study sheet and powerpoint

1. RE / SE
Last YR RE
E/B
O/B
Add
T/B
Net Income (this
YR)
Dividends PLUG
Given in B/S,
E/B of this
YR RE
E/B
Net Fixed Assets
O/B(from prev
yr)
Given on B/S or
calculated (Asset HC
– Acc Dep)
From I/S Dep X (this YR)
From I/S Loss (this yr) OR
OR Gain (this
YR)
TAKE T/B
From I/S
(Fixed assets b4
purchases)
Net Purchases
(N/P)
PLUG (CR side? Net
Disposal)
E/B (total fixed
assets this YR)
Given on B/S or
calculated (Asset HC
– Acc Dep)
#1: READ THE CASE 30 Minutes
• Role
• Decision: “wondered” / “wanted to” + secondary decisions (follow up Qs:
financing? marketing?)
o Highlight interconnectedness of decisions & recommendations
• Goals: qualitative + quantitative (use 2 evaluate options + make decisions)
o Include personal/secondary goals (eg. hire son, have fun with the business)
• Constraints: possible constraints that could be factored into the decision
#2: DETERMINE TYPE + ANALYSIS REQUIRED
aka what statements do we need to make / what 2 analyze??
#3A: UNDERSTAND THE ORGANIZATION – Business Size Up 30 Minutes
case fact à implication
• Industry Analysis: Label industry (esp if more than 1 SEPARATE)
o Key success factors à what does this mean 4 us? are we following these?
o Industry trends + external factors (labour, regulations, other industries) à
how does this effect us (growth, profitability, etc..)
• Consumer Analysis: WHO ARE THEY? (Big corp vs. end consumer,
demographics, size)
o What do they value/want (physical product, benefits); When they buy
(purchase patterns); where they buy (trade chain implications); How are
they influenced (price, convenience, psychologically) à economies of
scale, brand loyalty, credibility w/ retail
• Competitive Analysis:
o Who are they (indirect and direct); What are they doing well/poorly (is
this sustainable? more access to financing? Product competition?); How
their business works (their competitive advantage); à How can we
compete (opportunities, need a savvy marketing campaign), how will they
react; WHAT IS OUR COMPETITVE EDGE? – is our edge sustainable?
• Corporate Capabilities: INTERNAL ANALYSIS – strengths/weaknesses?
o Finance: access to additional financing/equity- why/why not?, revenue
pattern-seasonality? growth? why?, profitability trends-why?, marketing
budget for extensive plan?, a lot of investors- means they think its profitable
o Marketing: established brand? good sales team?
o Operations: capacity restrictions, quality/length of production, supplier
relationships, cheap/expensive labor, trade chain
o Human Resources: experience, established relationships/supported by
any other firms, any patents
o Past success
o Analysis/Implications à Do they have the corp. capability to go
ahead/good idea to expand? More concerns or strengths? Does past prove
success is possible?
#3B: UNDERSTAND THE ORGANIZATION – Financial Size Up 30 Minutes
STATEMENT OF CASH FLOWS
• Label all lines on the balance sheet as O/F/I AND source/use for what we know changes
over the two years
↑ ↓
Asset Use (–) Source (+)
Liability/Equity Source (+) Use (–)
• Looking @ breakdown of cash use throughout the year ∴Y2 – Y1
––––––––––––––––––––––––––––––––––
Operations
Net Income: Net income after tax (I/S)
Adjustments to Cash Basis:
I/Sà Deal w/ non-cash expenses: + amortization/depreciation, + losses or – gains for
assets/investments (including sales), negate effects of items that don't relate to normal
business activities. Deal w/ A/R, Income tax Pay, A/P+Incurred Liab (diff b/w 2 years for
all)
B/Sà day2day running of business (A/R, Invent, Salary/insurance payable): + sources, –
uses
Net Cash Flow (NCF) from Operations:
Financing (DON'T INCLUDE LAND)
B/Sà ANYTHING related to loans payable, bank indebt., mortgages, bonds, stocks
(include shareholder advances/loans), personal investment [all of these are diff b.w 2 yrs]
Reconstruct RE to calculate dividends (calculations below)
NCF from Financing:
Investing
Capital Assets, Purchases of land, marketable securities, goodwill, patents.
