EMERGING FROM THE HIGH TECH REVOLUTION:
           OPERATIONS ANALYSIS FOR THE SMALL BUSINESS
                           R...
DISCUSSION

fisCAL is a business financial analysis system that diagnoses business performance based on
financial statemen...
programming to get them to do a sophisticated set of computations. Then, specific operating
instructions are required to a...
c.   Financial Statement comparison to standard by Percentages and Dollarized.
d.   Financial Ratio comparisons, using the...
The eighth criterion: The analyst must be directed to areas of discrepant performance. For the
busy small business owner/m...
At least one system that was developed on the foregoing principles, fisCAL by Halcyon, has met
the ultimate test of succes...
Repairs & Maintenance                       8,484             0.45
  Supplies, Operating                         33,500   ...
Operating Expenses             44.8        33.8        32.5
 Operating Profit               4.4         3.3         33.2
 ...
FINANCIAL RATIO COMPARISON
STUDY FOR GENERIC RETAIL RETX20
ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00
...
CASH MARKET VALUE-ANALYSIS STUDY FOR GENERIC RETAIL RETX20
ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00
...
TOTAL ASSETS                             784,504                784,504
LIABILITIES
Notes Payable - Short Term            ...
Your Breakeven Point is greater than 90% of Sales. This indicates a risky position that should be
corrected by a strategy ...
*            ---------------------                                             *
*        (1) - PRINT COMPLETE ANALYSIS   ...
Balance Sheet Input Screens

         INPUT ASSETS SHEET FOR STUDY CASE
         ===================================

CASH...
(6) Altman, Edward I., Financial Handbook, 5th Ed. (New York: Wiley, 1981)

(7) Levine, Sumner N., Financial Analysts Hand...
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EMERGING FROM THE HIGH TECH REVOLUTION: OPERATIONS ANALYSIS ...

  1. 1. EMERGING FROM THE HIGH TECH REVOLUTION: OPERATIONS ANALYSIS FOR THE SMALL BUSINESS Robert J. Brinson, The Halcyon Group, Inc. ABSTRACT This paper describes the development of an applications software package for business performance analysis and diagnosis which meets important criteria for applicability in the small business environment. Thus, the high tech microcomputer is made available to the small business owner/manager to perform this important function in-house, using available data. The development of a ten item criteria list is described. This list includes hardware compatibility, data availability, selection of a standard of comparison, analytical techniques employed, ease of operation, keypunch error checking, report formatting, availability of a computerized analysis with corrective suggestions, and cost. Details of program development are presented, including exhibits of data entry and analytic/diagnostic output. INTRODUCTION The recent revolution of high technology computing equipment at affordable prices has brought generic big business operating systems into the reach of the small business. The last few years have witnessed the development of practical, affordable software for such applications as payroll systems, point-of-sale inventory control, receivables and payable systems. It has also seen the integration of these systems into practical general ledger packages. Now, it is feasible for the single-person office to generate a full set of ledgers and operating reports automatically and accurately, with little or no routine professional help. This revolution is just now beginning to be fulfilled. And, as it finds its place in the small business, it gives them the same level of efficient record keeping ability that big business has enjoyed for decades. More important, it also generates the potential for spawning a whole new family of offspring. This new outgrowth of the high tech revolution is the family of analytic/diagnostic software for generating management reports. Inventory analysis, sales analysis, productivity reports and financial statement analysis are examples. Whether this outgrowth will be a revolution in its own right, only time will tell. But, in the meantime, it is a major potential yet to be exploited by the small business. Big business has been doing this type of analysis for decades on their mainframe computers. Thus far, in the small business arena, the need has been there but the offerings have been few and inadequate to the task. Analytic/diagnostic software today stands where operational software (payroll, general ledger, etc.) stood five to ten years ago. The offerings are few, those that are available are hard to use, and the output is poorly formatted. It is important to separate the analytical software tools (spreadsheets, databases, and word processors) from analytic/diagnostic programs. Lotus, dBase, and Multimate are the tools. They do well what they were designed to do. But they are not the solutions we seek because, although it is possible to do so, few, if any, small business managers are developing practical business diagnostic programs from these software offerings. They don't have the time, the knowledge, or the inclination to do so. What is needed is generic, simple, menu driven, easy-to-operate analytic/diagnostic systems derived from these tools. This paper describes one such system, a program that has proved itself by success in the marketplace. Its development principles and features are explored in detail. It is our hope that this system will serve as a model for others and that describing its development will help future diagnostic software developments for small business to proceed more quickly and practically than they have in the past. The software program we will be describing is "fisCAL". It was developed by The Halcyon Group, located in Charleston, South Carolina.
