Financial Management Basics

Study Notes

A financial statement is a written report that quantitatively describes a firm's financial health.
The three most commonly used financial statements are the income statement, the balance sheet, and the statement of cash flows.
Income statement reflects the results of a firm's operations over a specified period of time, recording all revenues and expenses.
Balance sheet is a snapshot of a company's assets, liabilities, and owner's equity at a specific point in time.
Statement of cash flows summarizes the changes in a firm's cash position for a specified period of time and details why the changes occurred.

Forecasts are estimates of a firm's future income and expenses, based on past performance, current circumstances, and future plans.
New ventures typically base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and other expenses.
Budgets are itemized forecasts of a company's income, expenses, and capital needs, and are an important tool for financial planning and control.

Financial ratios depict relationships between items on a firm's financial statements.
Analysis of financial ratios helps a firm determine whether it is meeting its financial objectives and how it stacks up against industry peers.

Financial management deals with raising money and managing a company's finances to achieve the highest rate of return.
Many experienced entrepreneurs stress the importance of keeping on top of the financial management of the firm.

Historical financial statements reflect past performance and are usually prepared on a quarterly and annual basis.
Pro forma financial statements are projections for future periods based on forecasts, typically completed for two to three years in the future.

Profitability: a company's ability to make a profit, essential for remaining viable and providing a return to its owners.
Liquidity: a company's ability to meet its short-term financial obligations.
Efficiency: how productively a firm utilizes its assets relative to its revenue and its profits.
Stability: the overall health of the firm's financial structure, particularly as it relates to its debt-to-equity ratio.