Essential Standard 4.00Essential Standard 4.00

Understanding the role of finance in Understanding the role of finance in business.business.

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Objective 4.01Objective 4.01

Understand financial management.Understand financial management.

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TopicsTopics

Financial planningFinancial planning Business budgetsBusiness budgets Financial records and statementsFinancial records and statements Financial performance ratiosFinancial performance ratios

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Financial planningFinancial planning

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Financial PlanningFinancial Planning

Why should a business do financial planning?Why should a business do financial planning? Reduces financial uncertaintiesReduces financial uncertainties Increases control of financial activitiesIncreases control of financial activities Provides a ‘map of finances’ for businessProvides a ‘map of finances’ for business Makes it easier to ‘stick’ to financial processes and Makes it easier to ‘stick’ to financial processes and

goals.goals.

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Financial Planning continuedFinancial Planning continued

Phases of businessPhases of business Start-upStart-up

Financial planning includes determining the amount of money Financial planning includes determining the amount of money needed to start and operate the business until a profit is made. Also needed to start and operate the business until a profit is made. Also the major categories of sales and expenses are determined. the major categories of sales and expenses are determined.

OperationOperation Financial planning includes determining whether they are making Financial planning includes determining whether they are making

enough money to operate. The basic formula used is Revenue – enough money to operate. The basic formula used is Revenue – Expenses = Profit or Loss.Expenses = Profit or Loss.

ExpansionExpansion Financial planning includes determining whether enough money is Financial planning includes determining whether enough money is

made to cover growth opportunities.made to cover growth opportunities.

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Business budgetsBusiness budgets

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Business BudgetsBusiness Budgets

Types of business budgets:Types of business budgets: Start-up budget used by a new business or during Start-up budget used by a new business or during

expansion of a business until profits are made.expansion of a business until profits are made. Operating budget used for ongoing business Operating budget used for ongoing business

operations for a specific period.operations for a specific period. Cash budget used to estimate cash flow in and out Cash budget used to estimate cash flow in and out

of a business.of a business.

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Business Budgets continuedBusiness Budgets continued

Steps for preparing a business budget:Steps for preparing a business budget: Prepare a list of income and expense items.Prepare a list of income and expense items. Gather accurate information from business Gather accurate information from business

records.records. Create the budget.Create the budget. Clearly communicate the budget to key Clearly communicate the budget to key

employees in order to make sound business employees in order to make sound business decisions.decisions.

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Financial Financial records and statementsrecords and statements

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Financial Records and Statements Financial Records and Statements

What is the purpose of financial records?What is the purpose of financial records?

Financial records provide specific Financial records provide specific information about business activities that is information about business activities that is used to analyze the financial performance of used to analyze the financial performance of a business.a business.

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Financial Records and StatementsFinancial Records and Statements

Financial records used by businesses:Financial records used by businesses: Asset records- Things that have valueAsset records- Things that have value Depreciation records- How assets lose value Depreciation records- How assets lose value

over time.over time. Inventory records- The goods you have to Inventory records- The goods you have to

sell.sell. Records of accounts- Records of accounts-

Accounts payable- bills you oweAccounts payable- bills you owe Accounts receivable- Businesses who Accounts receivable- Businesses who

owe you moneyowe you money

Financial Records and StatementsFinancial Records and Statements

Cash records- Cash in/out of the Cash records- Cash in/out of the businessbusiness

Payroll records- Employee pay Payroll records- Employee pay Tax records- Taxes the business owes Tax records- Taxes the business owes

the state and federal governmentthe state and federal government

Financial Records and StatementsFinancial Records and Statements

What are financial statements?What are financial statements? Financial statements provide a picture of the Financial statements provide a picture of the

financial performance of a business.financial performance of a business.

What are the main financial statements:What are the main financial statements: Balance SheetBalance Sheet Income StatementIncome Statement

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Financial Records and StatementsFinancial Records and Statements Balance SheetBalance Sheet

AssetsAssets == Liabilities +Liabilities + Owner’s Owner’s EquityEquity

Assets: Things that have valueAssets: Things that have value What are some examples????What are some examples????

Liabilities: Things you oweLiabilities: Things you owe What are some examplesWhat are some examples

Owner’s Equity: Assets – LiabilitiesOwner’s Equity: Assets – Liabilities This is what a business is worth.This is what a business is worth.

