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Financial Management


Financial Management Chapter 12 Pages 290 - 313 – PowerPoint PPT presentation

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Title: Financial Management

Financial Management
  • Chapter 12
  • Pages 290 - 313

  • Recognize important financial questions that must
    be answered in a business.
  • List the steps in budget preparation.
  • Describe the three types of business budgets.

Why A Business Budget?
  • To anticipate sources and amounts of income
  • To predict the types and amounts of expenses for
    a specific business activity or the entire
  • Revenue all income that business receives over
    a period of time.
  • Expenses the costs of operating a business.

  • Basic financial equation
  • Revenue (income) Expenses Profit or Loss

Business Expansion
  • Successful businesses expand to be able to serve
    more customers, reach unserved markets, and sell
    new products.
  • Business expansion calls for research to develop
    new products and locate new markets.

Budget Preparation
  • The most important step in financial planning is
    developing a budget.
  • A budget provides detailed plans for the
    financial needs of individuals, families, and

Budget Goals
  • Determine the sources and amounts of income, to
    identify the types of expenses and predict their
    costs, to determine how income will be
    distributed to cover those expenses, and to
    reward investors if there is a profit.

Steps in Budgeting
  • Step 1 Prepare a list of each type of revenue
    and expense that will be a part of the budget.
  • Step 2 Gather accurate information from
    business records and other information sources
    for each type of revenue and expense.

Steps in Budgeting (continued)
  • Step 3 Create the budget using a computer by
    calculating each type of revenue, expense, and
    amount of net income or loss.
  • Step 4 Show and explain the budget to people
    who need financial information to make decisions.

Types of Budgets
  • Start-up Budget
  • Operating Budget
  • Cash Budget

Start-up Budget
  • Plans income and expenses from the beginning of
    the business until it becomes profitable.

Operating Budget
  • Describes the financial plan for the day-to-day
    operations of the business. It is usually
    planned for 6 months to a year.

Cash Budget
  • An estimate of the actual money received and paid
    out for a specific time period.

Financial Records
  • Used to record and analyze the financial
    performance of a business.
  • ALL successful businesses maintain accurate
    financial records.

Common Types of Financial Records
  • Asset records
  • Depreciation records
  • Inventory records
  • Records of accounts
  • Accounts Payable
  • Accounts Receivable
  • Cash records
  • Payroll records
  • Tax records

Financial Statements
  • Reports that are used to record and analyze the
    financial performance of a business.

Financial Statements
  • The three most important elements of a companys
    financial strength are its asset, liabilities,
    and owners equity.
  • Assets what a company owns
  • Liabilities what a company owes
  • Owners Equity value of the owners investment
    in the business.

Types of Financial Statements
  • Balance Sheet lists the assets, liabilities,
    and owners equity (or capital). Usually
    prepared every 6 months or once a year.
  • Income Statement reports the revenues,
    expenses, and net income or loss from business
    operations for a specific period of time.
  • Examples on pages 300 and 301

Payroll Management Goals
  • Describe the components of a business payroll
  • Identify information included in payroll records
    and paychecks.

  • The financial record of employee compensation,
    deductions, and net pay.
  • A payroll system maintains information on each
    employee to be able to calculate the companys
    payroll and to make the necessary payments to
    each employee.

More Payroll
  • As part of the compensation system, most
    businesses provide employees a range of benefits
    such as
  • Insurance options
  • Paid or unpaid vacation
  • Sick leave and personal leave
  • Retirement plans
  • Education assistance

Payroll Taxes
  • Income Taxes the Federal government, most
    states, and some local governments require
    employers to withhold income tax from their
    employees pay.
  • Social Security and Medicare (FICA)
  • Federal Insurance Contribution Act
  • Unemployment Taxes (FUTA)
  • Federal Unemployment Tax

Payroll Preparation
  • Payroll record holds the employees name,
    Social Security number, address, and other needed
    personal information.
  • Also includes individual tax information and a
    record of benefits.
  • The employees current and year-to-date earnings,
    deductions, gross pay, and net pay are maintained
    in the payroll record.
  • Employees can pick up their paychecks or arrange
    for direct deposit to their bank.
  • See bottom of page 306 and
  • top of page 307

Financial Decision-Making Goals
  • Recognize important financial information mangers
    use to make decisions.
  • Identify the steps in making financial decisions
    in business.

Understanding Financial Performance Ratios
  • Financial Performance Ratios are comparisons of a
    companys financial elements that indicate how
    well the business is performing.

Current Ratio
  • Current assets are compared to the current
  • The business could convert to cash within one
  • Tells you whether the business could pay its
    debts when they become due.
  • Should be 11 for a healthy business.

Debt to Equity Ratio
  • The companys liabilities divided by the owners
    equity is the debt to equity ratio.
  • Tell how much the business is relying on borrowed
  • Most banks want to see a debt to equity ratio no
    higher than 21. Too much debt puts a business
    at risk because it may have trouble meeting its
    obligations to its lenders.

Return on Equity Ratio
  • The net profit of the business compared to the
    amount of owners equity is the return on equity
    ratio. This shows the rate of return the owners
    are getting on the money they invested. It
    should be compared to the return they could
    receive if they used their money in other ways
    such as savings, investing in other companies, or
    purchasing stocks and bonds.

Net Income Ratio
  • The total sales compared to the net income for a
    period such as six months or a year.
  • Shows how much profit is being made by each
    dollar of sales for the period being analyzed.
  • Should be compared to past periods and competing

Making Financial Decisions
  • Make a budget
  • Use the budget to guide business operations.
  • Regularly check performance.
  • Look for discrepanies differences between
    actual and budgeted performance.
  • Make needed adjustments.
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