Instructional Area: Financial Analysis (FI) Standard:

Understands tools, strategies, and systems used to maintain, monitor, control, and plan the use of
financial resources

1. Performance Element: Use risk management products to protect a business’s financial

wellbeing. Performance Indicators: Obtain insurance coverage (FI:082) (ON)

The federal government requires every business with employees to

have workers’ compensation, unemployment, and disability insurance.

Some states also require additional insurance. Laws requiring

insurance vary by state, so visit your state’s website to find out the
requirements for your business.
Four steps to buy business insurance
1. Assess your risks. Think about what kind of accidents,
natural disasters, or lawsuits could damage your business. If
you need help, the National Federation of Independent
Businesses (NFIB) provides information for choosing
insurance to help you assess your risks and to make sure
you've insured every aspect of your business.
2. Find a reputable licensed agent. Commercial insurance
agents can help you find policies that match your business
needs. They receive commissions from insurance companies
when they sell policies, so it's important to find a licensed
agent that’s interested in your needs as much as his/her
own.
3. Shop around. Prices and benefits can vary significantly. You
should compare rates, terms, and benefits for insurance
offers from several different agents.
 4. Re-assess every year. As your business grows, so do your
liabilities. If you have purchased or replaced equipment or
expanded operations, you should contact your insurance
agent to discuss changes in your business and how they
affect your coverage.

2. Performance Element: Acquire a foundational knowledge of accounting to understand its nature

and scope. Performance Indicators: Explain the concept of accounting (FI:085) (CS)

Definition of Accounting
Accounting is the recording of financial transactions along with storing, sorting, retrieving,
summarizing, and presenting the results in various reports and analyses. Accounting is
also a field of study and profession dedicated to carrying out those tasks.

Examples of Financial Accounting

One part of accounting focuses on presenting the financial information in the form of
general-purpose financial statements (balance sheet, income statement, etc.) that are
distributed to people outside of the company. These external reports must be prepared in
accordance with generally accepted accounting principles often referred to as GAAP or US
GAAP.

Examples of Management Accounting

Another part of accounting focuses on providing a company's management with the
information needed to keep the business financially healthy. Although some of the
information comes from recorded transactions, many of the analyses and reports include
estimated and projected amounts based on various assumptions. Generally, this
information is not distributed to people outside of the company's management. A few
examples of this information are budgets, standards for controlling operations, and
estimating selling prices when quoting prices for new work.

Other Examples of Accounting

Some of the many other examples of accounting include:

● Advising on accounting systems

● Income tax planning, advising, and reporting
● Auditing the financial statements of companies and other organizations
● Providing general business advice
● Financial planning for individuals
3. Performance Element: Implement accounting procedures to track money flow and to determine
financial status. Performance Indicators: Explain the nature of balance sheets (FI:093) (SP)
Describe the nature of income statements (FI:094) (SP) Prepare cash flow statements (FI:092)
(MN)

- Balance Sheets: Assets - Liabilities

- Liabilities split into current and long term
- Time until its paid off
- Assets split into current and fixed
- Time until liquidation
- Income Statements/Profit Loss Statements:
- Gross Income - Operating Costs
- Gross Income= Revenue - Cost of Production - Discounts, Allowances,
etc.
- Operating Costs = Fixed Expenses + Variable Expenses
- Fixed Expenses do not change on a month to month basis
- Variable Expenses change on a month to month basis
- Can be done in pre & post tax variants
- Cash Flow Statements
- Describes where the cash is at currently, cash being almost instantly
liquefiable.
- Can be positive or negative, but ideally positive
- Cash flow can be broken down to 3 components
- Financial Activities
- Payment on debts, like customers paying the business on
their debts or the company paying its lenders its debts.
- e.g. Interest & Taxes, Cash Exchange & Balance
- Investing Activities
- Loans issued by the business, or to the business’s
purchase/sales of assets
- e.g. Insurance, Stocks, Debts paid & issued
- Operating Activities
- Routine business operations, buying & selling products,
paying bills and employees, purchasing of supplies, etc.
- e.g. Fixed assets purchase, capital expenditures, business
acquisitions.

