1. Financial Management
BM007: Analyze financial data in order to make short-term and long-term decisions.

2. Records Used in Business
Accounting Records:
Financial records of the transactions of the business

3. Purpose of Record Keeping:
Identify the source of receipts
Identify expenses paid or owed
Determine the kinds and value of assets
Prepare financial records
Prepare and support tax returns
Check the progress of the business
Plan the future direction of the business

4. Needs for Specific Records
Cash accounting
Cash receipts-used to record all cash received
Cash payments-used to record all cash payments
Petty Cash-used for small disbursements
Suggestions for the safe handling of cash

5. Needs for Specific Records
Continued
Accounts receivable: to record amounts owed by customers
Accounts payable: to record amounts owed to creditors.
Asset records:
Fixed asset
Depreciation
Asset book value

6. Needs for Specific Records
Continued
Payroll records
Earnings record (hours worked, wages, overtime wages, and all deductions)
Regular reports (filed with state and federal government)
Tax records
Federal government requires every business to report its income and expenses.
Government requires each employee fill out a W-4 form.

7. Record Systems Small businesses Large businesses
Manual systems/cash register
Popular software (QuickBooks) for small to medium-sized companies
Large businesses
More complex equipment and software
Outsourcing-use of outside firms for specialized tasks.
Separate accounting department

8. Business Budgets and How They are Used
Sales budget-forecasting sales revenue for a specified time.
Merchandising budget-forecasting the amount of goods the company expects to sell to customers over a specified time.
Advertising budget-forecasting the amount of money for advertising, based on sales of merchandise (planned together with merchandising budget)

9. Business Budgets and How They are Used
continued
Cash budget-estimating the cash flow (cash into and out of the business)
Primary sources of incoming cash—cash receipts and borrowing.
Capital budget-plan to replace fixed assets or buy new ones.

10. Business Budgets and How They are Used
continued
Income statement budget-a plan showing projected sales, costs, expenses, and profits for a future period. By subtracting its total costs and expenses from the projected sales, a business can estimate its profit.

11. Evaluate the Budget
Compare actual figures to the estimated figures on the budget
Identify the variance (the difference between the two figures)
Make necessary changes (used as a control tool)

12. Data Shown on Financial Statements
Financial statements-reports to summarize financial data.
Balance Sheet
Assets, Liabilities, Capital (Owner’s Equity)
Accounting equation (A=L+O)
Income Statement
Revenue-income earned
Expenses-all costs incurred in operating the business
Profit or Loss-the difference between total revenue and expenses

13. Analysis of financial data
Cash Flow-the movement of cash into and out of a business.
Working Capital-the difference between current assets and current liabilities.
Ratio Analysis-a comparison between two numbers showing how many times one number exceeds the other

14. Analysis of financial data
Continued
Types of Ratio Analysis:
Liquidity
Leverage
Activities
Profitability

15. Financial Advice Accountants Banks Consultants
Small Business Administration (SBA)

16. Obtaining Capital Methods of obtaining capital:
Equity or owner’s equity
Retained earnings
Debt capital or creditor capital
Factors to consider when obtaining credit
The cost
Interest rates
Power of lenders/creditors

17. Sources of Outside Capital
Banks and financial firms
Small loan companies
Venture capital firms
Current credit companies
Sales finance companies
Insurance companies
Individual investors/investment groups
Pension funds
Investment banking
Equipment manufacturers

18. Minimizing and Managing Risks
Establish a credit system
Credit Sales
Work with a national credit card co.
Offer its own credit card
Offer consumers other credit plans
Determine credit standing
Creditworthiness-a measure of a person’s ability and willingness to repay a loan.
Obtain credit information from applicant
Obtain information from credit agencies

19. Minimizing and Managing Risks
Continued
Federal and state credit law
Equal Credit Opportunity Act-illegal to deny credit because of age, sex, marital status, race, national origin, religion, or public assistance
Truth-in Lending law-requires business to reveal on the form the cost of obtaining credit (including interest rate)

20. Minimizing and Managing Risks
Continued
Federal and state credit law
Fair Credit Reporting Act-cardholders have rights to see their agency reports and to correct errors on reports.
Fair Debt Collection Practices Act-forbids debt collector to use abusive, deceptive, or unfair collection methods.

21. Analyzing Credit Sales
Aging the Accounts Receivable: analyzing customers’ account balances based upon the number of days the balance remains unpaid.
Minimizing Uncollectible Accounts: analyze credit sales to determine which collection procedure is the most effective. Goal is to increase sales while keeping bad debts to a minimum.

22. Insurance and Risk Reduction
One-third of all small business failures result from significant business theft.
Companies spend up to $10 million per year protecting against copyright losses.
Companies lose $1-25 billion to employee theft each year.
The average company loses $1.3 million each year to credit card fraud.
Bad checks written by customers cost business an estimated $5 billion per year.
The average cost to settle a liability claim brought against a company is $1 million.
Source: Business Risks International (

23. Insurance Terms Insurer Policyholder Policy Insured Insurance Peril
Risk
Premium
Deductible

24. Types of Business Insurance
Property: fire, theft, etc.
Vehicle: collision, comprehensive, etc.
Personal: health, disability, etc.
Liability: injury to others
Bonding: loss from negligence or dishonesty

25. Non-insurable Risks-those risks which are not covered by insurance.
Examples of Non-insurable Risks:
Changes in economic conditions
Changes in weather and environmental developments
Changes in customers’ tastes