1. PRESENTED BY:
Anthony Chamungwana
MENTORSHIP
ON
FINANCIAL REVIEW

2. LESSON 1

3. Introduction
The objective of this portion of mentorship is the participants
gain practical insights on how to assess business financial
performance and be able to:
› Evaluate capital investments, financing options & cash flows
› Evaluate business operations, processes, managers and
capacity utilisation
› Use the information provided in financial statements for
analysing the financial performance
› Forecast future business conditions
› Make informed decisions germane to the operations and
growth of the business.
MENTORSHIP METHOD IS OF INTERACTIVE NATURE WITH
PRACTICAL REFERENCES/REVIEWS.

4. Financial Review Defined
Financial Review is an overall review of your organization's
summarized financial activity.
My Defn: (It’s a medical check up of business)
THE BIG QUESTIONS:
› How often do you review your business numbers?
› How should you approach reviewing your financials?
› What documents should you analyse?
› What exactly should you be looking for?
THESE ARE FUNDAMENTAL QUESTIONS THAT WE SHALL
ADDRESS IN THIS MENTORSHIP PROGRAM

5. WHY IS FINANCIAL REVIEW IMPORTANT
Why is Financial Review important for any business?
An essential component of financial management is a regular
financial review of activity to identify:
§ Potential compliance issues
§ Significant budget variances (Budget Vs Actuals)
§ To compare business projections against actual performance
achieved
§ Compare company performance against sector and
competitors( in its industry).
§ Essential tool for fund raising (debt, equity, other instruments-
bond) to avoid surprises on your applications from financiers,
deal room submissions, investor pitch, etc
§ It is also important to review/analyse financials of your
competitors as well

6. WHY IS FINANCIAL REVIEW IMPORTANT
› Before conducting a financial review of your company or
any other company for that matter, it is important:
› To establish if there were any changes made on the
accounting standards that may re-classify financial
reporting with impacts on the values.
› To collect industry information (e.g. sector performance,
ratios, growth, etc) to allow an informed review that give
you competitors’ position.

7. How do we conduct Financial Reviews
› For our purposes we will discuss the basic steps that
are essential in conducting a practical financial review on
a business be it small or large and make review of
selected financial statements.
› What financial statements do we need for financial
review:
§ Balance Sheets
§ Cash Flow Statements
§ Income Statements
§ Shareholders equity statements

8. Key Steps in Financial Review
While performing a company financial review can be involving,
these steps provides a basic foundation towards this process.
10 Critical Steps:
› Step 1. Analyse the financial statements and scan them in
order to look for large movements in specific items from one
year to the next.
› Step 2. Make sure to review the financial statement’s notes.
› Step 3. Analyse the Balance Sheet to see if there are large
changes in the company’s assets, liabilities, or equity.
› Step 4. Examine the Income Statement to identify trends
over time.
› Step 5. Evaluate the business’s Shareholder’s Equity
Statement.

9. Key Steps in Financial Review……
› Step 6. Analyse the company’s Cash Flow Statement.
› Step 7. Calculate financial ratios.
› Step 8. Gather the company’s key competitor’s data analyse
them.
› Step 9. Review the market data of the business’s stock/share
price (If public listed), as well as the Price to Earnings (P/E)
Ratio.
› Step 10. Review the Dividend Pay-out Ratio

10. Open Discussion

11. LESSON 2

12. Key Steps in Financial Review……
Step 1. Analyse the financial statements and scan them in order to look
for large movements in specific items from one year to the next. Eg:
1. Did revenues have a big jump, or a big fall, from one particular year to
the next?
2. Did costs increase
3. Did total or fixed assets grow or fall?
4. Did profit fall/loss increase
5. Is there new financing? If YES what options have been used (Debt,
equity, Bond (where bond used, are there green shoe options)?
6. How have the financial ratios changed/movement
Look for suspicious activity. If anything jumps out, research what you know
about the business to find out why an item is suspicious-looking. For
instance, did the company sell off some of its operations during the period
of time you’re analysing?
Step 2. Make sure to review the financial statement’s notes. These notes
may have information that could be important in your analysis of the
business.

