.
3. Evaluate credit applications.
2. Check credit and background.
1. Obtain information.
Section 21.2 Managing Your Finances
35
Financial Management
Granting Credit
Credit bureaus provide
important information to
businesses who are
considering loan or credit
applications.
Section 21.2 Managing Your Finances
credit bureaus
agencies that collect and
sell information on how
promptly people and
businesses pay their bills
36
Financial Management
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
37
Financial Management
21.2
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.
Section 21.2 Managing Your Finances
38
Financial Management
21.2
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.
Section 21.2 Managing Your Finances
39
Financial Management
21.2
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.
Section 21.2 Managing Your Finances
40
Financial Management
21.2
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.
Section 21.2 Managing Your Finances
41
Financial Management
21.2
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.
Section 21.2 Managing Your Finances
42
Financial Management
Digital Signatures
Our society depends on signed documents.
Digital signatures can be used to validate the authenticity of
documents and their sources.
Section 21.2 Managing Your Finances
43
Financial Management
Tech Terms
decryption
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
Section 21.2 Managing Your Finances
44
Financial Management
Tech Terms
encryption
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
Section 21.2 Managing Your Finances
45
Financial Management
Tech Terms
public 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
Section 21.2 Managing Your Finances
46
End of
Financial
Management
Back to Table of Contents