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Understanding Financial Management: Key Components for Business Success

This guide highlights the essential role of finance in business, focusing on financial management. Key topics include financial planning, business budgets, financial records and statements, and performance ratios. Learn why financial planning is crucial, explore various phases (start-up, operation, expansion), and understand the basic financial equation. Discover types of business budgets and the steps for preparing them. Gain insights into the purpose of financial records and the difference between key financial statements. Finally, delve into critical financial performance ratios to assess business health effectively.

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Understanding Financial Management: Key Components for Business Success

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

  2. Objective 4.01 Understand financial management.

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

  4. Financial planning

  5. 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?

  6. 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?

  7. Business budgets

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

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

  10. Financial records and statements

  11. 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

  12. 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?

  13. Financial performance ratios

  14. 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

  15. 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?

  16. 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?

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