13. Key Steps in Financial Review…
Step 3. Analyse the Balance Sheet to see if there are large changes in the
company’s assets, liabilities, or equity. BS is also known as Statement of
Financial Position.
WHY DO WE DO THIS AND WHAT TO LOOK FOR?
A balance sheet reflects the company's position by showing what the
company owes and what it owns. The value of balance sheet accounts can
be/are used to calculate ratios that show the liquidity, efficiency and financial
structure of a business.
Let us take a look at a few of these important ratios.
1. Current ratio: Current assets include cash, petty cash, temporary
investments, and inventory, while current liabilities include short term loans,
wages payable, and trade creditors. The current ratio is defined as current
assets divided by current liabilities. The ideal value for the current ratio is
between 1.5 and 2. If the current ratio is too high, then we can infer that the
company is hoarding assets instead of using them for expanding the
business, which might affect long-term returns. If the current ratio goes >1,
then it is difficult for a company to meet its short-term obligations.

14. Key Steps in Financial Review…Ratios
2. Quick ratio: This defines a company’s ability to meet its short-term
obligations while making the best out of its liquid assets. It is also called the
acid test ratio. The quick ratio = sum of cash, cash equivalents, short term
investments and current receivables divided by current liabilities. A quick ratio
= 1 is considered normal. Value >1, means company can not pay/meet its
liability obligations.
3. Asset turnover ratio: The asset turnover ratio tells you about the efficiency
with which a business utilizes its assets. A higher asset turnover ratio indicates
that the company’s assets are being utilized efficiently. A lower asset turnover
means that the company may not be utilizing its assets efficiently
Formular: Asset Turnover Ratio = Net Sales / Average Total Assets

15. Key Steps in Financial Review…Ratios
4. Inventory turnover ratio: This ratio indicates the number of times a
company sells and replaces its stock during a given period of time. High
inventory turnover indicates that the company is selling its products with ease
and that those products are still in demand. Low inventory turnover indicates
a decline in demand for the company’s products.
Formular: Inventory Turnover = COGS/Average Value of Inventory
Average Value of
Inventory: It is calculated by adding the value of inventory at the end of a period
to the value of inventory at the end of the prior period and dividing the sum by 2.
5. Debt-to-equity ratio: This ratio help investors or bankers to decide if they
want to lend/invest to the company. The ratio is a clear indicator of a
company’s long-term ability to generate sufficient income to meet payments. If
the ratio is too high, then the company is vulnerable to late interest payments
or even bankruptcy. Take note of any assets that are pledged as security.
Formular: Debt-to-equity ratio = Total liabilities/ owner’s equity.

16. Key Steps in Financial Review…
Step 4. Examine the Income Statement to identify trends over time.
In examining Income Statement, Four Steps are applied:
i. Find the bottom line (Should be easy—it’s at the bottom):
› On a very basic level, it’s good to see a positive number there. If bottom
line is preceded by a minus sign, then expenses exceeded revenue. Find
out why. And what the plan is for making the red turn to black.
NOTE: A net loss does not necessarily imply disaster. Sometimes new
companies have a lot of start-up costs and do not expect to turn a profit in
YR1-YR3.
ii. Look at the sources of income.
› Do they make sense for the business?
› Are they repeatable events/sales or a one off sales?
iii. Look at the expense categories.
› Are they logical? For most businesses, you will see salaries and wages,
insurance, rent, supplies, interest, and at least a few other things. Is
anything missing that you would expect to see?

17. Key Steps in Financial Review…
iv. Now look at the amounts: What are the biggest expenses?
› If this is a service business (although digital applications are changing this),
expect to see a large number for salaries. If it’s a manufacturing business,
materials and supplies may logically be a significant total, transport, fuel.
› Where there is increase in debt, find out why the company is borrowing,
and from what source, what rate (competitive), what currency (FX
Exposures).
Step 5. Examine and valuate the business’s Shareholder’s Equity Statement.
How Does a Statement of Shareholders' Equity Help a Company's
Planning?
The statement of shareholders’ equity is an important component of planning
as it shows the total amount of capital attributable to the owners of a
business.
1. Planning Profit Distribution (Dividend)
› It helps decision on distribution of its profits.
› What amount is retained earnings and the amount that will be
distributed to shareholders.
›

18. Key Steps in Financial Review…
2. Selling Additional Shares/Diversifying for new investor(s)
ASK these questions:
› Has the company issued new shares, or bought some back?
› Has the retained earnings account been growing or shrinking?
Four components that are included in the shareholders' equity
calculation are outstanding shares, additional paid-in capital, retained
earnings, and treasury stock. If shareholders' equity is +Ve, a company
has enough assets to pay its liabilities; if it’s -Ve, a company's liabilities
surpass its assets.

