This chapter shows us how to use a firm's financial statements to analyze past performance and assess its current financial condition. Financial analysis includes the use of accounting statements to measure and interpret past performance. While past performance is no guarantee of future performance, it can help us understand the future. The chapter demonstrates the use of financial ratios and discusses the limitations of financial analysis. Ratios are convenient summary measures and always have to be viewed with a dose of healthy skepticism. The ratios commonly used for financial analysis, however, help you to ask the right questions about a firm's financial performance.

The chapter also provides an introduction to financial planning. Growth and financial planning go hand in hand. Financial planning helps identify the financing requirements needed to fund growth and the need for external financing. While financial planning models use little finance theory, they help focus on the funding needs of the firm for given growth plans.