Reconstruct Fixed Asset acct: calculate net purchases of plant/equipment (down left)
CombinedNetFixedAssets YR1 – AmortizationExpense YR2 – Loss YR2 + Gain YR2
+ X = CombinedNetFixedAssets YR2
– NP if +ve/DB (net purchases = use), + NP if –ve/CR (net disposals = source)
NCF from Investing:
NCF: NCF Operations + Finance + Investing
Add Beginning Cash: Last year’s E/B
TOTAL = Ending Cash: should match cash figure on this year’s B/S
––––––––––––––––––––––––––––––––––
ANALYSIS: Ask Qs to be answered with RATIOS!!! Mention what ratios you will be using
• Operations: +ve or –ve cash flow from OPS? NI vs NCF (explain the relation)?
o NI vs NCF? Both +ve: managing cash properly. NI –ve: core business not generating
cash. NI +ve but NCP –ve: look @ major uses.
o Major sources (where is the $$ coming from): (#1) Net Income à company’s core
business generating cash (profitable), sustainable, need this long term; (#2)
Stretching AP, Reducing Inventory, Tightening Credit à not sustainable, is this
acceptable given particular situation?
o Major uses: AP/AR/Inventory? (concerns=ratio) AP < AR + INV cash tie-up problem
∴ days ratios, what can we do to fix this (shortages/overstocks, tighten credit, are we
paying too fast/can we hold on to $ longer). NI? Will profitability change w/ decisions?
o Growth company? Cash shortage OK temp (should expect to generate cash + shortfall
justified w/ development/uses– no justification? corrective action).
• Financing:
o Matching: ST sources 2 ST uses (eg. ST financing aka line of credit 2 cover temp OPS
cash shortage – should expect 2 generate $ in order 2 repay – interest coverage). LT
sources 2 LT uses (bank loan 2 cover expansions, purchases of fixed assets). à
Don’t want to see ST (loans or even things like AP/AR) financing LT purchases – takes
v long for these to generate cash and ST are repaid soon; àWant to see cash
generated from NI invested in growth b/c committed to growth; a lot of cash on hand
should be used to repay debt which would decrease interest expense.
o Dividends? Shouldn’t be paid if net income is –ve
o Debt vs Equity: Is there more of one than the other? Try to balance (D2E ratio). What
is preferred? D= increased risk of insolvency/bankrupt. E= less control.
§ More D = less likely to get more; More E= ppl believe idea + willing 2 invest.
• Investing:
o Purchases: Does it make sense to invest in FA? Growing company? No investment =
concern of no growth/replacing old equip. ^matching = how are we funding??
o NCF +ve? Company is selling off FA! Unless an explanation: company selling assets 2
cover OPS shortfalls or pay loans = major trouble.
• Zero EB in cash is problematic: Need cash 2 cover ST obligations (liquidity ratios).
RATIO ANALYSIS
Profitability: How profitable is the venture?
– Vertical Analysis: Profitability/operating efficiency issues.
COGS 2
Sales
COGS
Net Sales
∗ 100
Relative cost of inputs ¯ ratio = ¯ costs
Gross Profit
2 Sales
Gross Profit
Net Sales
∗ 100
Gross Margins: % of profit earned
on sales - % sales $ left to cover
OPS X + contribute 2 profits
­ ratio = ­profit per
sale
OPS X 2
Sales
OPS X
Net Sales
∗ 100
Relative impact of OPS X ¯ ratio = ¯ OPS X
relative 2 sales
Net Income 2
Sales
Net Income
Net Sales
∗ 100
Profit Margin=ultimate profitability:
% NI for every sales dollar
­ ratio = more $ per
sale
Analysis à How COGS is affecting gross margin; fluctuations with OPS X – overall
efficiency/profitability.
– Return on Investments: ROA (bought much FA); ROE (seeking pot.investors + returns impt)
ROA Net Income
Avg Total Assets
What kind of return are fixed
assets generating?
High return = good use
of assets
ROE Net Income
Avg Shareholder's Equity
Max return available to
shareholders?
High return = happy
shareholder’s/owners
Growth: Measures improvement in profit/sales/assets (same formula for all)
Profit Y2 – Profit Y1
Profit Y1
Analysis PROFIT: Growth over op cycle, ­the better–compare 2 industry
SALES: Proportional to profit àWhy growth (price? volume?); Not prop = add sales harmful?
