Chapter 3 3 Financial Management Planning · Financial Management Planning 3 3.1 Business Financial Goals 3.2 Understand Financial Statements 3.3 Develop a Financial Budget 3.4 Interest

BUS291-Business Finance 12/17/2013

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Financial Management Planning

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3.1 Business Financial Goals

3.2 Understand Financial Statements

3.3 Develop a Financial Budget

3.4 Interest and Time Value of Money

Chapter 3

Terms

business financial goals

creditor

principal

interest

collateral

Business Financial Goals

Slide 2

Financial Needs of a Business

Financial health is a critical factor in the

success of any business.

Slide 3


2

Set Financial Goals

business financial goals

establish direction for the financial plans of a

business

three main financial needs of a business

meet financial obligations and pay debts

provide competitive rates of return for

investors

finance future growth and improvement

Slide 4

Meet Current Financial Obligations

creditor

an individual or an organization that provides

funds to a business

fund repayment and interest due at an

agreed-upon future date

principal

the amount of money borrowed

interest

the amount paid for the privilege of borrowing money

Slide 5

Provide Competitive Financial Return

To Investors

Generally, people invest their money

where they can receive the highest rate of

return.

Corporate management is under a great

deal of pressure to maintain a competitive

rate of return.

Slide 6


3

Finance Business Growth and

Improvement

Business growth can be financed through a

variety of methods

attracting additional investments

borrowing additional money from creditors

reinvesting profits

A business must be financially healthy to grow.

collateral

an asset promised by a business to a

creditor if repayment of a loan isn’t

completedSlide 7

Establish Financial Goals

Business financial goals must be clear

and specific.

Slide 8

Characteristics of Effective Goals

Specific

directed at a particular business action

Realistic

must be possible

Measurable

identifies the financial performance that is expected

to change

Established for an identified period of time

allows adequate time for the business to improve the

identified performance

provides a timeframe in which the business usually

measures performanceSlide 9


4

Determine Financial Priorities

Each company must determine specific

financial goals.

short-term goals

long-term goals

Financial goals need to be prioritized.

Slide 10

Terms

financial statements

balance sheets

assets

depreciation

liabilities

owner’s equity

income statement

cash flow statement

Slide 11

Understand Financial Statements

The Financial Statements

financial statements

specific reports prepared according to

accepted accounting standards that

provide financial information about an

enterprise

balance sheet

income statement

cash flow statement

Slide 12


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forms are organized consistently

reliable

statements contain objective, unbiased

information

comparable

information from different companies or from

different time periods can be compared

understandable

Slide 13


establishes guidelines for financial

statements

Securities and Exchange Commission

(SEC)

requires corporations to prepare financial

statements

requires independent audits of statements

Financial Accounting Standards Board

Slide 14


Balance Sheet Components

balance sheet

identifies assets, liabilities, and equity of a

business at a specific date

a “snapshot” in time

Assets = Liabilities + Owner’s Equity

Slide 15


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Slide 16

all of the things a business owns and uses as a

part of business operations

current assets

a life of less than one year

long-term assets

have a life of over a year

often define the nature of the business

depreciation

the decrease in the value of an asset over time

assets

Slide 17


those things that the business owes to

others

current liabilities

those that will be paid for within a year

long-term liabilities

payment will not be made in full for more than one

year

owner’s equity the total value that all owners and investors have

in the firm

liabilities

Slide 18



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Analyzing a Balance Sheet

The balance sheet lists the values of

everything owned and owed by a

business.

A balance sheet must be in balance.

Owner’s Equity = Assets – Liabilities

Specific values on a balance sheet can

be compared to one another.

Slide 19

Income Statement

income statement

provides a view of the financial changes in

a business that have occurred during a

specific period of time

documents all income and expenses

during a period and the resulting profits or

losses

Slide 20

Slide 21


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Analyzing An Income Statement

Items on the income statement should

be compared from month to month and

from year to year.

will show decline and/or improvement

Entries should be compared with similar

entries on other income statements for

companies within the same industry.

