BUSINESS SIZE-UP OVERVIEW <ul><li>Two purposes:  </li></ul><ul><li>Understanding the past </li></ul><ul><ul><ul><li>e.g. a...
BUSINESS SIZE-UP FRAMEWORK <ul><li>Internal (firm) factors </li></ul><ul><li>Operations </li></ul><ul><li>Management </li>...
EXTERNAL SIZE-UP: ECONOMY <ul><li>“ Business cycle”? </li></ul><ul><ul><li>In a recession, inventories and accounts receiv...
EXTERNAL SIZE-UP: INDUSTRY <ul><li>Size, growth and profitability of industry? </li></ul><ul><li>Competition? </li></ul><u...
INTERNAL SIZE-UP: OPERATIONS <ul><li>Cost vs. quality? </li></ul><ul><li>Process? </li></ul><ul><ul><li>Job shop, line flo...
INTERNAL SIZE-UP: MARKETING <ul><li>Consumer analysis: needs, buying process </li></ul><ul><li>Marketing mix: </li></ul><u...
INTERNAL SIZE-UP: MANAGEMENT <ul><li>Experience of key personnel </li></ul><ul><li>Focus and drive </li></ul><ul><li>Chara...
INTERNAL SIZE-UP: FINANCE <ul><li>Liquidity </li></ul><ul><li>Efficiency </li></ul><ul><li>Profitability </li></ul><ul><li...
FINANCIAL SIZE UP: RATIOS <ul><li>Examine relation between numbers in the income statement and balance sheet </li></ul><ul...
FINANCIAL SIZE UP: LIQUIDITY <ul><li>Current ratio </li></ul><ul><ul><li>can short term claims be covered by liquid assets...
FINANCIAL SIZE UP: LIQUIDITY <ul><li>Collateral analysis </li></ul><ul><ul><li>Compute value that could be obtained in liq...
FINANCIAL SIZE UP: EFFICIENCY <ul><li>Accounts payable turnover (days) </li></ul><ul><li>Accounts receivable turnover (day...
FINANCIAL SIZE UP: PROFITABILITY <ul><li>Sales growth </li></ul><ul><li>Net profit margin </li></ul><ul><li>Gross profit m...
FINANCIAL SIZE UP: PROFITABILITY <ul><li>Return on assets (ROA) </li></ul><ul><ul><li>could substitute earnings before int...
FINANCIAL SIZE UP: CAPACITY <ul><li>Debt to assets </li></ul><ul><li>Debt to equity </li></ul><ul><li>Interest coverage </...
OVERALL SIZE-UP IMPLICATIONS <ul><li>Opportunities  </li></ul><ul><ul><li>what is critical to success?  </li></ul></ul><ul...
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PowerPoint Presentation on Business and Financial Size Up ...

  1. 1. BUSINESS SIZE-UP OVERVIEW <ul><li>Two purposes: </li></ul><ul><li>Understanding the past </li></ul><ul><ul><ul><li>e.g. are inventory levels consistent with production process? </li></ul></ul></ul><ul><ul><ul><li>e.g. are accounts receivables consistent with credit terms? </li></ul></ul></ul><ul><li>Predicting the future: </li></ul><ul><ul><ul><li>External and internal examination of key success factors and capabilities </li></ul></ul></ul><ul><ul><ul><li>Used in conjunction with quantitative analysis (e.g., projected financial statements or projected cash flows) </li></ul></ul></ul>
  2. 2. BUSINESS SIZE-UP FRAMEWORK <ul><li>Internal (firm) factors </li></ul><ul><li>Operations </li></ul><ul><li>Management </li></ul><ul><li>Marketing </li></ul><ul><li>External factors </li></ul><ul><li>economy </li></ul><ul><li>industry </li></ul><ul><li>Past financial performance </li></ul><ul><li>liquidity </li></ul><ul><li>profitability </li></ul><ul><li>capacity </li></ul><ul><li>asset management </li></ul><ul><li>Future financial performance </li></ul><ul><li>key success factors? </li></ul><ul><li>firm capabilities? </li></ul><ul><li>Implications for financing </li></ul>
  3. 3. EXTERNAL SIZE-UP: ECONOMY <ul><li>“ Business cycle”? </li></ul><ul><ul><li>In a recession, inventories and accounts receivable grow relative to sales, profit margins and cash flows decline and lenders pay more attention </li></ul></ul><ul><li>Future interest rates? </li></ul><ul><ul><li>Depend on default risk, interest rate risk and inflation </li></ul></ul><ul><li>Government? </li></ul><ul><ul><li>Taxes, regulations, assistance programs </li></ul></ul><ul><li>Implications for the future: key economic variables? </li></ul>
  4. 4. EXTERNAL SIZE-UP: INDUSTRY <ul><li>Size, growth and profitability of industry? </li></ul><ul><li>Competition? </li></ul><ul><ul><li>Ease of entry, pressure from substitute products, bargaining power of buyers/suppliers, existing rivalries </li></ul></ul><ul><ul><li>Competitive strategies? Low cost producer or differentiated products? </li></ul></ul><ul><li>Opportunities/risks </li></ul><ul><ul><li>Political, economic, social, technological </li></ul></ul><ul><li>Implications for the future: key success factors for industry? </li></ul>
