This document provides an overview of key financial concepts for new venture finance including how to prepare and interpret balance sheets, income statements, cash flow statements, and various financial metrics and ratios. It discusses calculating and analyzing metrics like net cash burn rate, liquidity ratios, conversion periods, leverage ratios, and comparing company performance to industry peers. The document uses an example company to illustrate how to apply these concepts to a real-world case.
The capital which is needed for the regular operation of business is called working capital. 1- for the purchase of raw materials
2- for the payment of wages
3- payment of rent and of other expenses
Working capital is kept in the form of cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.
Size Of Business
Nature Of Business
Storage Period
Credit Period
Seasonal Requirement
Potential Growth Or Expansion Of Business
Changes In Price Level
Dividend Policy
Working Capital Cycle
Operating Efficiency
Other Factors
Working capital requirement of a firm is directly influenced by the size of its business operation.
Big business organizations require more working capital than the small business organization.
Working capital requirement depends also upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations.
A service sector does not require any amount of stock of goods. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount.
Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high A firm should keep more quantity of goods in store and hence requires more working capital. if the storage Period is less , then more stock of goods must be held in store as work-in-progress.
Cash Flow Statement is a basic concept which every young manager must learn. This presentation excellently explains what you should know about this topic!
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.
Values used in calculating financial ratios are taken from the balance sheet, income statement, statement of cash flows or (sometimes) the statement of retained earnings. These comprise the firm's "accounting statements" or financial statements. The statements' data is based on the accounting method and accounting standards used by the organization.
Ratios
Profitability ratios
Liquidity ratios
Activity ratios (Efficiency Ratios)
Debt ratios (leveraging ratios)
Market ratios
Capital budgeting ratios
Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.[5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.[6] These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.
Financial ratios allow for comparisons
between companies
between industries
between different time periods for one company
between a single company and its industry average
Financial Models are one of the things that entrepreneurs need to build for their businesses. This presentation gives a clear idea about how to put a financial model together.
The capital which is needed for the regular operation of business is called working capital. 1- for the purchase of raw materials
2- for the payment of wages
3- payment of rent and of other expenses
Working capital is kept in the form of cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.
Size Of Business
Nature Of Business
Storage Period
Credit Period
Seasonal Requirement
Potential Growth Or Expansion Of Business
Changes In Price Level
Dividend Policy
Working Capital Cycle
Operating Efficiency
Other Factors
Working capital requirement of a firm is directly influenced by the size of its business operation.
Big business organizations require more working capital than the small business organization.
Working capital requirement depends also upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations.
A service sector does not require any amount of stock of goods. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount.
Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high A firm should keep more quantity of goods in store and hence requires more working capital. if the storage Period is less , then more stock of goods must be held in store as work-in-progress.
Cash Flow Statement is a basic concept which every young manager must learn. This presentation excellently explains what you should know about this topic!
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.
Values used in calculating financial ratios are taken from the balance sheet, income statement, statement of cash flows or (sometimes) the statement of retained earnings. These comprise the firm's "accounting statements" or financial statements. The statements' data is based on the accounting method and accounting standards used by the organization.
Ratios
Profitability ratios
Liquidity ratios
Activity ratios (Efficiency Ratios)
Debt ratios (leveraging ratios)
Market ratios
Capital budgeting ratios
Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.[5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.[6] These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.
Financial ratios allow for comparisons
between companies
between industries
between different time periods for one company
between a single company and its industry average
Financial Models are one of the things that entrepreneurs need to build for their businesses. This presentation gives a clear idea about how to put a financial model together.
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Summary Notes A2--Balance Sheet 1 The Balan.docxrhetttrevannion
Summary Notes: A2--Balance Sheet
1
The Balance Sheet (The Statement of Financial Position) records information on:
Assets—the value of things that are owned
Liabilities—the value of things that are owed
The balance sheet tells us what the company is worth on a particular date (assuming we do a good job
valuing assets and liabilities).
The Accounting Equation always holds:
Liabilities + Owners’ Equity = Assets
Balance sheet example (thousands):
J&M, Inc. BALANCE SHEET December 31
2015 2014 Changes
Assets
Current assets:
Cash and cash equivalents
Short-term marketable sec.