ASSETS: Proportional to above à Invested in right kind of assets otherwise issue.
Efficiency:
Trouble selling INV (nature of inv.): Days of INV= (INV/(COGS/360)) à How long inv remains
in stock? Pref low side of industry; LOW=lack of sufficient inv; HIGH=excess (waste of cash).
Issues w/ customer (AR, can we dictate terms) Days of AR= (AR/(Sales/360)) àDays until
payment after a credit sale. Pref lower side of industry. LOW=policies too tight? Scaring off
business?; HIGH=needless cash squeeze; Compare 2 credit term… effective management?
Issues w/ supplier (AP, credit terms, power): Days of AP=(AP/(Purchases(aka COGS)/360))
àHow long it takes to pay supplier. Pref high side of industry. LOW=get more ST cash by
delaying payments. HIIGH=could get bad rep + priv cut off.
Total current assets = TCL, Total Current Liab = TCL, Current LIab = CL
Liquidity: Cash flow problems! CA are lower/not much higher than CL, fear of going
Bankrupt, not selling INV, or meeting ST obligations. + Efficiency of working capital + ST risk
Current Ratio= (TCA/TCL) à 2:1 ✓ à measures ST liquidity; greater than one business is
liquid; TOO LOW = insolvency. TOO HIGH = inefficient capital use.
Acid Test=((Cash+T/I+AR)/TCL) à 1:1 ✓à immediate liquidity-will point to company’s
reliance on INV as liquid asset. DON’T USE IF NO INVENTORY (eg asset heavy ind.)
Analysis à both<1 not enough CA to cover its CL; if CL are due (look at the chances of
creditors/suppliers demanding prompt payment) they’d have to sell AR and would become
BR; àboth>1 enough CA to cover CL
Stability Ratios: company is planning expansion; comment if lot of debt; raising additional
debt/financing; LT risk.
Debit2Equity=(TL/TE) % à debt dollar to equity dollar; lower = safer = easier to obtain debt;
want balance!!!
Net Worth to TA=(TSE/TA) % à % business financed by equity; higher = safer; too low =
too much debt; too high = likely underleveraged ∴reducing ROE + debt cheaper than equity.
Interest Covg=(EBIT/Int exp) X à # times company can meet interest payments; assures
loan charges can be covered; low = low margin of safety/potential bankruptcy/NO MORE
DEBT.
Increase GROSS MAGIN by cheaper production costs OR increased selling prices
(beginning + end)/2
CONTRIBUTION ANALYSIS: Are products we’re selling making money?
Contribution: = Net Sales – Variable Costs
Sub-Unit Evaluation: Revenues – Direct Costs = Net Contribution of Sub-Unit
• +ve = $X toward paying fixed/indirect costs AKA KEEP
• -ve = does not contribute AKA improve profitability or eliminate it. Only keep if elimination
would hurt sales of contributing units AKA it supports good sales.
Unit Contribution: = Selling Price – VC per unit CMR: =UC/SP OR =Contrib./Net Sales
––––––––––––––––––––––––––––––––––––––––––––––––––––
Breakeven: Revenues = Expenses; Total Contribution = Fixed Costs
• BE Units: Fixed Costs / Unit Contribution
• BE Sales $: Fixed Costs / Contribution Margin Ratio (Weighted AVG CMR for multiproduct)
• Margin of Safety (how much we can be off by): (Projected Sales – BE Sales)/PS
2257 Final: Irfan Jivraj (2508517700, Alina Lalji (250783191), Areesa Kanji
(250794831)
Target Profit? Add TP to Fixed costs
in calculations to find required.
COSTING METHODS
DIRECT: direct, traceable costs (materials, labour, selling expense, etc..) – cost
per unit does not change with volume.
ABSORPTION: includes all production costs regardless of fixed/variable
(material, DL, FOH);
FULL:

2. #4: ASSESSING FUTURE OPPORTUNITIES 120 Minutes
DIFFERENTIAL ANALYSIS
1. Outline alternatives
2. Evaluate qualitative factors involved in the decision
QUALITATIVE:
• PROS/CONS of options + relative implications + link goals to objectives
• Direct competition? Risk and uncertainty? Funding requirements?
