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Terms in this set (71)
are restricted to funds supplied by partners
There are three main forms of business ownership or business organization
sole proprietorships, partnerships, and corporations
about 73 percent of all business firms are
is a business venture owned by an individual who is personally liable for the venture's debt and other liabilities
the proprietorship has the following important advantages
It has the shortest startup time which means it is easily formed, it has the lowest legal fees which means it is inexpensively formed, it is subject to few government regulations, and the business avoids corporate income tax which means profits are only taxed at the personal level
Two key disadvantages of the sole proprietorship form of business involve
potential difficulty in raising needed capital and the presence of unlimited personal liability for business debts
refers to a general partnership, which is a business venture owned by two or more individuals, called partners, who are each personally liable for the venture's liability
the major advantage of a partnership
is its low cost, ease of formation, and the business avoids corporate income tax
The disadvantages of the partnership include
difficulty of transferring ownership (wealth) to other partners, unlimited personal liability for business debts, limited life of the organization, and difficulty of raising large amounts of capital
in a partnership, the general partners have unlimited liability
and may have to cover debts of other less financially sound partners.
a limited partnership
limits certain partners' liability for venture obligations to the amount paid for their partnership interests; these partners are known as limited partners
at least one partner must be a general partner in a limited partnershi
and face unlimited liability for the firm's obligations.
limited liability company (LLC)
provides the owners with limited liability (like a corporation) and passes its income before taxes through to the owners
A limited liability partnership (LLP)
is a related but distinct structure. Also formed by state law, the LLP is normally affiliated with the provision of professional services (physicians and attorneys).
business corporations are
the dominate form of business organization. A corporation is a legal entity that separates the personal assets of owners, called shareholders, from the assets of the business
the primary goal of a financial manager
should be to maximize wealth
does not take into consideration the timing of returns, does not directly consider cash flows and ignores risk
fails to take into account the timing of the cash flows generated from the firm's projects.
the financial manager
must place primary emphasis on cash flows, the inflow and outflow of cash
subchapter S corporation
An S corp provides limited liability for its shareholders, while its income is taxed only at the personal level of its shareholders
Seed, Startup, and First-Round Financing Sources:
Nearly every entrepreneurial firm will face major financial problems in its early years, making entrepreneurial finance critical to the survival and success of the venture
of financial capital become attainable in the firm's
expansion and maturity stages
the primary source of funds is
primary source of funds at the development stage
entrepreneur's own physical and financial assets
also provide an important secondary source of seed financing
Family members and friends
minimizes the need for financial capita
Two primary sources of formal external venture capital for startup-stage ventures are
business angels and venture capitalist
are wealthy individuals who invest in early stage ventures in exchange for the excitement of launching a business and a share in any financial rewards
are individuals who join in formal, organized venture capital firms to raise and distribute capital to new and fast-growing ventures
The survival stage
revenues start to grow and help pay some, but typically not all, of the firm's expenses
This mixture of debt and equity
used by the firm to finance its operation is called capital structure.
revenue, cogs, gross profit, op. expenses, ebit / op. profits, depreciation, interest expenses, ebt, taxes, net income
provides a financial summary of the firm's operating results during a specified period, such as for a year
The balance sheet
represents a summary statement of the firm's financial position at a given point in time
he operating cash flow can differ from the firm's
The common-size balance sheet
is constructed by expressing each item on the balance sheet as a percentage of total assets
The common-size income statement
is a popular approach for the evaluation of profitability in relation to sales by expressing each item on the income statement as a percent of sales
involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.
is used when the firm's ratio values are compared to those of a key competitor or to the industry average, primarily to identify areas for improvements
involves the comparison of the firm's current to past performance and the evaluation of developing trends to assess the firm's progress over time.
short-term liquidity ratios
measure the firm's ability to pay its bills over the short run without undue stress
a measure of the firm's ability to pay off short-term obligations without relying on
sale of inventories
measure how efficiently a firm uses its assets to generate sales.
A high number of days for the average collection period may indicate
poor credit collection procedures or a lax credit policy
Inflation may tend to cause older firms to appear more efficient and profitable than
The higher the debt ratio, the more financial leverage a firm has and, thus
the greater will be its risk and return
The debt ratio
measures the proportion of total assets financed by the firm's creditors (bankers). The higher this ratio, the greater the firm's degree of indebtedness and the more financial leverage it has to finance its assets
The times interest earned ratio
measures the extent to which operating profits can decline before the firm is unable to meet its annual interest costs. Failure to meet this obligation can bring legal action by the firm's creditors.
if a firm had a times interest earned ratio of 6 times, then
the firm has sufficient EBIT to cover its interest expense 6 times over.
. The profitability ratios show the combined effects of
liquidity, asset management, and debt management on operations
a profit margin of .50 means that
for each $1 of sales generated by the firm it earns 50 cents in net income.
The return of assets (ROA)
measures the overall effectiveness of management in generating profits with its available assets.
The return on equity (ROE)
measures the return on the owners' investment in the firm
The DuPont system
of analysis allows the firm to break its return of equity into a profit-on-sales component, an efficiency-of-asset-use component, and a use-of-leverage component.
the statement of cash flows
shows the actual cash flows generated by the firm for the year.
he primary importance of deprecation is
its effect on cash flows
given the financial manager's preference for faster receipts of cash flows
a shorter depreciable life is preferred to a longer one.
Under the basic MACRS procedures, the depreciable value (basis) of an asset is
its full cost (original cost) including outlays for installation
The forecast of cash receipts and cash disbursements for the next planning period is done using
the cash budget
Cash planning involves the preparation of the firm's cash budget
Without adequate cash, regardless of the level of profits, any firm could fail.
cash is a "non-earning" asset
which means it earns no interest, a manager needs a certain amount of cash on hand to pay for labor, inventory, fixed assets, and taxes to name just a few expenses
since cash is a "non-earning" asset, one goal of cash management is
to minimize the amount of cash necessary to conduct business
The transaction motive occurs when
the firm's management keeps excess cash on hand to cover its bills with suppliers. This cash is needed to conduct business.
The precautionary motive occurs when
the firm's management needs to hold cash as a safety margin which acts as a financial reserve
in cash budgeting, the impact of deprecation is
reflected in the level of cash outflow represented by the tax payments.
The speculative motive occurs when
the firm's management wants to hold cash to take advantage of special cash bargains.
The key input into any cash budget is
the sales forecast
Forecast fixed assets and inventory needs.
These purchases are dependent on the forecast of sales.
If the ending cash is less than the minimum cash balance,
financing is required
Required financing and excess cash
are typically viewed as short-term.
Because the typical cash budget shows cash flows only on a monthly basis,
the information by the cash budget is not necessarily adequate for ensuring solvency
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