  2. 2. DISCUSSION fisCAL is a business financial analysis system that diagnoses business performance based on financial statement analysis. One of its key features is that it computes key indicators of financial performance and compares them to an industry norm or in-house standard. Thus, performance is always measured against some goal or standard. Developing the Criteria In developing fisCAL, we were concentrating on a package that would be attractive to the generic small business marketplace, while also being rigorously accurate, well founded and properly documented. To achieve these ends, we established the following principles: 1. It had to operate on a computer that is popular, economical, and generally found in the small business office. 2. It had to use readily available data from standard financial reports. 3. It had to use a standard, well recognized and current data base as the comparative. No narrowly based standards or outdated data were to be allowed. 4. It had to rely on well recognized, accepted analytical techniques that could be supported by full disclosure in the documentation. 5. It had to be fully menu-driven, easy to learn and easy to use. Data input had to be 100 per cent prompted. There could be no reference to documentation or user manuals after the initial boot-up. 6. It had to have a simple but effective method to check for keypunch and worksheet errors. 7. It had to generate reports in a format that the small business owner/manager could understand and use. 8. It had to readily direct the analyst/owner/manager to discrepant areas of business performance. 9. It had to suggest corrective action through a computer-programmed analytical routine. 10. It had to meet the above criteria and still be able to be sold at an affordable price. Now, these ten points provided us with a tall order. But, in reviewing each one, we felt there as no compromise that could be made on any of them, if fisCAL was to serve as a model approach to developing practical diagnostic software for the small business. The Market Search The first step in develpment was to search the market for available commercial software that would meet these criteria. The search led down many blind paths, but none was fruitful. We searched commercial market sources, libraries, and software sources catalogs (1). They led nowhere. We eventually employed the services of the NASA STAC at the University of Florida to do a thorough nationwide search. Their conclusion: "...portions of your specifications can be found in available software, but nothing that we have found meets even a majority of your criteria." Our conclusion was that all commercial software purporting to do financial analysis suffered from four or more deficiencies on our list of ten criteria. More important, almost all of them were lacking in four of our most important criteria: (1) use of an appropriate standard of comparison, (2) ease of learning and operation, (3) keypunch and worksheet error check, and (4) generating suggestions for corrective action. It was also obvious that the spreadsheet and database software, such as Lotus and dBase III, did not meet our criteria. It takes days of study to learn how to use them and additional weeks of
  3. 3. programming to get them to do a sophisticated set of computations. Then, specific operating instructions are required to assure the operations are carried out appropriately. So, having concluded that nothing was available in the commercial market that met our criteria, the development project was on! Developing the Program As we developed the program, we proceeded down the criteria list: First, what hardware should it be developed for? It wasn't hard to see that the business world was quickly converting to IBM compatible microcomputers. We contacted numerous hardware and software dealers and distributors. We also reviewed catalogs and available publications. Dual-drive IBM compatible machines with 512K memory using 5 1/4 inch disks were fast becoming the standard in business applications. Thus, we chose 512K, IBM compatible machines for our development. It is interesting to note that this is already rapidly changing. Larger machines and 3 1/2 inch disks are here! The second criterion: What financial data would we utilize? The two basic statements that are the standard output of the accountant's trade are the Income Statement and the Balance Sheet. Any firm, no matter how small and no matter whether using internally generated or externally generated financial reports, will obtain these two statements. Other statements, such as cash flow, sources and uses, etc. would also be helpful in diagnostic activity. But their general lack of availability would severely restrict the base of applicability of the program we were developing. So, we chose to concentrate on the Income Statement and the Balance Sheet. The third criterion: What database of industry norms to use? We found four databases which met our criteria for recognition and statistical significance. They are: 1. Robert Morris Associates (2) 2. Financial Research Associates (3) 3. Dun & Bradstreet (4) 4. U.S. Department of Commerce (5) Department of Commerce data was eliminated because it is a minimum of three years old when it is first published so it did not meet the currency-of-data requirement. Dun & Bradstreet data was eliminated because the standard publication does not include all the data we needed to do a full analysis. Financial Research Associates data was eliminated because it is poorly documented and narrowly based, though it does have some valid features for small business application. Robert Morris Associates data is published annually. It is the best documented of all the data bases. It is statistically accurate and reasonably complete. And, it is accepted by banks, CPA's and consultants nationwide as a standard. We chose it as a base and obtained a license to use this data in our program. However, there was a deficiency. It is impossible to find a database to fit all possible industrial classifications. Yet, one of the basic principles of the development program was that there had to be a standard to measure against. Thus, we determined that it was necessary to allow the manual input of either a budgeted, historical, or in-house standard. We included this capability in the final version of fisCAL. The fourth criterion: What are to be the analytical techniques that form the basis of the reports? We reviewed numerous texts on the subject of financial performance analysis (6;7;8) and combined this with our own, in-house system of performance diagnosis. The final list of techniques forming the complete report are: a. Breakeven Analysis. b. Degree of Operating Leverage.