4. Performance Element: Implement financial skills to obtain business credit and to control its use.
Performance Indicators: Explain the purposes and importance of obtaining business credit
(FI:023) (ON) Analyze critical banking relationships (FI:039) (ON) Make critical decisions
regarding acceptance of bank cards (FI:040) (ON) Determine financing needed for business
operations (FI:043) (ON) Identify risks associated with obtaining business credit (FI:041) (ON)
Explain sources of financial assistance (FI:031) (ON) Explain loan evaluation criteria used by
lending institutions (FI:034) (ON) Complete loan application package (FI:033) (ON)
Business credit is a track record of a business’s financial responsibility that companies,
investors, or financial organizations use to determine whether or not that business is a good
candidate to lend money to or do business with.

There are a number of agencies that calculate business credit, and each agency has a different
calculation method, but typically this is a ranking from 0 to 100. The higher the number, the
lower your calculated risk. Maintaining a score of 80 or higher is a good rule of thumb.

Common factors that impact your business credit are public records, such as liens or
bankruptcies, credit, such as outstanding balances and payment habits, and demographic
information, such as business size and years on file.

Explain the purposes and importance of obtaining business credit (FI:023) (ON)

Strong business credit can help you grow your business. Many banks, investors, and
companies rely on your business creditworthiness when setting loan terms, determining
insurance premiums, increasing lines of credit, or considering you as a viable partner.

According to the Small Business Administration (SBA), insufficient or delayed financing is the
second most common reason for business failure. Because anyone can view your business
credit score—it’s not confidential—it’s important to establish business credit from the start
receive better interest rates, loan terms, and negotiation leverage on payment periods with
suppliers.

As a small business owner, separating personal credit and business credit is also important.
Think of your business credit as a wall dividing your business decisions from your personal
credit history. Rather than being linked to your name and Social Security number, business
credit is linked to your business entity and separate Tax ID number.

This separation can remove potential funding obstacles that could prevent your business from
growing. Likewise, it limits your personal liability while running a company—in the event your
business went under, your personal credit would be protected.

Analyze critical banking relationships (FI:039) (ON)

What Is Relationship Banking

Relationship banking is a strategy used by banks to strengthen loyalty of customers and
provide a single point of service for a range of products and services.

A customer of a bank may start out with a simple checking or savings account, but
relationship banking involves a personal or business banker offering certificates of deposit,
safe deposit boxes, insurance, investments, credit cards, all types of loans and business
services (e.g., credit card or payroll processing). They may also include specialized financial
products designed for specific demographics, such as students, seniors or high net worth
individuals.

Understanding Relationship Banking

Banks that practice relationship banking take a consultative approach with customers, getting
to know their particular situation and needs and adapting to changes in their financial or
business lives. The relationship banking approach is easily observable in a small town bank,
but it is also practiced in the retail branches of the large money center banks. Whether for an
individual or small business, a relationship bankers will engage in high-touch service to try to
make their banks the 'one-stop shop' for their A-to-Z needs. Cross-selling is the modus
operandi of relationship bankers, but they must be careful. Federal anti-tying laws established
by the Bank Holding Company Act Amendments of 1970 prevent banks from making the
provision of one product or service contingent on another (with some exceptions).

Make critical decisions regarding acceptance of bank cards (FI:040) (ON)

- Benefits of having a bank card:

- Speed of transaction is significantly faster, as normally it’d take 1-2 days to
have the funds transferred
- Allows for the possibility of e-commerce
- Drawbacks:
- The cumulative fees of debit card processing
- More time spent reconciling their bank account information, especially if
inexperienced

Determine financing needed for business operations (FI:043) (ON)

Add up costs
One-time costs may include such items as legal and professional costs for incorporating or
registering your business; starting inventory; licence and permit fees; office supplies and
equipment; long-term assets, such as machinery, a vehicle or real estate; consulting services;
and website design.

Recurring expenses will include such items as salaries, rent or lease payments, raw materials,
marketing costs, office and plant overhead, financing costs, maintenance and professional
fees.

Once you’ve determined your initial and follow-on expenses, you will need to estimate how
much money you will have at your disposal.

Calculate your financial resources

Estimate how much starting capital you will have and the amount of revenue you’ll be able to
generate each month during the start-up period. To calculate the latter, research your
potential market and industry averages to come up with realistic numbers.