• Sunk costs
3. Separate recurring flows (cash flow) from one times (invest)
QUANTITATIVE:
• Identify things that are CASH, FUTURE, DIFFERENT
• Reoccurring (Inflows + Outflows) vs One-Time (Investment)
• Based on FULL operating cycle
• May have high/low sales values for some differentials (if range given)
Low Projection High Projection
Cash Inflows – (can also
be things that we will
save $ on now)
Incremental Revenues
(include any A/R sales).
Use case info to project. (Eg. #cust x price)
Total Cash Inflows
Cash Outflows
Incremental recurring
costs. (Ex. rent, promo,
COGS, salaries, wages,
expenses, insurance,
capital expenses)
*Just acct for difference b/w new and old rent.
*Look in case for losses in revenue.
*Expenses: Use past IS to find ratio or %, and multiply
by sales.
*No ops X if allocated! Ops X – (amort and int)
Total Cash Outflows
Net Cash Flow Inflows – outflows: Positive? Generate this cash
annually from this alternative
Investments
Include Diff. Inv, AP, AR
here! (1-time jump, then
maintain).
Ex. A/R (see red print) A/P Always negative,
disinvestment
Ex. Training, equipment,
building, set up
Total Investments
4. Calculate ROI [(Annual Return/Initial Investment)*100]
Calculate Payback [(Initial Investment/Annual Return)]
5. Evaluate ROI vs. hurdle rate à interest rate (risk of venture)
Ex. Interest = 6%, ROI = 5% à 1% from pocket!
ROI (return from each $
of investment)
= NCF / Inv,
Compare to hurdle rate + interest rate (risk of venture)
ROI should be > than interest rate
Payback (how many
years before you get
investment back)
= Inv / NCF
(should be less than1 YR for working capital)
THINGS TO RMBR:
- If one of the alternatives is the status quo, just account for the
difference!
- Don’t include amortization or allocation!
- Good if payback is short compared to useful life
- Might see a lot of investment in working capital; not very reliable
WORKING CAPITAL:
Diff Inv = (Diff COGS/360) x Days of Inv (increase = +, decrease = –)
*Diff COGS = Total Cash Outflow from differential analysis
Diff A/R = (Diff Credit Sales(aka revenues)/360) x Days of AR (or
given credit terms)
(increase = +, decrease= –)
Diff A/P = (Diff credit purchases or Diff COGS/360) x Days of AP
(increase = –, decrease = +)
6. Sensitivity. Consider variables that are significantly uncertain. (if
time or req’d)
7. Make a decision.
CONTRIBUTION ANALYSIS PT 2 SETTING PRICES
Pricing: = Competition + Cost + Willingness 2 Pay
**Use Contribution + BE analysis from other side**
PROFIT ANALYSIS
Sales (PROJECTED: Price * Units Sold)
LESS: Variable Costs
Contribution
LESS: Fixed Costs
Net Income / Profit
CASH BUDGET
Oct Nov Dec (END) TOTAL
Sales $250,000 $250,000 $250,000 SUM
Inflows (from financing, equity infusions,
collections, sales)
Collections - - $250,000 SUM
Total Inflows - - $250,000 SUM
Outflows (cash ops X, capital
expenditures,
financial commitments, equity
reductions,
fixed asset purchases, interest/principle
payments, dividends)
SUM
Utilities $500 $500 $500 SUM
Inventory $50,000 SUM
Total Outflows $500 $500 $50,500 SUM
Net Cash Flow (inflow-outflow) ($500) ($500) $199,500 SUM
Beginning Cash (1stst
month? last YR E/B) ($500) ($1000) 1st Month
Ending Cash (Next Month’s beginning) ($500 ($1000) $198,500 Last Month
Analysis à Highlight KEY VARIABLES
à –ve monthly ending cash = ST financing req’d: Max cash requirement? Which
month? Can we secure this much financing (ST working capital loan/line or credit vs LT
bank loan)?
àOverall cash flow? +ve (good financial position – excess cash? invest, pay down
payables, pay off loan, rennov.) or –ve (financing req’d – bank loan) àidentify cause of
cash flow +ve (sales? BL?), -ve (inventory? salaries? FA purchases?)
àWhat kind of financing can solve this problem?