  4. 4. c. Financial Statement comparison to standard by Percentages and Dollarized. d. Financial Ratio comparisons, using the 14 most highly accepted ratios. e. Analysis of Operating Capital Requirements. f. Cash Market Value computation. g. Z-Score Bankruptcy Predictor. There are numerous other reports and analyses that could be generated. But these form the basis of a well-founded analysis, and additional reports add nothing of significance to the diagnosis. A complete report is presented in Appendix I. The fifth criterion: The program must be fully menu-driven. It was our observation that the analyst, the small business manager, or any of those using our program would be busy people; that taking extended periods out of their schedules to learn how to use a program and then additional time to relearn after a layoff would be unacceptable nuisances. These nuisances would lead to reduced use of the program. So, our goal was to have a program so user friendly that all that was required of the operator was to know the boot-up instruction. The operator was not to be intimidated by the need to memorize or look up extensive protocol in order to fully utilize the program. This level of friendliness has been achieved with fisCAL. Pertinent operating screens are presented in Appendix II. The program can be run completely without referring to the documentation manual. All necessary instructions are on the screen. The operator is prompted at every data entry point. As a result, fisCAL can be operated equally effectively by the owner/manager who is a computer novice, by a clerk who has no business experience, or by the knowledgeable consultant who has both business and computer experience. The sixth criterion: Checking for data entry errors. This is one of the most important necessities in any data processing activity. It is easy to install complicated methods of making these checks. One of the better systems is double-data-entry followed by a computerized comparison. This is effective but double-data-entry is time consuming. For fisCAL, we conceived of a simple and effective system. On entering the income statement data, the computer calculates net profit. If this computed value does not agree with the operator's work papers, the operator is prompted to find the error before proceeding. The same system is used on the Balance Sheet data. After entering the data, the computer computes net worth. It prompts the operator to compare this value to the work papers. If they don't agree, the error can be corrected. Thus, our system forces correction of both keypunch and worksheet addition errors. The seventh criterion: Reports must be formatted for easy understanding by the small business manager. The small business manager is busy and is not necessarily equipped to extract the essence from obscure financial reports. To address this problem, fisCAL has several features (Refer to Appendix I): a. The Financial Statement comparison is reported in dollars as well as percentages. The dollarized version vividly brings out major dollar variances from the standard. Discrepant items are easy to find and deal with. b. The Operating Capital Analysis reports cash items (cash, accounts receivable, inventory, and accounts payable) in terms of days of sales on hand. This is a handy way to analyze these items, and is more effective than dollar variances. c. Wherever comparisons to norm can be made, the degree of variance is reported. d. The Breakeven Analysis details variable and fixed expenses and reports the percentage contribution to coverage of fixed expenses. Thus, in developing fisCAL's reports, considerable thought was given to making them friendly for the person who would be reading and using them, whether that person is the analyst or the business owner.
  5. 5. The eighth criterion: The analyst must be directed to areas of discrepant performance. For the busy small business owner/manager or analyst, this need is apparent. Pouring over eight or ten pages of detailed reports is not a task that the busy manager or analyst cherishes. So, we addressed this principle in three ways with fisCAL: 1. Variances from norm are shown in each report. The largest percentage or dollar variances are easy to spot. 2. A one page Summary Report, as presented in Appendix I, outlines the major results of each of the detailed reports. For the busy manager, a quick overview can be had. 3. A coding system is used on the Summary Report. It points our favorable and unfavorable variances and, by code, indicates the degree of the variance. Thus, the busy manager or analyst can key in on discrepant performance factors quickly, leaving more time to study possible solutions. The ninth criterion: The program must suggest corrective action for improving discrepant items. This is one of the most important parts of the fisCAL repertoire. Many business managers, and even analysts, having found the problem, are hesitant as to the proper way to approach a solution. And, of course, there is often more than one solution set. So, fisCAL includes a Narrative Analysis, as presented in Appendix I, which suggests solutions to discrepant items. This computer-generated solution at least provides a starting point for the analyst. Often, when there is more than one solution possible, fisCAL will suggest more than one. Of course, no single analyst, including fisCAL, can foresee all possible solution sets. Thus, the analyst or manager should stilluse external knowledge to add to fisCAL's built-in brain. The tenth criterion: The established market price had to be affordable. The small business is not able to afford analytical programs that are priced in the thousands of dollars. So, fisCAL's price had to be in the hundreds. This issue shot through the entire fisCAL development program because it required that the source code be an efficient one for programming. But, once a source code was chosen, we would have to deal with its good and bad features throughout the rest of the development effort. We needed a system that was efficient to program, quick and efficient in operation, and to handle our programming goals. The ideal in efficient operation and overall programming capacity and flexibility would have been a language system such as Basic. However, the programming costs would have been prohibitive as measured against the projected sales price. A database handling system was the next best approach, but the operating requirement of these systems is such that the data handling capacity for a floppy disk program is severely limited. Therefore, our choice was to program in one of the better database systems, dBase III Plus, and compile the program on Clipper, dBase provided the advantage of efficient programming capability. Speed, efficiency, and system capacity were obtained by compiling on Clipper. The overall result was a speedy, efficient program that sells in the range of $500. CONCLUSION fisCAL, then, has addressed each criterion that was originally established as important to analytic/diagnostic software development. To summarize, a good, useful program must: 1. Operate on hardware most often found in the small business environment. 2. Utilize readily available operating data. 3. Use norms and standards of comparison that are readily available, statistically accurate, and verifiable. 4. Use standard analytical techniques. 5. Be easy to operate, menu-driven. 6. Have a simple, direct means of checking for keypunch and worksheet errors. 7. Generate reports that the small business manager can understand and respond to. 8. Direct the manager quickly and efficiently to discrepant items. 9. Provide suggestions for corrective action. 10. Sell for a moderate price that the small business can afford.
