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MBA1- Finance w BUSINESS SIZE-UP OVERVIEW - PowerPoint PPT Presentation


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BUSINESS SIZE-UP OVERVIEW Two purposes: Understanding the past e.g. are inventory levels consistent with production process? e.g. are accounts receivables consistent with credit terms? Predicting the future: External and internal examination of key success factors and capabilities

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business size up overview
BUSINESS SIZE-UP OVERVIEW

Two purposes:

  • Understanding the past
      • e.g. are inventory levels consistent with production process?
      • e.g. are accounts receivables consistent with credit terms?
  • Predicting the future:
      • External and internal examination of key success factors and capabilities
      • Used in conjunction withquantitative analysis (e.g., projected financial statements or projected cash flows)
business size up framework
BUSINESS SIZE-UP FRAMEWORK
  • Internal (firm) factors
  • Operations
  • Management
  • Marketing
  • Past financial performance
  • liquidity
  • profitability
  • capacity
  • asset management
  • External factors
  • economy
  • industry
  • Future financial performance
  • key success factors?
  • firm capabilities?
  • Implications for financing
external size up economy
EXTERNAL SIZE-UP: ECONOMY
  • “Business cycle”?
    • In a recession, inventories and accounts receivable grow relative to sales, profit margins and cash flows decline and lenders pay more attention
  • Future interest rates?
    • Depend on default risk, interest rate risk and inflation
  • Government?
    • Taxes, regulations, assistance programs
  • Implications for the future: key economic variables?
external size up industry
EXTERNAL SIZE-UP: INDUSTRY
  • Size, growth and profitability of industry?
  • Competition?
    • Ease of entry, pressure from substitute products, bargaining power of buyers/suppliers, existing rivalries
    • Competitive strategies? Low cost producer or differentiated products?
  • Opportunities/risks
    • Political, economic, social, technological
  • Implications for the future: key success factors for industry?
internal size up operations
INTERNAL SIZE-UP: OPERATIONS
  • Cost vs. quality?
  • Process?
    • Job shop, line flow or project
  • Plant and equipment?
    • Capacity, scheduling
  • Inventory?
    • Raw material, work in progress and finished goods
  • Workers?
    • Skills, training, rewards, labour relations
  • Implications for the future: supply risk?
internal size up marketing
INTERNAL SIZE-UP: MARKETING
  • Consumer analysis: needs, buying process
  • Marketing mix:
    • Price
      • discounts and allowances, credit terms
    • Promotion
      • advertising and promotion
    • Product
      • features, quality, service, warranties
    • Place (distribution channels)
  • Implications for the future: demand risk?
internal size up management
INTERNAL SIZE-UP: MANAGEMENT
  • Experience of key personnel
  • Focus and drive
  • Character
  • Leadership
  • Strategy
  • Implications for the future: capabilities?
internal size up finance
INTERNAL SIZE-UP: FINANCE
  • Liquidity
  • Efficiency
  • Profitability
  • Capacity
  • Implications
    • From the past: financial health?
    • For the future: profitability and financing needs
financial size up ratios
FINANCIAL SIZE UP: RATIOS
  • Examine relation between numbers in the income statement and balance sheet
  • Usefulness:
    • Compare to internal targets (e.g. accounts receivable management)
    • Consider trends for a given firm
    • Compare to industry and / or comparable firm
financial size up liquidity
FINANCIAL SIZE UP: LIQUIDITY
  • Current ratio
    • can short term claims be covered by liquid assets
  • Acid test or quick ratio
    • exclude inventories and prepaid expenses

Current Assets

Current Liabilities

Cash + S.T. Securities + Accounts Receivable

Current Liabilities

financial size up liquidity11
FINANCIAL SIZE UP: LIQUIDITY
  • Collateral analysis
    • Compute value that could be obtained in liquidation
    • Can obligations be met?
    • Typical recovery rates
      • Cash 100%
      • Accounts receivable 75%
      • Inventory 50%
      • Land Market value
      • Other fixed assets 20%
financial size up efficiency
FINANCIAL SIZE UP: EFFICIENCY
  • Accounts payable turnover (days)
  • Accounts receivable turnover (days)
  • Inventory turnover (days)

Accounts Payable

Purchases / 365

Accounts Receivable

Net Sales / 365

Ending Inventory

Total Cost of Goods Sold / 365

financial size up profitability
FINANCIAL SIZE UP: PROFITABILITY
  • Sales growth
  • Net profit margin
  • Gross profit margin

Year ‘t’ Net Sales

-1

Year ‘t-1’ Net Sales

Net Income (after tax)

Net Sales

Gross Income

Net Sales

financial size up profitability14
FINANCIAL SIZE UP: PROFITABILITY
  • Return on assets (ROA)
    • could substitute earnings before interest and taxes for net profit (removes effect of “capital structure”)
  • Return on equity (ROE)
    • equity includes preferred stock, minority interests and retained earnings

Net Income (after tax)

Total Assets

Net Income (after tax)

Net Worth

financial size up capacity
FINANCIAL SIZE UP: CAPACITY
  • Debt to assets
  • Debt to equity
  • Interest coverage
    • ability to meet interest payments out of recurring profits

Current liabilities + Long-term debt

Total Assets

Current liabilities + Long-term debt

Net Worth

Earnings before interest and taxes

Interest expense

Net income before taxes + interest expense

=

Interest expense

overall size up implications
OVERALL SIZE-UP IMPLICATIONS
  • Opportunities
    • what is critical to success?
    • does firm have capabilities?
    • impact on future financial requirements?
  • Risks
    • Business risk:
      • focuses on Earnings before Interest and Taxes (EBIT)?
    • Financial risk:
      • focuses on capital structure (debt versus equity)
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