Financial Management for Small Businesses – Financial Statements and Present Value Models (Robinson et al.)

This book intends to help students and others learn how to successfully manage the finances of small to medium size firms. The underlying assumption of this book is that successful financial managers need to master the construction and analysis of financial statements and present value models. Learning how to construct and analyze financial statements and present value models is the focus of this book that is divided into five parts.

Part I provides an introduction to management. Chapter 1 describes the firm management process—a process that includes identifying the firm’s mission statement and strategic (long term) goals and tactical (short term) objectives; identifying the firm’s strengths, weaknesses, opportunities, and threats; identifying and evaluating alternative strategies; and finally implementing and evaluating the preferred strategy. Chapter 1 notes that the management process has wide application including managing the financial resources of the small to medium size firm.

The firm’s opportunities and threats are most often nested in factors outside the firm’s control. For example, different ways to organize the firm (Chapter 2) and the tax environment facing the firm (Chapter 3) are factors external to the firm. They are important to discuss, though, because the firm can adopt different responses to the legal and tax environment in which it operates.

Part II focuses on the internal financial strengths and weaknesses of the firm and its ability to respond to external opportunities and threats. Chapter 4 focuses on the construction, analysis, and interpretation of coordinated financial statements (CFS). CFS are the primary tools for answering the question: what are the financial strengths and weaknesses of the firm?

An important consideration, especially when the focus is on small to medium-sized firms, is how to construct financial statements when the firm has incomplete records. While the data used in the financial management process and the construction of financial statements are most often assumed to be obtainable and accurate, the reality may be quite different. Small to medium-sized firms often lack the financial records required to conduct the analyses described in Part II of this book. Acquiring and sometimes guesstimating the missing data is almost an art form—a process that forms the nexus between theory and practice.

An important lesson to be learned about financial statements—even when we can construct them accurately—is that financial statements alone do not reveal completely the financial strengths and weaknesses of the firm. This more complete view of the firm’s strengths and weaknesses requires ratios be constructed using data included in the firm’s CFS (Chapter 5). Ratios constructed using the firm’s CFS can be compared with similar firms, and significant deviations from the norm can be noted and given further attention. Ratios describing the firm’s financial well-being can be described by the acronym SPELL: (S)olvency, (P)rofitability, (E)fficiency, (L)iquidity, and (L)everage.