  6. 6. At least one system that was developed on the foregoing principles, fisCAL by Halcyon, has met the ultimate test of success: marketability. Even before it was ready for market, fisCAL was in demand. It has continued to be a market success through Version 3.1, the current version. More enhancements are on the way, responding to feedback from the banks, CPA's, consultants, and individual businesses that are communicating their desires to Halcyon. SUMMARY The advent of high tech equipment for data processing at affordable prices has brought a consequent revolution in the ability of small business to process operational data. The next wave of this technological revolution - as yet not fully exploited will be functional, generic software programs for analytic/diagnostic reporting. Few of these exist. And the features required to make them attractive to the small business have not been developed. This paper has described one successful analytic/diagnostic program, fisCAL by Halcyon. It has described the ten features that formed the foundation for its development and has discussed why they were chosen. It has also described how each of these features was addressed in the development process. It is the hope of the developer that reporting details of the development of this successful program will spur others to utilize similar or superior criteria, thereby enhancing the development of practical analytic/diagnostic software for small business analysis. APPENDIX I FISCAL SAMPLE REPORTS BREAKEVEN ANALYSIS STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00 ($) (%) SALES/REVENUE 1,900,881 100.00 VARIABLE DISBURSEMENTS Cost of Goods Sold/Cost of Contracts 966,280 50.83 Advertising 18,853 0.99 Bad Debts 12,079 0.64 Car/Delivery 40,481 2.13 Commissions 713 0.04 Freight 0 0.00 Taxes/Licenses 3,300 0.17 Travel and Entertainment 13,903 0.73 Other Expenses (Variable) 0 0.00 Other Expenses (Variable) 0 0.00 TOTAL VARIABLE DISBURSEMENTS 1,055,609 55.53 CONTRIBUTION 845,272 44.47 FIXED DISBURSEMENTS Bank Services Charges 0 0.00 Depletion/Amortization 0 0.00 Depreciation 42,121 2.22 Dues & Publications 0 0.00 Employee Benefit Program 0 0.00 Insurance 29,788 1.57 Laundry & Cleaning 0 0.00 Leased Equipment 7,850 0.41 Legal/Professional 16,263 0.86 Office Expense 0 0.00 Outside Labor 0 0.00 Pension/P.S./Payroll Taxes 32,850 1.73 Rent 41,091 2.16
  7. 7. Repairs & Maintenance 8,484 0.45 Supplies, Operating 33,500 1.76 Utilities 20,166 1.06 Salaries - Officers 75,000 3.95 Payroll 397,494 20.91 Other Expenses (Fixed) 57,137 3.01 Other Expenses (Fixed) 0 0.00 Interest 10,014 0.53 Miscellaneous Expenses/(Income) 0 0.00 TOTAL FIXED DISBURSEMENTS 771,760 40.60 PRETAX PROFIT 73,512 3.87 DOLLAR SALES BREAKEVEN 1,735,565 DEGREE OF OPERATING LEVERAGE 6.01 Z-SCORE BANKRUPTCY PREDICTOR 3.06 FINANCIAL STATEMENT COMPARISON BY PERCENTAGES STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00 SIC# PERCENT RETX20 59431 VARIANCE ASSETS Cash and Equivalents 1.1 7.3 -84.8 Accounts Receivable - Trade (net) 25.6 29.3 -12.6 A/R Progress Billing 0.0 0.0 inf A/R Current Retention 0.0 0.0 inf Inventory 30.8 40.1 -23.1 Cost & Est Earnings in Excess of Billings 0.0 0.0 inf All Other Current 2.7 1.1 148.8 TOTAL CURRENT 60.3 77.8 -22.5 Fixed Assets (Net) 39.6 17.1 131.7 Joint