Chapter 7: Financial Management

Study Notes

Financial management deals with two things: raising money and managing a company's finances to achieve the highest rate of return.

Most entrepreneurial ventures need to raise money during their early life due to three reasons:
- Initial startup costs
- Growth and expansion
- Cash flow management

Personal funds:
- Founders contribute personal funds, along with sweat equity, to their ventures
- Friends and family are the second source of funds for many new ventures
- Bootstrapping: finding ways to avoid the need for external financing
Debt financing:
- Getting a loan
Equity capital:
- Exchanging partial ownership of a firm for funding
- Business angels: individuals who invest their personal capital directly in start-ups
- Venture capital: money invested by venture capital firms in start-ups and small businesses with exceptional growth potential
- Initial public offering (IPO): a company's first sale of stock to the public
Creative sources of financing:
- Crowdfunding: funding a project or new venture by raising monetary contributions from a large number of people
- Leasing: a written agreement allowing an individual or business to use a property for a specified period in exchange for payments
- Grant programs: programs providing financial support to entrepreneurs
- Strategic partners: partnerships formed to share costs of product or service development, gain access to particular resources, or facilitate speed to market

Three steps involved in properly preparing to raise debt or equity financing:
- Develop a solid business plan
- Prepare a comprehensive financial plan
- Develop a persuasive pitch

Financial statements provide a snapshot of a firm's financial position at a given point in time
Income statement (profit or loss statement):
- Lists revenues and expenses over a particular period
- Calculates gross profit, operating income, earnings before interest and taxes, pretax income, and net income
Balance sheet:
- Lists a firm's assets, liabilities, and stockholders' equity
- Assets include current assets (cash, accounts receivable, inventories) and long-term assets (net property, plant, and equipment)
- Liabilities include current liabilities (accounts payable, notes payable) and long-term liabilities (long-term debt)
- Stockholders' equity includes common stock and paid-in surplus, and retained earnings
Statement of cash flows:
- Divided into three sections: operating activities, investment activities, and financing activities
- Shows the inflows and outflows of cash over a particular period

A way to interpret or make sense of a firm's historical financial statements
Involves comparing a firm's financial results to industry norms to determine how it stacks up against its competitors and identify any financial "red flags" requiring attention### Profitability Ratios
Associate the amount of income earned with the resources used to generate it
Return on Assets (ROA) = net income/average total assets (21.4% in 2018, 18.7% in 2017, 14.7% in 2016)
Return on Equity (ROE) = net income/average shareholders' equity (35.0% in 2018, 31.0% in 2017, 24.9% in 2016)
Profit Margin = net income/net sales (22.3% in 2018, 17.9% in 2017, 13.6% in 2016)

Measure the extent to which a company can quickly liquidate assets to cover short-term liabilities
Current Ratio = current assets/current liabilities (3.06 in 2018, 2.26 in 2017, 2.35 in 2016)
Quick Ratio = quick assets/current liabilities (2.58 in 2018, 1.89 in 2017, 1.96 in 2016)

A firm's pro forma financial statements look forward rather than track the past
Preparation of pro forma financial statements helps a firm rethink its strategies and make adjustments if necessary
Preparation of pro forma financials is necessary if a firm is seeking funding or financing

Operating activities: net cash provided by operating activities $140,200 in 2018, $164,600 in 2019, $201,800 in 2020
Investing activities: net cash flows provided by investing activities $(250,500) in 2018, $(100,000) in 2019, $(275,000) in 2020
Financing activities: net cash flows provided by financing activities $119,500 in 2018, $(75,000) in 2019, $100,000 in 2020
Increase in cash: $9,200 in 2018, $(10,400) in 2019, $26,800 in 2020