Chapter 21

2. Chapter 21 Financial Management Analyzing Your Finances 21.1 Managing Your Finances 21.2

3. 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

4. 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

5. 21.1 comparative financial statement ratio analysis current ratio working capital debt ratio net profit on sales ratio operating ratio quick ratio Section 21.1 Analyzing Your Finances

6. Using Financial Statements Every business prepare two primary financial statements: • The income statement, also called the statement of operations and earnings, reports the revenue, expenses, and net income or loss for the period. • The balance sheet reports the assets, liabilities, and owner’s equity accounts. Section 21.1 Analyzing Your Finances

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 statementa financial statement with financial data from two accounting periods used as an analysis tool by a business owner Section 21.1 Analyzing Your Finances

8. Ratio Analysis Owners, lenders, and creditors use ratio analysis to determine the financial strength, activity, or bill-paying ability of a business. ratio analysisthe comparison of two or more amounts on a financial statement and the evaluation of the relationship between these two amounts Section 21.1 Analyzing Your Finances

9. Current Ratio The current ratio indicates the ability of a business to pay its bills. current ratiothe comparison of current assets (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 Section 21.1 Analyzing Your Finances

10. Working Capital Businesses information from the balance sheet to calculate working capital. working capitalthe capital available to a business to carry out its daily operations Section 21.1 Analyzing Your Finances

11. Debt Ratio If a business’s debt ratio is high, a large portion of the business operation is being financed by creditors. debt ratiothe measurement of the percentage of total dollars in a business that is provided by creditors Section 21.1 Analyzing Your Finances

12. Net Profit on Sales Ratio Net profit on sales ratio is calculated using information from the income statement. net profit on sales ratiothe number of cents left from each dollar of sales after expenses and income taxes are paid Section 21.1 Analyzing Your Finances

13. Operating Ratio Operating ratio gives the business owner a sense of whether expenses are in line with similar businesses. operating ratiothe relationship between each expense and total sales as reported on the income statement Section 21.1 Analyzing Your Finances

14. Quick Ratio The higher the quick ratio, the better. quick ratioa measure of the relationship between short-term liquid assets, which include cash and accounts receivable, and current liabilities Section 21.1 Analyzing Your Finances

15. 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

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. Section 21.1 Analyzing Your Finances

17. 21.1 • 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

18. 21.1 • Describe how operating ratios are calculated. Each expense is divided by total sales for the period. Section 21.1 Analyzing Your Finances

19. 21.1 • 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

20. 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

21. 22.2 Careful management of your business finances is an essential element of running a successful business. Section 21.2 Managing Your Finances

22. 22.2 variable expenses fixed expenses budget capital expenditures credit bureaus Section 21.2 Managing Your Finances

23. 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

24. Planning for Profits Forecastsales Evaluateprofit potential PlanforProfits Controlcosts Budget Section 21.2 Managing Your Finances 24

25. 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

26. 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

27. 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

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 Section 21.2 Managing Your Finances

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. Section 21.2 Managing Your Finances

30. 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

31. 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

32. 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 Section 21.2 Managing Your Finances

33. 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

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. Section 21.2 Managing Your Finances

35. Granting Credit The Five Steps of Granting Credit • Inform the customer. • Make your decision. • Evaluate credit applications. • Check credit and background. • Obtain information. Section 21.2 Managing Your Finances 35

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 Section 21.2 Managing Your Finances

37. 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

38. 21.2 • 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

39. 21.2 • 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

40. 21.2 • 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

41. 21.2 • 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

42. 21.2 • 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

43. 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

44. 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

45. 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

46. 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

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