Financial Records and StatementsFinancial Records and Statements

Income StatementIncome Statement The Income Statement has three sections:The Income Statement has three sections:

RevenueRevenue SalesSales Interest IncomeInterest Income

ExpensesExpenses RentRent SalariesSalaries

Net Profit / LossNet Profit / Loss Net Profit: Sales are greater than expensesNet Profit: Sales are greater than expenses Net Loss: Expenses are greater than salesNet Loss: Expenses are greater than sales

Financial Records and StatementsFinancial Records and Statements

What is the difference between a balance sheet What is the difference between a balance sheet and an income statement?and an income statement? A balance sheet includes assets, liabilities, and A balance sheet includes assets, liabilities, and

owner’s equity. owner’s equity. An income statement includes sales, expenses, and An income statement includes sales, expenses, and

net profit or loss.net profit or loss.

Cash Flow Statement (CFS)Cash Flow Statement (CFS)

Complements the Complements the balance sheetbalance sheet and and income statementincome statement

A mandatory part of a company's financial A mandatory part of a company's financial reports since 1987reports since 1987

Records the amounts of Records the amounts of cashcash and cash and cash equivalents entering and leaving a company. equivalents entering and leaving a company.

The CFS allows investors to understand The CFS allows investors to understand How a company's operations are runningHow a company's operations are running Where its money is coming fromWhere its money is coming from How it is being spent. How it is being spent.

Financial performance Financial performance ratiosratios

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Financial Performance RatiosFinancial Performance Ratios

Financial performance ratiosFinancial performance ratios are are comparisons using a company’s financial comparisons using a company’s financial data to determine how well a business is data to determine how well a business is performing. performing.

The four main types of financial ratios:The four main types of financial ratios: Current ratioCurrent ratio Debt to equity ratioDebt to equity ratio Return on equity ratioReturn on equity ratio Net income ratioNet income ratio

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Financial Performance Ratios Financial Performance Ratios continuedcontinued Current ratio Current ratio

Equals current assets/current liabilitiesEquals current assets/current liabilities Represents assets that the business could convert Represents assets that the business could convert

into cash in < 1 year compared to liabilities that it into cash in < 1 year compared to liabilities that it must pay in < 1 year; shows ability of company to must pay in < 1 year; shows ability of company to pay debts as they become due. Ideally, this ratio pay debts as they become due. Ideally, this ratio should be over 1.0.should be over 1.0.

Normally, the higher the ratio, the more favorable Normally, the higher the ratio, the more favorable it is for the company.it is for the company.

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Financial Performance Ratios Financial Performance Ratios continuedcontinued Debt to equity ratio Debt to equity ratio

Equals total liabilities/owner’s equityEquals total liabilities/owner’s equity Shows how much the business relies on money Shows how much the business relies on money

borrowed externally versus money from within the borrowed externally versus money from within the business. Ideally, this ratio should be less than business. Ideally, this ratio should be less than 2.0.2.0.

Normally, the lower this ratio, the more favorable Normally, the lower this ratio, the more favorable it is for the company.it is for the company.

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Financial Performance Ratios Financial Performance Ratios continuedcontinued Return on equity ratio Return on equity ratio

Equals net profit/owner’s equityEquals net profit/owner’s equity Indicates the rate of return the Indicates the rate of return the

owners/stockholders are receiving on their owners/stockholders are receiving on their investments. There is not an ideal ratio; however, investments. There is not an ideal ratio; however, it is used to compare with other types of it is used to compare with other types of investments to see if there may be another investments to see if there may be another investment that is more desirable.investment that is more desirable.

Normally, the higher the ratio, the more favorable Normally, the higher the ratio, the more favorable it is for the company.it is for the company.

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Financial Performance Ratios Financial Performance Ratios continuedcontinued Net income ratio Net income ratio

Equals total sales/net incomeEquals total sales/net income Shows the amount of sales needed for each dollar Shows the amount of sales needed for each dollar

of net income. While there is not an ideal ratio, of net income. While there is not an ideal ratio, managers use this number to compare to past managers use this number to compare to past periods to determine how changes in sales affect periods to determine how changes in sales affect net income.net income.

Normally, the lower the ratio, the more favorable Normally, the lower the ratio, the more favorable it is for the company, as it takes less in sales to it is for the company, as it takes less in sales to generate net income.generate net income.

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