Chapter 8
Assessing a New
Venture’s Financial
Strength and
Viability
Bruce R. Barringer
R. Duane Ireland
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Chapter Objectives
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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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Chapter Objectives
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6.
7.

Explain the purpose of a statement of cash flows.
Discuss how financial ratios are used to analyze and interpret a firm’s financial statements.
8. Discuss the role of forecasts in projecting a firm's future income and expenses.
9. Explain what a completely new firm bases its forecasts on. 10. Explain what is meant by the term percent of sales method. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Financial Management
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• 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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Financial Management
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The financial management of a firm deals with questions such as the following on an ongoing basis:
• How

are we doing? Are we making or losing money?

• How

much cash do we have on hand?

• Do

we have enough cash to meet our short-term obligations?

• How

efficiently are we utilizing our assets?

• How

do our growth and net profits compare to those of our industry peers?

• Where
• Are

will the funds we need for capital improvements come from?

there ways we can partner with other firms to share risk and reduce the

amount of cash we need?
• Overall,

are we in good shape financially?

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Financial Objectives of a Firm
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Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Financial Objectives of a Firm
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• 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.

• Liquidity
– Is a company’s ability to meet its short-term financial obligations. • Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Financial Objectives of a Firm
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• 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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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The Process of Financial Management
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• 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