1. Explain the two functions of the financial management of a firm.
2. Identify the four main financial objectives of entrepreneurial ventures.
3. Explain the difference between historical and pro forma financial statements.
4. Explain the purpose of an income statement.
5. Explain the purpose of a balance sheet.
• Financial Management
– Financial management deals with two things: raising money and managing a company’s finances in a way that achieves the highest rate of return
– Chapter 10 focuses on raising money. This chapter focuses primarily on:
• How a new venture tracks its financial progress through preparing, analyzing, and maintaining past financial statements.
• How a new venture forecasts future income and expenses by preparing pro forma (or projected) financial statements.
• Profitability
– Is the ability to earn a profit.
• Many start-ups are not profitable during their first one to three years while they are training employees and building their brands.
• However, a firm must become profitable to remain viable and provide a return to its owners.
• Efficiency
– Is how productively a firm utilizes its assets relative to its revenue and its profits.
• Southwest Airlines, for example, uses its assets very productively. Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry.
• Stability
– Is the strength and vigor of the firm’s overall financial posture. • For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.
• Importance of Financial Statements
– To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements.
• A financial statement is a written report that quantitatively describes a firm’s financial