Ventures & Invest 0.0 0.0 inf Intangibles (net) 0.0 0.6 -100.0 All Other Non-Current 0.1 4.6 -98.3 TOTAL ASSETS 100.0 100.0 LIABILITIES Notes Payable - Short Term 23.1 12.2 89.1 Current Matured Long Term Debt 16.6 5.3 212.7 Accounts Payable - Trade 3.4 21.6 -84.4 Accounts Payable - Retention 0.0 0.0 inf Billings in Excess of Costs & Est Earnings 0.0 0.0 inf Income Taxes Payable 0.0 1.2 -100.0 All Other Current 2.6 9.4 -72.1 TOTAL CURRENT 45.6 49.7 -8.2 Long Term Debt 33.8 15.0 125.5 Deferred Taxes 0.0 0.5 -100.0 All Other Non-Current 0.0 2.3 -100.0 Net Worth 20.5 32.4 -36.6 TOTAL LIABILITIES & 100.0 100.0 NET WORTH INCOME DATA Net Sales 100.0 100.0 Gross Profit 49.2 37.1 32.5
  8. 8. Operating Expenses 44.8 33.8 32.5 Operating Profit 4.4 3.3 33.2 All Other Expenses (net) 0.5 0.8 -34.1 Profit Before Taxes 3.9 2.5 54.7 FINANCIAL STATEMENT COMPARISONS BY DOLLARS STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/ 7/1987 FOR INCOME/BALANCE ON 12/31/00 SIC* RETX20 59431 VARIANCE ($) ($) ($) ASSETS Cash and Equivalents 8,679 57,269 -48,589 A/R - Trade (net) 201,012 229,860 -28,847 A/R Progress Billings 0 0 0 A/R Current Retention 0 0 0 Inventory 241,929 314,586 -72,657 Cost & Est Earnings in Excess of Billings 0 0 0 All Other Current 21,466 8,630 12,837 TOTAL CURRENT 473,088 610,344 -137,257 Fixed Assets (Net) 310,792 134,150 176,641 Joint Ventures & Invest 0 0 0 Intangibles (net) 0 4,7O7 -4,707 All Other Non-Current 625 36,087 -35,462 TOTAL ASSETS 84,5O4 784,5O4 LIABILITIES Notes Payable - Short Term 181,O21 95,71O 85,311 Current Matured Long Term Debt130,000 41,579 88,421 Accounts Payable - Trade 26,423 169,453 -143,030 Accounts Payable - Retention 0 0 0 Billings in Excess of Costs & Est Earnings 0 0 0 Income Taxes Payable 0 9,414 -9,414 All Other Current 20,541 73,743 -53,202 TOTAL CURRENT 357,985 389,899 -31,914 Long Term Debt 265,307 117,676 147,631 Deferred Taxes 0 3,923 -3,923 All Other Non-Current 0 18,044 -18,044 Net Worth 161,213 254,179 -92,967 TOTAL LIABILITIES & 784,504 784,504 NET WORTH INCOME DATA Net Sales 1,900,881 1,900,881 Gross Profit 934,601 705,227 229,374 Operating Expenses 851,075 642,498 208,577 Operating Profit 83,526 62,729 20,797 All Other Expenses (net) 10,014 15,207 -5,193 Profit Before Taxes 73,512 47,522 25,990
  9. 9. FINANCIAL RATIO COMPARISON STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00 SIC# PERCENT RETX20 59431 VARIANCE (%) (%) (%) LIQUIDITY RATIO COMPARISON CURRENT RATIO 1.3 1.6 -17.4 QUICK RATIO 0.6 0.7 -16.3 SALES/RECEIVABLES 9.5 10.7 -11.6 COST OF SALES/INVENTORY 4.0 5.0 -20.1 COST OF SALES/PAYABLE 36.6 10.7 241.8 SALES/WORKING CAPITAL 16.5 10.5 57.3 COVERAGE RATIO COMPARISON EBIT/INTEREST 8.3 3.1 169.1 CASH FLOW/CURRENT MATURITY (LTD) 0.6 1.9 -70.2 LEVERAGE RATIO COMPARISON FIXED/WORTH 1.9 0.5 285.6 DEBT/WORTH 3.9 2.1 84.1 OPERATING RATIO COMPARISON % PROFIT BEF TAXES/NETWORTH 45.6 21.9 108.2 % PROFIT BEF TAXES/TOTAL ASSETS 9.4 6.9 35.8 SALES/NET FIXED ASSETS 6.1 25.0 -75.5 SALES/TOTAL ASSETS 2.4 3.1 -21.8 OPERATING CAPITAL REQUIREMENTS ANALYSIS STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00 SIC# RETX20 59431 ($) ($) SALES/REVENUE 1,900,881 1,900,881 ACCOUNTS RECEIVABLE 201,012 229,860 A/R PROG BILLINGS 0 0 A/R CUR RETENTION 0 0 INVENTORY 241,929 314,586 ACCOUNTS PAYABLE (TRADE) 26,423 169,453 ACCOUNTS PAYABLE (RETENTION) 0 0 AVERAGE SALES PER DAY 5,208 5,208 (Based on 365 days per year) (DAYS) (DAYS) CASH ON HAND/AVERAGE DAYS SALES 1.67 11.00 RECEIVABLES/AVERAGE DAYS SALES 38.60 44.14 INVENTORY/AVERAGE DAYS SALES 46.45 60.41 TOTAL TRADING CYCLE 86.72 115.54 PAYABLE/AVERAGE DAYS SALES 5.07 32.54 NET CASH CYCLE 81.64 83.00 OPERATING CAPITAL REQUIRED $ 425,198 $ 432,262