Slide 22

Cash Flow Statement

cash flow

statement

shows how

cash is

used by a

company

during a

specific

period of

time

Slide 23

Terms

financial budget

budget discrepancies

operating budget

capital budget

trend analysis

Slide 24

Develop a Financial Budget


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Plan the Financial Future

financial budget

a projected financial statement for a

specific future time period

Slide 25

The Purpose of Budgeting

Budgets serve as a road map for monitoring

business activities and performance.

A company’s performance can be compared

against it’s budget.

If necessary, changes can be made to align

performance with the budget.

budget discrepancies

differences between budgeted amounts and

actual performance

Slide 26

Types of Financial Budgets

operating budget

projects all income and expenses for the

operations of a business for a specific time

period

cash budget

an estimate of the flow of cash into and out

of a company

capital budget

a plan to acquire and finance long-term

assets of a business

Slide 27


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Slide 28

Prepare a Financial Budget

Budgets need to be accurate.

Inaccurate budgets are misleading.

Slide 29

Steps In Budget Preparation

1. Identify the type of budget and the categories of financial information included in the budget.

2. Organize the information categories to reflect the financial calculations that must be completed in the budget.

Net Cash Flow = Cash Receipts – Cash Payments

Slide 30


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4. Select the method of calculating

budgeted amounts.

trend analysis

examines financial performance over several

periods of time

3. Gather and analyze internal and

external information that will affect the

budget.

Slide 31

Steps In Budget Preparation

5. Complete the budget by making the

necessary financial calculations.

Terms

interest rate

time value of money

future value

present value

Slide 32

Interest and Time Value of Money

The Meaning of Interest

Interest adds value to your money over

time.

Slide 33


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Understand Interest Rates

interest

the amount charged to a borrower for the use of the

lender’s money

interest rate

the cost of borrowing money, expressed as a

percentage of the amount borrowed, usually over a

period of one year

simple interest

the amount of interest is calculated at the end of each year based on the total amount loaned

compound interest rate

pays interest on both the total amount borrowed and on the amount earned

Slide 34

Calculate Simple Interest

Slide 35

Calculate Compound Interest

For annually compounded interest, the

interest at the end of the first year is added

to the amount loaned and that amount is

used to calculate the interest earned at the

end of the second year.

The more frequent the compounding, the

higher the total interest and the greater the

return on investment.

Slide 36


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Calculate Future Value

future value (FV)

the amount to which an amount of money will grow in a

defined period of time at a specified investment rate

Slide 37

i is not the annual interest rate unless interest is compounded once a year

n is only the number of years of the investment if interest is compounded annually

Future Value (FV): the total amount of principal and interest

I = FV - P

Actual Rate of Interest

You should know the actual rate of

interest when borrowing money.

the frequency of compounding affects the

interest rate

Slide 38

Time Value of Money

Time value of money is used to determine the value of investments.

time value of money the difference in the purchasing power of an amount of

money at a future date

inflation the general increase in the price of goods and services

over time

Slide 39

future value

the amount to which an amount of money will grow in a

defined period of time at a specified investment rate

present value

the current value of an amount of money to be

received at a future date based on a specified

investment rate


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Present Value Examples

discount

the amount of money subtracted from a

loan at the time of lending equal to the

interest charged by the lender

you can calculate the present value of a

discounted loan

Slide 40

Future Value Examples

Future value can be used to determine the total

cost of a large purchase that will take multiple

years to pay off.

Slide 41

Slide 42

Future Value Examples


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Methods Of Calculating Time Value

Of Money

A variety

of

technique

s can be

used to

calculate

the time

value of

money.

Slide 43

Documents

Chapter 3 3 Financial Management Planning · Financial Management Planning 3 3.1 Business Financial Goals 3.2 Understand Financial Statements 3.3 Develop a Financial Budget 3.4 Interest