Entrepreneurship

Lecture on Financial
Management:Assessing
a New Venture’s
Financial Strength.
Lecture 9
Bruce R. Brringer

By Dr. Naveed Ahmad

 Financial
management

Financial management deals with two

primary aspects: raising money and
managing a company's finances to
achieve the highest rate of return.
• Tracking Financial Progress
Definition: A new business tracks its
financial progress by creating and
reviewing past financial statements.

• Example:
Income Statement: This shows how
much money the business made and
spent over a certain period.

Example: If a coffee shop made

$10,000 in sales and spent $7,000 on
expenses, its net profit would be
$3,000.
• Balance Sheet: Shows what the
business owns (assets) and owes
(liabilities) at a specific point in time.

• Example: If the coffee shop has

$5,000 in the bank (asset) and owes
$2,000 for rent (liability), its equity
(what the owners own) is $3,000.

• Cash Flow Statement: Shows how

cash moves in and out of the business.

Example: If the coffee shop received

$10,000 from sales but spent $7,500 on
supplies and wages, the net cash flow is
$2,500.
Forecasting Future Income and
Expenses

Definition: A new business predicts its

future financial performance by creating
pro forma (projected) financial
statements.

1: Pro Forma Income Statement:

Estimates future profits.

Example: If the coffee shop expects to

double its sales to $20,000 next year and
expects expenses to rise to $14,000, the
projected net profit would be $6,000.
• 2:Pro Forma Balance
Sheet: Estimates future
assets, liabilities, and
equity.

• Example: If the coffee

shop expects to have
$8,000 in the bank and
$3,000 in debt (Bank
Loans, Credit Cards) the
projected equity would be
$5,000.
3:Pro Forma Cash Flow
Statement: Estimates
future cash inflows,
outflows and net cash
flow.

• Example: If the coffee

shop expects to receive
$20,000 from sales and
plans to spend $16,000 on
supplies, rent, and wages,
the projected net cash
flow would be $4,000.
The financial
•

management
of a firm deals
with questions
1: How are we doing? Are we making or losing
money?

Question: Are we profitable?

Example: Analyzing the income statement to

determine net profit or loss over a specific period.

2:How much cash do we have on hand? Do we

have enough cash to meet our short-term
obligations?

Question: What is our cash position?

Example: Reviewing the cash flow statement and

current cash balances to ensure liquidity for paying
bills and other short-term liabilities.
3: How efficiently are we utilizing our assets?

Question: Are we making the best use of our

resources?

Example: Examining financial ratios like return

on assets (ROA) and asset turnover ratio to
measure efficiency.

4: How do our growth and net profits compare to

those of our industry peers?

Question: How do we stack up against the

competition?

Example: Comparing financial metrics such as

revenue growth rate and profit margins to industry
benchmarks.
5: Where will the funds we need for capital
improvements come from?

Question: How will we finance our

investments?
Example: Identifying sources of financing such
as bank loans, equity financing, or retained
earnings for funding capital projects.

6: Are there ways we can partner with other

firms to share risk and reduce the amount of
cash we need?
Question: Can strategic partnerships help us
manage risks and resources?

Example: Exploring joint ventures, alliances, or

partnerships to mitigate risks and share costs.
Financial objective of a firm
1: Profitability: This means making sure the
company is making enough money to keep
running and to give some back to the people
who own it (the shareholders).

Example: Think of ways to bring in more

money and spend less, like finding new
customers or making things more efficiently.

2: Liquidity: This is about having enough cash

around to pay the bills that come up quickly, so
the company doesn't run into trouble.

Example: Keep track of how much money is

coming in and going out, so there's always
enough to cover what needs to be paid right
away.
Financial objective of a firm
3:Efficiency: This is all about using the company's
stuff (like machines, people, and materials) in the
best way possible to get the most out of them.

Example: Figure out better ways to do things so

that less time and money are wasted, like
organizing work better or fixing broken equipment
quickly.

4:Stability: This is about making sure the company

stays strong and steady, even if things get tough,
like during economic ups and downs.

Example: Keep an eye on how much money is

owed and how much the company owns, so it
doesn't get too risky, and save up some extra
money for emergencies.
 The process of financial
statement
Importance of Financial Statements:
Financial statements are crucial because they
help investors, creditors, and managers
understand how well a company is doing
financially. They provide valuable information
for decision-making, assessing performance,
and planning for the future.
 The process of financial
statement

1:Forecasts: Forecasts are predictions about

future financial performance based on current
and historical data. They help companies plan,
set goals, and make informed decisions about
things like budgets and investments.

Example: Imagine you own a lemon juice

shop. By looking at how much lemon juice you
sold last summer and how the weather's been
this year, you predict you'll sell even more this
summer. So, you plan to buy extra lemons and
cups to meet the demand. That's forecasting.
 The process of financial
statement
2:Budget: A budget is a financial plan that
lays out expected income and expenses
over a specific period. It helps companies
manage their finances by setting spending
limits and allocating resources effectively.

Example : let's say you plan to spend $50

on lemons, $20 on sugar, and $30 on cups
for the month. That's your budget. It helps
you decide how much you can spend on
each thing and keeps you from
overspending.
 The process of financial
statement
3: Financial Ratios: Financial ratios are tools used to
analyze a company's financial performance and health.
They compare different financial metrics to provide
insights into areas like profitability, liquidity, efficiency,
and solvency. Examples include the debt-to-equity ratio,
return on investment, and current ratio.

Example: Now, suppose you want to know how well your

lemon juice shop is doing financially. You calculate your
profit margin, which is how much money you make for
every cup of lemon sold. Let's say you sell each cup for $1,
and it costs you $0.50 to make it. Your profit margin is ($1
- $0.50) / $1 = 0.50, or 50%. This ratio tells you how
efficiently you're making money.
The
process of
financial
statement
Thanks