19. Key Steps in Financial Review…
Step 6. Analyse the company’s Cash Flow Statement.
Three Items need to be examined:
1. Operating activities
› Look at cash generated from operations. It shows how much cash the
business can generate from its core activities. Look at any one-off items
e.g. asset purchases/sales and raising money through debt or equity.
Examine the movements in W/C which have led to this figure. Large
increases in receivables and inventories could mean problems for the cash
flow of the business and should be avoided if possible.
2. Investing activities
› Examine any cash flows relating to non-current assets, e.g. sales of assets,
dividends, interest income
3. Financing activities
› E.g. debts, equity by existing shareholders, new issues (shares

20. Key Steps in Financial Review…
Step 7. Calculate financial ratios.
Lets focus on 5 key ratios:
1. Net Profit Margin
› This ratio how each shilling/dollar earned by your company is translated
into profits.
› It indicates how efficient your company controls/manages cost. Higher Net
Profit Margin means the business converts its revenue into actual profit
more effectively.
Formular: Net Profit / Net Sales
2. Current Ratio
› This ratio is a performance measurement of a company’s liquidity. It
determines if the business has enough resources to pay its debts over the
next year
Formular: Current Assets / Current Liabilities

21. Key Steps in Financial Review…
3. Debt-to-Equity Ratio (D/E)
› The Debt-to-Equity Ratio, also known as financial leverage, determines the
relative proportion of a business’s equity and debt used to finance its
assets.
› It is used as a standard for determining a business’s financial performance
and whether it’s financially healthy.
Formular: Total Liabilities / Shareholders Equity
4. Quick Ratio
› The Quick Ratio (Quick Assets Ratio or “acid test), provides a short-term
view of the company’s cash situation in relation to its short-term debts and
help to determine whether a business can meet its financial obligations if
issues arise.
Formular: (Current Assets – Inventories)/ Current Liabilities
(You are looking for a higher quick ratio here).

22. Key Steps in Financial Review….
5. Return on Equity (ROE) Ratio:
› The ROE ratio is one of the most important profitability metrics. It shows
how much profit a business earned compared to the total amount of
shareholder equity found on the balance sheet (invested).
Formular: Net Income/Shareholder’s Equity
Step 8. Gather the company’s key competitor’s data analyse them.
Step 9. Review the market data of the business’s stock/share price (If public
listed), as well as the Price to Earnings (P/E) Ratio.
P/E ratio is a metric that compares a company's share price to its annual net profits.
This ratio can be used to compare companies of similar size and industry to help
determine which company is a better investment.
P/E=Current Share Price/EPS

23. Key Steps in Financial Review…
Step 10. Review the Dividend Pay-out Ratio:
› The Dividend Pay-out Ratio measures the percentage of a company’s net
income given to shareholders in the form of dividends:
• Trajectory of the Company: a consistent and steadily rising ratio
suggest a company has healthy cash flows.
• Short-Term Stock Prices: if a company has a dividend pay-out ratio of
more than 100%, it may be attempting to inflate stock prices in the short
term.
• Comparing Stocks/shares Within an Industry: dividend pay-out ratios
should not be compared across industries where expectations of
dividend pay-outs may vary greatly.
• Maturity of a Company: more mature companies tend to have higher
pay-out ratios.
Formular: Total Annual Dividends Per Share / Earnings Per Share

24. Open Discussion

25. Assignment
Review the financial statements attached to the end of this
PPP and outline as much findings for discussion in the
next lesson.

26. LESSON 3

27. Assignment Results
› Draw a list of Findings (-ve findings that need
addressing
› What did you find that need immediate, mid and long
term address
› What would be mitigation on each of the findings
› What are the potential costs items associated with
proposed mitigation (and their sources/funding options)
› What would a realistic plan within short, mid and long
term?

28. Risk Analysis
It is important to carry a simple risk analysis while
reviewing the financials.
1. Credit Risk: Look at the potential risk associated
with trade receivables and potential impairment.
What is outstanding beyond credit limit timelines
(This can be found on the Notes.
2. FX Risk: Does that the company has foreign debt
that could expose the company into reprice risk?
Are there any hedging mechanism in place to
mitigate risk?
3. External Risks: E.g. changes in Macroeconomics,
Pandemic, wars, disasters, regulatory environment

29. Dealing with Findings
› Draw a list of Findings (-ve findings that need addressing
› Put a plan that address immediate issues, mid and long term
› Develop mitigation plan on each of the findings
› Establish costs associated with proposed mitigation (and their
sources/funding options)
› Identify positive areas that can be further optimized
› Develop a realistic plan with timelines for addressing the findings

30. Open Discussion

31. Vote of Thanks

32. Financial Statements

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