  10. 10. CASH MARKET VALUE-ANALYSIS STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00 BOOK METHOD BOOK VALUE OF ASSETS LESS LIABILITIES $ 161,213 CAPITALIZATION OF EARNINGS METHOD LAST YEARS EARNINGS $ 73,512 LESS 8.0% RETURN ON BOOK VALUE - 12,897 EXCESS EARNINGS = 60,615 ---------- VALUE OF GOODWILL (EXCESS EARNINGS/ 0.15) $ 404,100 BOOK VALUE + 161,213 ========== TOTAL VALUE OF BUSINESS $ 565,312 STRAIGHT CAPITALIZATION METHOD LAST YEARS EARNINGS CAPITALIZED AT 15.0% (LAST YEARS EARNINGS/0.15) $ 490,080 YEARS OF INCOME PURCHASED METHOD LAST YEARS EARNINGS $ 73,512 LESS 8.0% RETURN ON BOOK VALUE - 12,897 EXCESS EARNINGS = 60,615 ---------- 5 YEARS EXCESS EARNINGS PURCHASED $ 303,075 BOOK VALUE + 161,213 ========== TOTAL VALUE OF BUSINESS $ 464,287 PREVIOUS VALUATION METHOD PREVIOUS VALUATION $ 500,000 ___________________________________________________________________ METHOD VALUE WEIGHT BOOK METHOD 161,213 0.5 CAPITALIZATION OF EARNINGS METHOD 565,312 2.5 STRAIGHT CAPITALIZATION METHOD 490,080 1.0 YEARS PURCHASED METHOD 464,287 1.0 PREVIOUS VALUATION METHOD 500,000 0.5 ___________________________________________________________________ WEIGHT FACTORED VALUATION FOR RETX20 $ 490,592 WEIGHT FACTORED VALUATION FOR STND # 59431 384,519 ----------- COMPARATIVE CASH MARKET VALUE ADVANTAGE 106,072 REPORT SUMMARY STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/7/1987 FOR INCOME/BALANCE ON 12/31/00 SIC# RETX20 59431 VARIANCE ($) ($) ($) ASSETS Cash and Equivalents 8,679 57,269 -48,589*** Account Receivables 201,012 229,860 -28,847* Inventory 241,929 3l4,586 -72,657** All Other Current 2l,466 8,630 12,837 Total Current 473,088 610,344 -137,257 Fixed Assets (Net) 310,792 134,150 176,641 Intangibles (net) 0 4,707 -4,707 All Other Non-Current 625 36,087 -35,462
  11. 11. TOTAL ASSETS 784,504 784,504 LIABILITIES Notes Payable - Short Term 181,021 95,710 85,311 Current Matured Long Term Debt 130,000 41,579 88,421 Accounts Payable 26,423 169,453 -143,030*** Income Taxes Payable 0 9,414 -9,414 All Other Current 20,541 73,743 -53,202 TOTAL CURRENT 357,985 389,899 -31,914 Long Term Debt 265,307 117,676 147,631 Deferred Taxes 0 3,923 -3,923 All Other Non-Current 0 18,044 -18,044 Net Worth 161,213 254,179 -92,967-- TOTAL LIABILITIES & 784,504 784,504 NET WORTH INCOME DATA Net Sales 1,900,881 1,900,881 Gross Profit 934,601 705,227 229,374++ Operating Expenses 851,075 642,498 208,577-- Operating Profit 83,526 62,729 20,797 All Other Expenses (net) 1O,O14 15,207 -5,193++ Profit Before Taxes 73,512 47,522 25,990+++ CASH MARKET VALUE 490,592 384,519 106,072++ BREAKEVEN POINT 1,735,565 OPERATING CAPITAL RQRD 425,198 432,262 -7,064 RATIOS --------------------------------------------------------------------------------VAR % CURRENT RATIO 1.3 1.6 -17.4* QUICK RATIO 0.6 0.7 -16.3* SALES/RECEIVABLES 9.5 10.7 -11.6* COST OF SALES/INVENTORY 4.0 5.0 -20.1* COST