What
do we learn?
a. The importance of understanding the financial
management of an entrepreneurial firm.
Ø
2
activities of Financial management:
·
Raising
money.
·
Managing
a company’s finances in a way that achieves the highest rate of return.
Ø
Important
for a firm to have a solid grasp of how it is doing financialy.
Ø
Aware
of how much money they have in bank and if the amount if sufficient to satisfy
their firm’s financial obligations.
b. 4 main financial objective of an entrepreneurial firm.
Ø
Profitability:
the ability to earn a profit.
Ø
Liquidity:
·
ability to meet its short-term financial
obligations.
·
Account
recievable: money owed to it by its customers.
·
Inventory:
its merchandise, raw aterials, and products waiting to be sold.
Ø
Efficiency:
how productively a fir utilizes its assets reltive to its revenue and its
profits.
Ø
Stability:
·
The
strength and vigor of the firm’s overall financial posture.
·
Debt-to-equity
ratio: calculated by dividing its long-term debt by its shareholders equity.
c.
The process of
financial management as used in entrepreneurial firm.
Ø
Financial
statement: written report that quantitively describes a firm’s financial
health.
Ø
Flows
that commonly used:
·
The
income statement.
·
The
balance sheet.
·
The
statement of cash flows.
Ø
Forecasts:
estimation of a firm’s future income and expenses based on its past
performance, its current circumstances, and its future plans. ( typically, new
venture base their forcasts on an estimate of sales and then on industry
averages or the expiriences of similar start-ups regarding the costs of good
sold and other expenses)
Ø
Budgets:
itemized forecasts of a company’s income, expenses, and capital needs.
(important tool for financial planning and control)
Ø
The
process:
1.
Tracking
the company’s past financial performance through the preparation and analysis
of financial statements.
2.
Prepare
forecasts for 2 or 3 years in the future.
3.
Preparation
of pro forma financial statements.
4.
Ongoing
analysis of financial results. (financial ratios)
o
Depict
relationships between items on a firm’s financial stetments.
o
Used
to discern whether a firm is meeting its financial objectives.
d. Difference between historical and pro forma financial
statements.
Ø
Historical
financial statements:
·
reflect past performance and are usualy
prepared on a quarterly and annual basis.
·
Required
by the securities and exchange commission (SEC)
·
To
prepare financial statements and make them available to punlic
·
Submitted
to the SEC thourgh number of required fillings. (the most comprehensive
fillings is the 10-K →report a similar to the annual report except that it
contains more detailed information about the company’s business)
Ø
Pro
forma financial statements:
·
Projections
for future periods based on forecasts and are typically completed for 2 or 3
years in the future.
·
Strictly
planning tools and are not required by the SEC.
e. The different of historical financial statement and
their purposes.
Ø
Includes:
·
income statement.
o
Reflects
the results of the operations of a firm over a specified period of time.
o
Records
all the revenues and expenses for the given period and shows whether the firm
is making a profit or is experiencing a loss.
o
Typically
prepared on a monthly, quarterly, and annual basis.
o
Most
are prepared in a multi-layer format.
o
Three
numbers that receive the most attention when evaluating an income statement:
1.
Net
sales: consist of total sales minus allowances for returnedgoods and discounts.
2.
Cost
of sales/ cost of goods sold: includes all the direct costs associated with
producing or delivering a product or service.( include the material costs and
direct labor)
3.
Operationg
expenses: include marketing, administrative costs, and other expenses not
directly related to producing a product or service.
o
Compare
the ratio of cost of sales and operationg expenses to net sales for different
periods.
o
Profit
margin: ratio that is of practicular importance when evaluating a firm’s income
statements.
o
Price-to-earning
ratio,or P/E ratio: One ratio that will not be computed.
·
The
balance sheet.
o
A
snap shot of a company’s assets, liabilities, and owners equity at a specific
point in time.
o
3
major categories of assests:
1.
Current
asstes: include cash plus items that are readily convertible to cash.( such as
accounts revievable, marketable securities, and inventories)
2.
Fixed
asstes: assets used over a longer time frame.( real estate, buildings,
equipment, and furniture)
3.
Other
assets: miscellaneous assets including accumulated goodwill.
o
3
major categories of liabilities:
1.
Current
liabilities: obligations that are payable within a year. (including account
payable, accured expenses, and the current portion of long-term debt)
2.
Long-term
liabilities: notes or loans that are repayable beyond 1 year. (including
liabilities associated with purchasing real estate, buildings, and equipment)
3.
Owner’s
equity: equity invested in the business by its own owners plus the accumulated
earnings retainedby the business after paying dividens.
·
The
statement of cash flows.
o
Summarizes
the change’s in a firm’s cash position for a specified period of time and
details why the changes occurred.
o
Similar
to a month-end bank statement.
o
Reveals
how much cash is on hand at the end of the month as well as how the cash was
acquired and spent during the month.
o
3
separate activities:
1.
Operating
activities: net income( or loss), depreciation, and changes in current assets
and current liabilities other than cash and short-term debt.
2.
Investing
activities: the purchase, sale, or investment in fixed assets. (such as real estate,equipment,
and buildings)
3.
Financing
activities: cash raised during the period by borrowing money or selling stock
and/or cash used during the period by paying dividens, buying back outstanding
stock, or buying back outstanding bonds.
·
Ratio
analysis.
o
Most
practical way to interpret or make sense of a firm’s historical financial
statements.
o
Divided
into profitability ratios, liquidity ratios, and overall financial statements.
f. The role of forecasts in projecting a firm’s future
income and expenses.
Ø
Forecasts:
predictions of a firm’s future sales, expenses, income, and capital
expenditures.
Ø
Provide
the basis for its pro forma financial statement.
Ø
Helps
a firm create accurate budgets, build financial plans, and manage its finances
in a proactive rather thana reactive manner.
Ø
Assumptions
sheet: Explanation of the sources of the numbers for the forecast and the
assumptions used to generate them
Ø
Sales
forecast: A projection of a firm’s sales for a specified period (such as a
year).
Ø
Regression
analysis: A statistical technique used to find relationships between variables
for the purpose of predicting future values.
Ø
Percent-of-sales
method: A method for expressing each expense item as a percentage of sales.
Ø
Constant
ratio method of forecasting: If a firm determines that it can use the
percent-of-sales method and it follows the procedure, then the net result is
that each expense item on its income statement (with the exception of those
items that may be individually forecast, such as depreciation) will grow at the
same rate as sales.
Ø
Break-even
point: Where total revenue received equals total costs associated with the
output of the restaurant or the sale of the product.
g. The purpose of pro forma financial statement.
Ø Similar to its historical financial statements except
that they look forward rather than track the past.
Ø The preparation of pro form financial statements helps
a firm rethink its strategies and make adjustments if necessary.
Ø The preparation of pro forma financials is also
necessary if a firm is seeking funding or financing.
Ø 3 types of pro forma financial statement:
1. Pro forma income statement: Shows the projected results of the operations of a firm over a specific
period.
2. Pro forma balance sheet: Shows a projected snapshot
of a company’s assets, liabilities, and owner’s equity at a specific point in
time.
3. Pro forma statement of cash flows: Shows the projected flow of
cash into and out of a company for a specific period.
4.
Ratio
analysis: to evaluate a firm’s historical financial statement should be used to
evaluate the pro forma financial statements.
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