#5: DECISION
• Choose based on the goals and objectives of the business
• Compare how each option meets these qualitatively and quantitatively
• Address any concerns
• Link back to all components of analysis
#6: EVALUATE EFFECTIVENESS OF DECISION 30 Minutes
PROJECTED INCOME STATEMENT
• Must incorporate all decisions – ONE chosen differential **Low estimates
• Sources of INFO: Management projections/estimates, previous years’ statements (same $$ vs
same %), differential cash flows
Income Statement
Revenue
Existing Sales Growth rate x last year’s sales
+Differential Sales Total Differential Inflows (NOT including savings)
LESS: COGS
Existing Products Same % * existing sales (sales from above)
+Differential COGS All outflows – (anything that changed bc of sales)
GROSS PROFIT _(Total Revs -Total COGS)___________
Operating Expenses
Existing expenses
+Differential Ops X
+ Amortization
Total Operating Expenses
Use % of revenue from vertical analysis unless stated
Anything that changes with sales (left out above)
Previous Yrs value PLUS calc manually for new asset invest.
____________
Net Income Before Tax
Less: Income Tax % tax rate provided (or calculated from LY) x NIBT
Net income
Interpretation = Trends? à is the NET INCOME meeting GOALS???
NOTE: Some non-cash expenses will have changed and should be accounted for in the Income
Statement (ie. Amortization if new assets purchased)
PROJECTED BALANCE SHEET
Assets
Current Assets
+ Cash (Plug?)
+ A/R
+ Inventory
Last Yrs. Balance Sheet OR Goal stated
Projected Credit Sales/360 x Days A/R + Diff. A/R
*Existing Sales From Projected I/S
Projected COGS/360 x Days of Inv. + Diff Inv.
Total Current Assets
*Existing Products COGS From Projected I/S
Long Term Assets
+ Fixed Assets Last Yrs. + Bought
– Less A/D Last Yrs. + New A/D (should be given) OR calculate
A/D for 1 yr on total assets and add
Total Long Term Assets
Total Assets Should equal Total Liabilities and SHE
Liabilities and SHE
Current Liabilities
+A/P Projected COGS/360 x Days of A/P + Diff. A/P
Total Current Liabilities
Long Term Liabilities
+Loan (Plug?) Plug so that Assets = S/LE
Total Long Term Liabilities
Shareholder’s Equity
+ Existing Stock
+ New Shares (Plug?)
+ R/E
If looking to finance through equity?
Previous R/E + Projected Net Income - Dividends
Total SHE
Total Liabilities and SHE Should equal Total assets
* Current capital stock (under SHE stays same)
* Enter all other items from last years B/S that are not expected to change
* Plug for Cash or Debt depending on case info
- Liabilities > Assets = plug for cash (or use CB) à don’t need a loan
- Assets > Liabilities = plug for additional financing (loan) à Need more money. Pretty bad biz
#7: DECIDE ON FINANCING
Internal financing:
a. Improve spread between cash revenues and cash expenses
b. Working capital manipulation
c. Sell fixed assets
External financing:
a. Raise equity
b. Take on long term/short term debt
*COMMENT ON LIKELYHOOD OF GETTING FINANCING – Interest Coverage?
Current Debt to Equity ratio??
#8: ACTION / CONTINGENCY PLAN (KEEP IT SHORT)
How do you execute your decision?
Who do you talk to?
What are the primary risks in your decision?
How do you overcome them? Ex. if construction costs increase
Ex. for Horseshoe, we have our parent company and its fine
MARKETING PLAN
Push vs Pull Strategy:
Push Pull
*Targets retailer *Targets end customer
*Retailer must draw end consumers *End Cons. must create demand to retail.
*Good for limited budget *Really expensive
*Success with big retailers gives
credibility
*End consumers will enjoy unique
specialized products (ex. teracycle)
Message for Promotions:
Push Pull
*Make retailers aware of
what we do (ie. We care
about enviro.)
*Unique product “hipster”
*Good for retailor’s
image, make easy for
retailer (ie. Do displays)
Creative Promotion Alternatives
Bulk discounts
Include displays for retailers
Invest in distribution strategy, look cool
With what media will you communicate?
Consider different time frames:
Pre launch, grand opening, recurring
Stay within budget
$100,000 every year vs. $90,000 in the first year