Now, plug your estimated financial resources and your estimated expenses into a set of
financial projections for your business. A quick examination of your projections will show if
you’ll have a financial shortfall.

To meet any gap in funds, here are sources you can tap:

1. Personal investment
Most start-ups require some personal investment by the entrepreneur—either cash or
personal assets used as collateral to secure financing. If you foresee a cash shortfall, you may
need to dig deeper into your personal assets.

2. Friends and family

Many new entrepreneurs rely on capital from family and friends (sometimes known as “love
money”). Family and friends often don’t mind waiting to be repaid until profits start rolling in,
but it can be challenging to mix business with personal relationships.

3. Debt financing
Lenders offer various types of debt financing including term loans and lines of credit. Some
lenders offer loans specifically designed for new business ventures that come with flexible
repayment terms.

4. Outside equity financing

Businesses with high growth potential may be able to secure start-up money from angel
investors, business incubators (also known as accelerators) or venture capital funds. Funds
from these sources are usually given in exchange for an equity position in the company.

5. Grants and subsidies

Some companies may be eligible for government grants and subsidies to help with start-up
costs.

Identify risks associated with obtaining business credit (FI:041) (ON)

1. Personal Liability
You might be surprised at how fast and easy it is to get approved for a card. That is because
most credit card issuers are not underwriting the business. They are underwriting you. Most
underwriting models rely very heavily upon the credit score and credit history of the
individual rather than the business. And there is good reason for that: most small business
credit cards come with a personal liability. If the business fails and is unable to pay its debts,
you will likely still be personally liable for any charges that are made on your card.

If you are an employee of a small business and your boss gives you a supplementary card on
his or her account, you do not need to worry about the risk. But in most other cases, you will
be personally liable.
Tip: Check your contract to understand the liability. During the normal course of business, this
should not be a big concern. However, if your business is struggling - do not use the card for
purchases thinking that you can escape the liability if the business goes bankrupt. If you sign
on the dotted line, you are most likely personally responsible.

2. Credit Bureau Reporting

Most small business credit cards (but not all) will not report the balance on your small
business credit card to credit reporting agencies so long as the account is current. That is an
excellent benefit: you do not want business expenses impacting your personal debt burden
calculation when you apply for a mortgage. However, once you default on a small business
credit card, most credit card issuers will report the balance and derogatory information on
your credit report. Your credit score could rapidly and dramatically drop if a new trade-line is
added that has a big balance and missed payments.

Even worse, if your debt remains unpaid it will likely be passed along to a collection agency.
Collection agencies can also register negative "collection items" on your personal credit report
for small business debt, because of the personal guarantee.

Tip: Only put money on your small business credit card that you are confident of paying back.
If your business is in trouble, remember that borrowing your way out of trouble will catch up
with you in a very negative way.

3. CARD Act Protections Are Limited

The CARD Act added a number of important consumer protections for credit cards.
Unfortunately, small business credit cards did not benefit from most of these new
protections. The biggest and most important protection relates to risk-based repricing.

Before the CARD Act, credit card issuers could increase the interest rate on existing balances if
the borrower appeared riskier. For example, if you missed a payment on one credit card, the
interest rates on all of your cards could be increased. That practice is now banned on
consumer cards. Banks can only increase the interest rates on an existing balances if the
borrower misses two or more consecutive payments.

Legally, it is still relatively easy for banks that issue small business credit cards to increase the
interest rate on an existing balance. Fortunately, as a recent study reveals, many leading
banks have voluntarily decided to extend CARD Act protections to small business cards. But
just be warned that this is a decision made by the bank, rather than a regulatory requirement.

Tip: If you are not using your credit card to borrow, this is not a very important consideration.
If you do need to borrow on your credit card, do some homework first. Check to see if risk-
based re-pricing of existing balances is possible, and avoid cards that do it.
4. Still Liable For Employee Cards (In Some Circumstances)
Most small business credit cards give you the opportunity to offer cards to your employees
using your existing account. Just be careful. By adding employees to your existing small
business account, you are effectively creating an authorized user. It is no different from
adding your spouse or child to your personal credit card. The same credit limit will be used.
But, ultimately, the liability remains with the owner of the account.

The benefit of adding an authorized user is that you can earn points, miles or cash back on all
the spending done by your employees. You will also be able to see, in real-time, their activity.
However, by giving the card to your authorized employees, you are also taking personal
liability for their spending activity. If an angry employee decides to go shopping on his last
day, you will get stuck with the bill.