  5. 5. INTERNAL SIZE-UP: OPERATIONS <ul><li>Cost vs. quality? </li></ul><ul><li>Process? </li></ul><ul><ul><li>Job shop, line flow or project </li></ul></ul><ul><li>Plant and equipment? </li></ul><ul><ul><li>Capacity, scheduling </li></ul></ul><ul><li>Inventory? </li></ul><ul><ul><li>Raw material, work in progress and finished goods </li></ul></ul><ul><li>Workers? </li></ul><ul><ul><li>Skills, training, rewards, labour relations </li></ul></ul><ul><li>Implications for the future: supply risk? </li></ul>
  6. 6. INTERNAL SIZE-UP: MARKETING <ul><li>Consumer analysis: needs, buying process </li></ul><ul><li>Marketing mix: </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><ul><li>discounts and allowances, credit terms </li></ul></ul></ul><ul><ul><li>Promotion </li></ul></ul><ul><ul><ul><li>advertising and promotion </li></ul></ul></ul><ul><ul><li>Product </li></ul></ul><ul><ul><ul><li>features, quality, service, warranties </li></ul></ul></ul><ul><ul><li>Place (distribution channels) </li></ul></ul><ul><li>Implications for the future: demand risk? </li></ul>
  7. 7. INTERNAL SIZE-UP: MANAGEMENT <ul><li>Experience of key personnel </li></ul><ul><li>Focus and drive </li></ul><ul><li>Character </li></ul><ul><li>Leadership </li></ul><ul><li>Strategy </li></ul><ul><li>Implications for the future: capabilities? </li></ul>
  8. 8. INTERNAL SIZE-UP: FINANCE <ul><li>Liquidity </li></ul><ul><li>Efficiency </li></ul><ul><li>Profitability </li></ul><ul><li>Capacity </li></ul><ul><li>Implications </li></ul><ul><ul><li>From the past: financial health? </li></ul></ul><ul><ul><li>For the future: profitability and financing needs </li></ul></ul>
  9. 9. FINANCIAL SIZE UP: RATIOS <ul><li>Examine relation between numbers in the income statement and balance sheet </li></ul><ul><li>Usefulness: </li></ul><ul><ul><li>Compare to internal targets (e.g. accounts receivable management) </li></ul></ul><ul><ul><li>Consider trends for a given firm </li></ul></ul><ul><ul><li>Compare to industry and / or comparable firm </li></ul></ul>
  10. 10. FINANCIAL SIZE UP: LIQUIDITY <ul><li>Current ratio </li></ul><ul><ul><li>can short term claims be covered by liquid assets </li></ul></ul><ul><li>Acid test or quick ratio </li></ul><ul><ul><li>exclude inventories and prepaid expenses </li></ul></ul>Current Assets Current Liabilities Cash + S.T. Securities + Accounts Receivable Current Liabilities
  11. 11. FINANCIAL SIZE UP: LIQUIDITY <ul><li>Collateral analysis </li></ul><ul><ul><li>Compute value that could be obtained in liquidation </li></ul></ul><ul><ul><li>Can obligations be met? </li></ul></ul><ul><ul><li>Typical recovery rates </li></ul></ul><ul><ul><ul><li>Cash 100% </li></ul></ul></ul><ul><ul><ul><li>Accounts receivable 75% </li></ul></ul></ul><ul><ul><ul><li>Inventory 50% </li></ul></ul></ul><ul><ul><ul><li>Land Market value </li></ul></ul></ul><ul><ul><ul><li>Other fixed assets 20% </li></ul></ul></ul>
  12. 12. FINANCIAL SIZE UP: EFFICIENCY <ul><li>Accounts payable turnover (days) </li></ul><ul><li>Accounts receivable turnover (days) </li></ul><ul><li>Inventory turnover (days) </li></ul>Accounts Payable Purchases / 365 Accounts Receivable Net Sales / 365 Ending Inventory Total Cost of Goods Sold / 365
  13. 13. FINANCIAL SIZE UP: PROFITABILITY <ul><li>Sales growth </li></ul><ul><li>Net profit margin </li></ul><ul><li>Gross profit margin </li></ul>Year ‘t’ Net Sales Year ‘t-1’ Net Sales -1 Net Income (after tax) Net Sales Gross Income Net Sales
  14. 14. FINANCIAL SIZE UP: PROFITABILITY <ul><li>Return on assets (ROA) </li></ul><ul><ul><li>could substitute earnings before interest and taxes for net profit (removes effect of “capital structure”) </li></ul></ul><ul><li>Return on equity (ROE) </li></ul><ul><ul><li>equity includes preferred stock, minority interests and retained earnings </li></ul></ul>Net Income (after tax) Total Assets Net Income (after tax) Net Worth
  15. 15. FINANCIAL SIZE UP: CAPACITY <ul><li>Debt to assets </li></ul><ul><li>Debt to equity </li></ul><ul><li>Interest coverage </li></ul><ul><ul><li>ability to meet interest payments out of recurring profits </li></ul></ul>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 =
  16. 16. OVERALL SIZE-UP IMPLICATIONS <ul><li>Opportunities </li></ul><ul><ul><li>what is critical to success? </li></ul></ul><ul><ul><li>does firm have capabilities? </li></ul></ul><ul><ul><li>impact on future financial requirements? </li></ul></ul><ul><li>Risks </li></ul><ul><ul><li>Business risk: </li></ul></ul><ul><ul><ul><li>focuses on Earnings before Interest and Taxes (EBIT)? </li></ul></ul></ul><ul><ul><li>Financial risk: </li></ul></ul><ul><ul><ul><li>focuses on capital structure (debt versus equity) </li></ul></ul></ul>

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