OF SALES/PAYABLE 36.6 10.7 241.8* SALES/WORKING CAPITAL 16.5 10.5 57.3 EBIT/INTEREST 8.3 3.1 169.1 CASH FLOW/CURRENT 0.6 1.9 -70.2* MATURITY (LTD) FIXED/WORTH 1.9 0.5 285.6* DEBT/WORTH 3.9 2.1 84.1* % PROFIT BEF TAXES/ 45.6 21.9 108.2 NETWORTH % PROFIT BEF TAXES/TOTAL 9.4 6.9 35.8 ASSETS SALES/NET FIXED ASSETS 6.1 25.0 -75.5* SALES/TOTAL ASSETS 2.4 3.1 -21.8* DEGREE OF OPERATING 6.01 LEVERAGE BANKRUPTCY PREDICTOR 3.36 REPORT NARRATIVE SUMMARY STUDY FOR GENERIC RETAIL RETX20 ANALYSIS PROCESSED ON 12/ 7/1987 FOR INCOME/BALANCE ON 12/31/00 +++ Profit Before Tax is 154.7% of Standard. This is Good performance. -- Net Worth is 63.4% of Standard. Indicates need for improvement. * Consider reducing debt load by reinvesting profits or additional equity investment. Operating Capital requirement is 98.4% of Standard. This indicates satisfactory performance. ++ Cash Market Value is 127.6% of Standard. This position can be improved by improving Net Worth and/or Profits Before Taxes.
  12. 12. Your Breakeven Point is greater than 90% of Sales. This indicates a risky position that should be corrected by a strategy of: * Increasing Sales * Reducing Fixed or Variable Costs Study your Breakeven Analysis ** Bankruptcy Predictor is 3.36. You are in a dangerous position. Take corrective action: * increase Operating Profits (Earnings Before Taxes and Interest) * Reduce Total Assets. Use proceeds to pay off debt. * Increase Sales without increasing Assets or debt load. * Increase Market Value (or Book Value) of Equity by retaining earnings or investing outside capital. * Reduce Total Liabilities. * Retain all earnings in firm. * Increase Working Capital (Curr. Assets less Curr. Liabilities). Study the Z-Score Bankruptcy Predictor algorithm for guidance. *** The following Ratios are poor vs. your Standard: * CURRENT RATIO * QUICK RATIO * SALES/RECEIVABLES * COST OF SALES/INVENTORY * COST OF SALES/PAYABLE * CASH FLOW/CURRENT MATURITY (LTD) * FIXED/WORTH * DEBT/WORTH * SALES/NET FIXED ASSETS * SALES/TOTAL ASSETS APPENDIX II FISCAL OPERATING SCREENS *************************theHALCYONgroup************************* * * * "fisCAL" - MAIN MENU * * Select Desired Option * * --------------------- * * (1) - EDIT/ADD STUDY CASE * * * * (2) - EDIT/ADD INDUSTRY STANDARD * * * * (3) - PRINT REPORTS * * * * (4) - DISPLAY LIST OF STUDY CASES/STANDARDS * * * * (5) - PRINT LIST OF STUDY CASES/STANDARDS * * * * (6) - DELETE STUDY CASES * * * * (E) - EXIT * * * ***************************************************************** ENTER YOUR SELECTION [X] *************************theHALCYONgroup************************* * * * "fis-CAL" - PRINT MENU * * Select Desired Option *
  13. 13. * --------------------- * * (1) - PRINT COMPLETE ANALYSIS * * (2) - PRINT SUMMARY REPORT * * (3) - PRINT INCOME STATEMENT/BALANCE SHEET * * (4) - PRINT BREAKEVEN ANALYSIS * * (5) - PRINT INDUSTRY COMPARISONS * * (6) - PRINT OPERATING CAPITAL REQUIRED * * (7) - PRINT FINANCIAL RATIOS * * (8) - PRINT MARKET VALUE ANALYSIS * * (9) - PRINT TITLE PAGE * * * * (R) - RETURN TO MAIN MENU * * * ***************************************************************** ENTER YOUR SELECTION [R] Income Statement Input Screens INPUT INCOME STATEMENT FOR STUDY CASE RETX2O ================================================== FINANCIAL