Transcript Slide 1

Essential Standard 4.00
Understanding the role of finance
in business.
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Objective 4.01
Understand financial
management.
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Topics
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Financial planning
Business budgets
Financial records and statements
Financial performance ratios
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Financial planning
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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
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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.
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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
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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
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Financial Records and Statements
continued
• What are financial statements?
• What is the difference between a balance
sheet and an income statement?
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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
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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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