Financial Management Glencoe Entrepreneurship: Building a Business Analyzing Your Finances Managing Your Finances 21.1 Section 21.2 Section 21

Financial Financial ManagementManagement

Glencoe Entrepreneurship: Building a Business

Analyzing Your FinancesAnalyzing Your Finances

Managing Your FinancesManaging Your Finances

21.1Section

21.2Section

21

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Analyzing Your Finances

SECTIONSECTION 21.1

Chapter 21 Financial Management

• Describe the purpose of comparative financial statements.• Describe how different ratios are calculated.• Explain why financial statements are essential for decision

making.

Section Objectives




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By maintaining and analyzing financial records and reports, business owners and other interested parties have the information necessary to make sound business decisions.

The Main Idea




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Content Vocabularycomparative financial statementratio analysiscurrent ratioworking capital

debt rationet profit on sales ratiooperating ratioquick ratio




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Every business prepares two primary financial statements:

1. The income statement, also called a Profit and Loss (or P&L) statement, 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.

Using Financial Statements




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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 statement

a financial statement with financial data from two accounting periods used as an analysis tool by a business owner

Comparative Financial Statements




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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

Ratio Analysis




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The current ratio indicates the ability of a business to pay its bills.

current ratio

the 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

Current Ratio




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Businesses use information from the “current year” balance sheet to calculate working capital.

working capital

the capital available to a business to carry out its daily operations

Working Capital




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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

Debt Ratio




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Net profit on sales ratio is calculated using amounts from the “current year” income statement.

net profit on sales ratio

the number of cents left from each dollar of sales after expenses and income taxes are paid

Net Profit on Sales Ratio




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Operating ratio gives the business owner a sense of whether expenses are in line with similar businesses.

operating ratio

the relationship between each expense and total sales as reported on the income statement

Operating Ratio




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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

Small Business and Entrepreneurship




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Business owners must analyze the vital information provided in financial statements, identify problem areas, and make decisions.

Management Decision Making




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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

Management Decision Making




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After You Read

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.




SECTIONSECTION 21.1


After You Read

2. Describe how operating ratios are calculated.

Each expense is divided by total sales for the period.




SECTIONSECTION 21.1


After You Read

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.


Managing Your Finances


SECTIONSECTION


21.2

• 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 Objectives




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21.2

Careful management of your business finances is an essential element of running a successful business.

The Main Idea




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21.2

Content Vocabularyvariable expensesfixed expensesbudget

capital expenditurescredit bureaus




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21.2

The main goal of a business is to make a profit. Profits do not just happen. Business owners have to plan for them.

Planning for Profits


Planning for Profits

23

Planfor

Profits

Forecastsales

Evaluateprofit potential

BudgetControlcosts



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21.2

You can base projections of sales on:• sales records of previous periods• the current rate of sales growth in your industry and geographic

area • the rate of growth of the gross national product

Forecasting Sales




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21.2

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

Evaluating Profit Potential




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21.2

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

Evaluating Profit Potential

variable expenses

business expenses that change with each unit of product produced, such as supplies, wages, and production materials




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21.2

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

Budgeting




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21.2

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.

Managing Cash Flow




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21.2

A cash budget helps monitor your business’s cash flow by recording estimated cash flow, actual cash flow, and the difference between the two amounts. By recording and analyzing line items each month, business owners can address any significant changes from the budgeted amounts.

Using a Cash Budget


Improving Your Cash Flow

30

Closely monitor credit and collections.

Take advantage of credit terms.

Manage inventory carefully.

Offer cash discounts.

Set up a cash reserve.

Monitor payroll expenses.

Put cash surpluses to work.

Reduce expenses.



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21.2

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 expenseslong-term commitments of large sums of money to buy new equipment or replace old equipment

Planning for Capital Expenditures




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21.2

These tips will help you manage your taxes.• Time income to control when it is taxed.• Time deductions.• Choose the most beneficial depreciation method.• Write off uncollectible accounts.• Claim research and development expenses.• Keep records of all expenses.

Managing Taxes




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21.2

The main advantage of offering credit to customers is increased sales volume. The main disadvantage is the difficulty of collecting money owed in a timely manner.

Managing Credit


Granting Credit

34

The Five Steps of Granting Credit

1. Obtain information.

2. Check credit and background.

3. Evaluate credit applications.

4. Make your decision.

5. Inform the customer.



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21.2

Credit bureaus provide important information to businesses that are considering loan or credit applications.

credit bureausagencies that collect and sell information on how promptly people and businesses pay their bills

Granting Credit




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21.2

A business can collect accounts internally or hire a collection agency. The most effective internal collection procedures involve progressively forceful steps.

Collecting Accounts




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21.2

After You Read

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.




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21.2

After You Read

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.




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21.2

After You Read

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.




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21.2

After You Read

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, and keeping records of all expenses.




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21.2

After You Read

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.


Financial Financial ManagementManagement


Analyzing Your FinancesAnalyzing Your Finances

Managing Your FinancesManaging Your Finances

21.1Section

21.2Section

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Chapter 21Financial Management



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Financial Management Glencoe Entrepreneurship: Building a Business Analyzing Your Finances Managing Your Finances 21.1 Section 21.2 Section 21