Tip: If you want to avoid taking personal liability for your employee's purchases, set up a
reimbursement policy but have your employee use his or her own card for the transaction.

5. APRs Are Not Low

Small business credit cards are great tools for short-term borrowing. If you are able to pay
your balance in full and on time every month, you pay no interest and have a free line of
credit with 30-day repayment terms. But if you decide to pay the balance over time, the
interest rates on business cards are not low. For example, the Capital One Spark credit card
targets small businesses with the ability to earn unlimited 2% cash back. That is a great deal.
However, the APR on the card is 17.74% variable regardless of your credit score. Even if you
have an 850 FICO, you would still be paying 17.74% and have a personal liability.

If you need to borrow money longer term, consider an SBA loan program. Some marketplace
lenders have tried to offer cheaper ways to borrow. One of the leaders, FundingCircle, has
loans that start at 5.49% APR. With both SBA and Funding Circle, you will need to take the
time, energy and effort to apply. If you treat your business and your personal accounts as one
and the same, you will find approval difficult. But if you have a strong business with good
financial records and need to invest in growth, consider looking for better longer term
borrowing options than a credit card.

Tip: Small business credit cards are great options for short term borrowing, especially if you
can pay the balance in full and on time every billing cycle. If you need a bigger loan for a
longer period of time, shop around for a better deal to avoid the high interest rates.

Explain sources of financial assistance (FI:031) (ON)

5. Performance Element: Manage financial resources to ensure solvency. Performance Indicators:
Describe the nature of cost/benefit analysis (FI:357) (MN) Determine relationships among total
revenue, marginal revenue, output, and profit (FI:358) (MN) Develop company's/department's
budget (FI:099) (MN) Forecast sales (FI:096) (MN) Calculate financial ratios (FI:097) (MN)
Interpret financial statements (FI:102) (MN) File business tax returns (FI:652) (ON) Verify the
accuracy of business financial records (FI:653) (ON)

Horizontal Analysis

A horizontal analysis compares two or more years of a company's financial

statements. The analyst can find the same information from different years by
reading across the page. In comparing dollar figures and percentages in this way,
differences from year to year are easy to find. A variation of the horizontal
analysis is called the trend analysis. The trend analysis starts with the first year a
company is in business, also known as the base year. The base year percentages
are shown as 100 percent, and the increase or decline in percentages can be easily
shown.

Vertical Analysis

Vertical analysis is called such because the corporation's financial figures are listed
vertically on the financial statement. This type of analysis involves the calculation
of percentages of a single financial statement. The figures on this financial
statement are taken from the company's income statement and balance sheet.
Vertical financial statement analysis is also known as component percentages.

Ratio Analysis

There are several types of ratio analysis that can be used in interpreting financial
statements. Ratios may be computed for each year's financial data and the analyst
examines the relationship between the findings, finding the business trends over a
number of years.

Balance sheet ratio analysis determines a company's ability to pay its debts and
how much the company relies on creditors to pay its bills. This is an important
indicator of the financial health of the corporation.

Liquidity ratios show how well the company is able to turn assets into cash. When
evaluating the liquidity ratio, an analyst looks at the working capital, current ratio
and quick ratio.
6. Performance Element: Manage financial resources to ensure solvency. Performance Indicators:
Monitor business's profitability (FI:542) (MN)

7. Performance Element: Manage financial resources to ensure solvency. Performance Indicators:

Describe types of financial statement analysis (e.g., ratio analysis, trend analysis, etc.) (FI:334)
(MN) Discuss limitations of using financial statements to assess business performance (FI:655)
(MN) Spot problems in/issues with financial statements (FI:335) (MN)

8. Performance Element: Use debt and equity capital to raise funds for business growth.
Performance Indicators: Describe the financial needs of a business at different stages of its
development (FI:339) (MN) Discuss factors to consider in choosing between debt and equity
capital (FI:340) (MN)

9. Performance Element: Understand the fundamentals of managerial accounting to aid in financial

decision-making. Performance Indicators: Explain the nature of managerial cost accounting (e.g.,
activities, costs, cost drivers, etc.) (FI:657) (SP)