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

3. Describe the purpose of comparative financial statements.
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. comparative financial statement ratio analysis current ratio
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 statement a 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 analysis the 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 ration the comparison of current assents (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 capital the 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 ratio the 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 ratio the 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 ratio the 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 ratio a 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. Describe the purpose of comparative financial statements.
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. Describe how operating ratios are calculated.
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. Explain why financial statements are essential for decision making.
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. Describe ways to help manage your cash flow.
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. variable expenses fixed expenses budget capital expenditures
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. Evaluate profit potential
Planning for Profits
Forecast sales
Evaluate profit potential
Plan for Profits
Control costs
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. Describe ways to help manage your cash flow.
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. Explain the importance of controlling capital expenditures.
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. Describe ways to control your taxes.
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. Describe how you can manage credit offered to customers.
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

47. End of