STATEMENT DATE [12/31/00] BANK SERV CHARGE [ 0.00] SIC# [59431] STUDY CASE NAME [GENERIC RETAIL] CAR & DELIVERY [ 40,481.38] GROSS SALES [1,900,881.18] COMMISSIONS [ 712.74] DISCOUNT/RETURNS [ 0.00] DEPLETION/AMORTI [ 0.00] NET SALES [1,900,881.18] DEPRECIATION [ 42,121.28] COST OF GOODS/ DUES & PUBS [ 0.00] COST OF CONTRACTS [ 966,279.82] OTHER INCOME [ 0.00] EMPL BENE PROG [ 0.00] ADVER & PROMO [ 18,853.16] FREIGHT [ 0.00] BAD DEBTS [ 12,079.17] INSURANCE [ 29,787.91] INPUT INCOME STATEMENT FOR STUDY CASE RETX20 PAGE 2 LAUNDRY & CLEANING [ 0.00] TAXES & LICENSES [ 3,300.43] LEASED EQPT [ 7,850.30] TRAVEL & ENTER [ 13,902.59] LEGAL/PROFESS [ 16,263.47] UTILITIES/TELE [ 20,166.19] OFFICE EXPENSE [ 0.00] SALARIES-OFFICER [ 75,000.00] PAYROLL [397,494.23] OUTSIDE LABOR [ 0.00] [Other Expense(Fix) [57,136.60] PENSION/PROF. SHAR./ [Other Expense(Fix) [ 0.00] PAYROLL TAX [ 32,850.50] [Other Expense(Var) [ 0.00] [Other Expense(Var) [ 0.00] RENT [ 41,090.78] INTEREST [ 10,014.25] REPAIRS & MAINT [ 8,484.26] MISCELLANEOUS EXP [ 0.00] SUPPLIES, OPER [ 33,500.18] TAXES [ 18,150.00]
  14. 14. Balance Sheet Input Screens INPUT ASSETS SHEET FOR STUDY CASE =================================== CASH & EQUIV [ 8,679.39] EQUIPMENT [ 71,311.80] ACCTS RECEIVABLE [ 201,012.25] LEASEHOLD IMP. [ 0.00] INVENTORY [ 241,929.41] BUILDINGS [ 205,079.00] OTHER CUR ASSETS [ 21,466.49] LAND [ 73,880.80] FIXTURES [ 0.00] ACC DEPRECIATION [ -139,479.90] VEHICLES [ 0.00] JNT VENTURES/INVES [ 0.00] INTANGIBLES [ 0.00] OTHER N-CUR ASSETS [ 625.00] INPUT LIABILITIES FOR STUDY CASE RETX20 ========================================= ACCTS PAY (TRADE) [ 26,422.85] NOTES PAY L-TERM [ 265,307.00] CUR PORTION LTD [ 130,000.00] BANK LOANS PAY [ 0.00] NOTES PAY S-TERM [ 181,020.73] DEFERRED TAXES [ 0.00] ACCRUED EXPENSES [ 18,150.00] OTHER LOANS PAY [ 0.00] INCOME TAX PAYABLE [ 0.00] OTHER LONG TERM [ 0.00] OTHER CUR LIAB. [ 2,391.02] CAPITAL STOCK [ 20,000.00] RETAINED EARNINGS [ 141,212,64] Data Entry Error Check Screens NET PROFIT FOR THIS CASE IS 55361.94 DOES THIS MATCH MET PROFIT ON INCOME STATEMENT (Y/N) [Y] NET WORTH FOR THIS CASE IS 161212.64 DOES THIS MATCH NET WORTH ON BALANCE SHEET (Y/N) [Y] REFERENCES (1) Data Sources (Ziff-Davis Publishing Co., 1st Quarter, 1987) (2) Kelsay, Susan M., '86 Annual Statement Studies (Philadelphia: Robert Morris Associates, 1986) (3) Goodman, Karen, Financial Studies of the Small Business Annual (Winter Park, FL: Financial Research Associates, 1986) (4) Industry Norms and Key Business Ratios (New York: Dun & Bradstreet, 1986) (5) Census of Business (Washington: U.S. Department of Commerce Bureau of Census, Quinquennial)
  15. 15. (6) Altman, Edward I., Financial Handbook, 5th Ed. (New York: Wiley, 1981) (7) Levine, Sumner N., Financial Analysts Handbook (Homewood, IL: Dow Jones-Irwin, Inc., 1975) (8) Viscione, Jerry A., Financial Analysis: Tools and Concepts (New York: National Association of Credit Management, 1984) ACKNOWLEDGEMENT The author acknowledges the kind assistance of the South Carolina Small Business Development Center, William Little-john, Director. Their encouragement, critique, ideas, and aid in beta- testing were instrumental in making this project a success.

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