ch.8 - assessing a new ventures' financial strength and viability

Question 1

• Raising Money (ch.10)
• Managing a Company’s Finances

Answer 1

Financial Management

Question 2

• Profitability
• Liquidity
• Efficiency
• Stability

Answer 2

Financial Objectives

Question 3

• A company’s ability to make a profit.

Many start-ups are not profitabel during their first one to three years.
A firm must become profitable to remain viable and provide a return to its

Answer 3

Profitability

Question 4

• A company’s ability to meet its short-term obligations

A challege for firms to keep enough money in the bank to meet its routine obligations in a timely manner.

Answer 4

Liquidity

Question 5

• How productively a firm utilizes its assets

Answer 5

Efficiency

Question 6

• The overall health of the financial structure of the firm, particularly as it relates to its debt-to-equity ratio

For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

Answer 6

Stability

Question 7

• To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements.
• Common Financial statements: income statements, balance sheet, and the statement of cash flows.

Process of Financial Management

Answer 7

Importance of Financial Statements

Question 8

• Estimate of a firm’s future income and expenses, based on past performance, its current circumstances, and its future plans.
• New ventures base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups

ex: sales forecasts, forecast of costs of sales and other items

process of financial management

Answer 8

Forecasts

Question 9

• Depict relationships between items on a firms’s financial statements.

Answer 9

Fiancial Ratios

Question 10

1. Preparation of Historic Financial Statements
2. Preparation of Forecasts
3. Preparation of Pro Forma Financial Statements
4. Ongoing Analysis of Financial Results

Answer 10

The Process of Financial Management

Question 11

• Reflect past performance and are usually prepared on a quarterly and annual basis.

ex: income statement, balance sheet, and statement of cash flows

Answer 11

Historial Financial Statements

Question 12

• periods based on forecasts and are typically completed for two to three years in the future.
• strictly planning tools and are not required by the SEC.

Answer 12

Pro Forma Financial Statements

Question 13

• most practical way to interpret or make sense of a firm’s historical financial statements is through ratio analysis/

Answer 13

Ratio Analysis

Question 14

ROA= net income / average total assets
ROE = net income / average shareholders’ equity
Profit Margin = net income / net sales

Answer 14

Historical Ratio Analysis