Essential Standard 4.00 Understanding the role of finance in business. 1

Objective 4.01 Understand financial management. 2

Topics Financial planning Business budgets Financial records and statements Financial performance ratios 3

Financial planning 4

Financial Planning Why should a business do financial planning? What are the phases of business financial planning? –Start-up –Operation –Expansion What happens during each phase? 5

Financial Planning continued What is the basic financial equation? Revenue – Expenses = Profit or Loss In order to have a profit, which will be greater? In order to have a loss, which will be greater? 6

Business budgets 7

Business Budgets Types of business budgets: –Start-up budget –Operating budget –Cash budget 8

Business Budgets continued Steps for preparing a business budget: 1.Prepare a list of income and expense items. 2.Gather accurate information from business records. 3.Create the budget. 4.Clearly communicate the budget to key employees in order to make sound business decisions. 9

Financial records and statements 10

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 11

Financial Records and Statements continued What are assets? What are liabilities? What is owner’s equity? What are financial statements? What is the difference between a balance sheet and an income statement? 12

Financial performance ratios 13

Financial Performance Ratios What are financial performance ratios? The four main types of financial ratios: –Current ratio –Debt to equity ratio –Return on equity ratio –Net income ratio 14

Financial Performance Ratios continued Current ratio –How is current ratio calculated? –What does this ratio represent? –Which is more favorable, higher or lower? Debt to equity ratio –How is debit to equity ratio calculated? –What does the ratio represent? –Which is more favorable, higher or lower? 15

Financial Performance Ratios continued Return on equity ratio –How is current ratio calculated? –What does this ratio represent? –Which is more favorable, higher or lower? Net income ratio –How is current ratio calculated? –What does this ratio represent? –Which is more favorable, higher or lower? 16