Understanding Budgets and Financial Analysis

Ratios

Next Generation Science / Common Core Standards Addressed!

CCSS. Math Content HSSIC.B.5 - Use data from a randomized experiment to compare two treatments; use simulations to decide if differences between parameters are significant.

CCSS Math Content HSSIC B.6 - Evaluate reports based on data.

Agriculture, Food and Natural Resource Standards Addressed!

CRP.03.02. Design and implement a personal financial management plan.

– CRP.03.02.01.c. Appraise and select management tools to include in a personal financial management plan.

Bell Work / Student Learning Objectives

1. Explain enterprise budgets.2. What is a partial budget?3. How can you analyze financial trends

using financial ratios?4. What is the difference between

calculating financial ratios using a net worth statement and financial ratios.

Terms

• Budget• Current debt-to-

worth ratio• Current ratio• Enterprise budget• Fixed ratio• Gross ratio

• Leverage ratio• Net capital ratio• Operating ratio• Partial budget• Whole business

budget• Working capital

Interest Approach

• Open your SAE record book on the AET site to the enterprise budget.

• Explain how you developed the

budget.

• What source was used to determine the values used?

Budgeting

Putting the Pencil to it!

Budgeting

Reasons to budget• Plan financial obligations.

• Apply for credit.

• Experiment with opportunities.

• Organize the business.

Budgeting

Sources to use when budgeting• Actual business records.

• State’s summary data.

• Sample data.

• Data from similar businesses.

• Computer sources.

Enterprise BudgetsEnterprise — a portion

of the whole business.

Enterprise budget — income and expenses of one component of the whole business.

Uses of an Enterprise Budget• Determine capital needs• Determine labor needs• Show creditors use of

borrowed money.

Three Components of an Enterprise Budget• Income• Expenses

Fixed Variable

• Returns

Partial Budgets

• Shows expenses and income related to a change in the business/enterprise.

When to use a partial budget:• Expanding an

enterprise.• Adding an alternative

enterprise.• Changing production

practices.• Purchasing new

equipment.

A partial budget answers four questions:• What additional returns will be

received?• What costs will be reduced?• What additional costs will be

incurred?• What returns will be lost?

Net Worth Statement Ratios

Working capital

• Current assets –Current liabilities.

Current ratio (liquidity)

An Example:

Current debt to worth ratio

• Total current liabilities ÷ net worth

Leverage ratio (solvency)

• Total liabilities ÷ net worth

Net capital ratio (solvency)

• Total assets ÷ total liabilities.

Operating ratio

Fixed ratio

• Total fixed expenses ÷ Gross income.

Gross ratio

• Total expenses ÷ Gross income.

The End!