Entrepreneurship: Assessing a New Venture’s Financial Strength and Viability

Practice flashcards covering the key concepts, financial objectives, records, and forecasting methods discussed in Chapter 8 of Entrepreneurship: Successfully Launching New Ventures.

Financial management

The process of focusing on raising funds and managing a business's finances to maximize returns and make informed financial decisions.

Profitability

A firm's ability to earn a profit after covering all of its expenses, answering the question: "Is the business making money?"

Liquidity

The ability of a business to pay its short-term bills on time, ensuring it has enough cash to meet immediate obligations.

Efficiency

How effectively a business utilizes its resources, such as money, equipment, and employees, to generate sales.

Stability

The ability of a business to survive in the long run by managing debts and finances wisely to maintain overall financial health.

Historical financial statements

Reports that summarize actual financial activities and financial position based on data from a past accounting period, rather than estimates.

Income Statement

A historical financial statement that measures profitability over a period of time by recording revenue, expenses, and net profit or loss.

Balance Sheet

A financial statement that shows a business's financial position at a specific date, summarized by the equation: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.

Statement of Cash Flows

A report showing the movement of cash flow into and out of a business, categorized by operating, investing, and financing activities.

Financial Forecasts

Predictions or estimates of a company's future financial performance, which serve as the basis for preparing budgets and pro forma statements.

Sales Forecast

A specific estimate of future sales that serves as the primary basis for preparing all other financial forecasts.

Percent-of-sales method

A technique for estimating future expenses by expressing each expense item as a specific percentage of sales.

Pro forma financial statements

Projected financial reports that estimate future performance and position based on forecasts and assumptions instead of actual past results.

Financial Analysis

The evaluation of a firm's financial performance using historical and pro forma statements through ratio analysis, benchmarking, or comparing actual results vs. forecasts.

Ratio Analysis

A method of financial analysis used to evaluate performance by calculating ratios related to profitability, liquidity, efficiency, and financial stability.

Benchmarking

The process of comparing a company's financial performance ratios against industry averages or specific key competitors.