Accounts receivable
Inventory
Prepaid expenses
Deferred charges
Total current assets
$ 8,500
3,000
23,700
37,700
2,000
2,500
77,400
$ 6,100
5,000
19,500
39,800
1,500
3,000
74,900
+ $2,400
– 2,000
+ 4,200
– 2,100
500
– 500
+ 2,500
Long-term Assets:
Plant and equipment
Less accumulated depreciation
Total assets
154,000
(70,000)
$161,400
145,000
(50,000)
$169,900
+ 9,000
+ 20,000
– 8,500
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Wages payable
Accrued taxes
Total current liabilities
10,000
16,000
2,000
28,000
26,000
15,000
3,500
44,500
– 16,000
+ 1,000
– 1,500
– 16,500
Other liabilities
Long-term debt
Total liabilities
30,000
$58,000
32,000
$76,500
– 2,000
– 18,500
Shareholders’ equity
Preferred stock, 6%, $100 par value
Common stock, $4 par value (10,000 shares)
Additional paid-in capital
Retained earnings
Total owners’ equity
Total liabilities and equity
10,000
40,000
11,000
42,400
103,400
$161,400
10,000
40,000
11,000
32,400
93,400
$169,900
0
0
0
+ 10,000
+ 10,000
– 8,500
Notes about Assets:
• Assets are arranged in order of liquidity--cash is listed first
Summary Notes: A2--Balance Sheet
2
o Liquidity = easy to convert to cash ($)
• Current assets = convertible to cash within a year
o Firms with good LT assets but lack of cash have a “cash-flow” problem
• Short-term marketable securities--bonds that can be easily sold-like US govt. debt.
• Accounts receivable—owed to the firm by customers (30- or 45-day accounts receivable)
• Inventory--$ value invested in raw materials, work in process and finished goods
o Sometimes tricky to value--Last year’s unsold holiday sweaters? Gold stock of a jeweler?
• Prepaid expenses (e.g.: insurance policy or rent)
• Deferred charges (prepaid expenses for intangible asset like goodwill or startup costs in the pre-
operating period).
• Long-term Assets = harder to convert to cash
o Purchase price of plant and equipment
• Depreciation—With exception of land, an allowance is made for the “using up” of assets
• Total Assets = Current + LT Assets
Notes about Liabilities:
• Current liabilities must be paid in the next year
o Pay suppliers for raw.
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2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
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2. Describe and prepare a
balance sheet and an income
statement
Prepare a cash flow
statement and explain how it
helps monitor a venture’s
cash position
Describe operating
breakeven analysis in terms
of breakeven revenues
Identify major drivers on the
amount of revenues needed
to survive
Describe how financial ratios
are used to monitor a
venture’s performance
Identify cash burn rate
measures and liquidity ratios
and explain how they are
calculated and used
Identify specific leverage
ratios and explain their usage
by lenders and creditors
Identify and describe
measures of profitability and
efficiency that are important
to the entrepreneur and
equity investors
2
3. Generally Accepted Accounting Principles (GAAP):
guidelines that set out the manner and form for
presenting accounting information
Accrual Accounting:
the practice of recording economic activity when
recognized rather than waiting until realized
Depreciation:
reduction in value of a fixed asset over its expected life
intended to reflect the usage of wearing out of the asset
Accumulated Depreciation:
sum of all previous depreciation amounts charged to fixed
assets
3
4. Balance Sheet:
financial statement that provides a snapshot of a venture’s
financial position as of a specific date
Balance Sheet Equation:
Total Assets = Total Liabilities + Owners’ Equity
Assets:
financial, physical and intangible items owned or controlled by
the business
Owners’ Equity:
equity capital contributed by the owners of the venture is shown
after listing all liabilities
4
5. Current Assets:
cash & other assets that are expected to be converted
into cash in less than one year
Cash:
▪ amount of coin, currency, and checking account balances
Receivables:
▪ credit sales made to customers
Inventories:
▪ raw materials, work-in-process, and finished products which
the venture hopes to sell
Fixed Assets:
assets with expected lives of greater than one year
5
6. Current Liabilities:
Payables:
▪ short-term liabilities owed to suppliers for purchases made on
credit
Accrued Wages:
▪ liabilities owned to employees for previously completed work
Bank Loan:
▪ interest-bearing loan of one year or less from a commercial bank
Long-Term Debts:
loans that have maturities of longer than one year
Capital Leases:
long-term, noncancelable leases whereby the owner
receives payments that cover the cost of the equipment
plus a return on investment in the equipment
6
7. Income Statement:
financial statement that reports the revenues generated
and expenses incurred over an accounting period
Sales or Revenues:
funds earned from selling a product or providing a service
Gross Earnings:
net sales (after deducting returns and allowances) minus
the cost of production
Net Income (or Profit):
bottom line measure after all operating expenses,
financing costs, and taxes have been deducted from net
sales
7
8. Statement of Cash Flows:
shows how cash, reflected in accrual accounting,
flowed into and out of a firm during a specific
period of operation
Can be used to determine if a venture has
been building or burning cash
“Net Cash Burn” occurs when the sum of cash
flows from “operations” and “investing” is
negative
8
9. Assume:
Company started business on January 1, began
production on July 1, and sold first unit in August
▪ Sold 1,200 units @ $100/unit during the year
▪ Sold 100 units each in August and September; Sold 250 units each in
October and November; and Sold 500 units each in December
▪ All sales on credit, payable by customer in 30 days
Other expenses include:
▪ Rent – $500/month
▪ Marketing – $12,500 (for the year)
▪ Other administrative expenses – $1,500/month
▪ Depreciation expense – assume 20 year useful life
9
10. Assume:
Company produced 1,600 units
▪ Produced 200 units each in July and August and Produced 300
units each in September, October, November and December
Cost to produce each unit:
▪ Cost of parts, materials, etc. – $50/unit
▪ Cost of direct labor – $15/unit
All materials for production were purchased at the
beginning of the month they were used
▪ All materials were purchased on credit, payable to supplier in
30 days
10
11. Other assumptions:
Company applied for and received two credit
cards totaling a $30,000 line of credit with an
introductory rate of 0% for the first 12 months
▪ Two cards held a $25,000 balance as of December 31
$3,000 of administrative wages incurred in
December were paid the next month (in January)
11
12. 12
Assume the following beginning Balance Sheet as of January 1
17. Financial Ratios:
show the relationship between two or more financial
variables
Trend Analysis:
used to examine a venture’s performance over time
Cross-sectional Analysis:
used to compare a venture’s performance against
another firm at the same point in time
Industry Comparables Analysis:
used to compare a venture’s performance against the
average performance in the same industry
17
18. 18
Measures of Financial Performance by Life Cycle Stage
19. 19
Company ABC Income Statement for Years Ended 2009 and 2010
20. 20
Company ABC Balance Sheet for Years Ended 2008, 2009, and 2010
21. 21
Company ABC Statement of Cash Flows for Years Ended 2009 and 2010
22. Net Cash Burn Rate:
represents the amount of cash expended on the
venture’s operating and financing expenses and
its capital investments in assets net of the cash
generated from operations (sales) and financing
= Cash burn rate – Cash build rate
22
23. Cash Burn Rate:
cash expended by a venture on its operating and
financing expenses and its investments in assets
= Inventory-related expenses + Admin expenses +
Marketing expenses + R&D expenses + Interest
expenses + Change in prepaid expenses – (Change in
accrued liabilities + Change in payables) + Capital
investment + Taxes
For 2010, Cash Burn:
= 425,000 + 65,000 + 39,000 + 27,000 + 20,000 + 0 –
(1,000 + 27,000) +50,000 + 8,000 = 606,000
▪ Note 425,000 = 380,000 (COGS) + 45,000 (Change in Inv.)
23
24. Cash Build Rate:
Cash build for a fixed period of time, typically a
month
= Net Sales – Increase in Receivables
For 2010, Cash Build:
= 575,000 - 30,000 = 545,000
Net Cash Burn
= Cash burn – Cash build
= 606,000 - 545,000 = 61,000
24
25. Liquidity Ratios:
Indicates the ability to pay short-term liabilities when
they come due
Current Ratio:
= Average current assets/Average current liabilities
= ((250,000+180,000)/2) ÷ ((204,000+110,000)/2)
= 1.37
Quick Ratio =
(Average current assets –Average inventories)/Average current
liabilities
(= (250,000 +180,000)/2 – (140,000+95,000)/2) ÷ ((204,000 +
110,000)/2)
= .62
25
26. 26
Operating Cycle
Operating Cycle –
time required to purchase,
produce, and sell the
venture’s products plus
the time needed to collect
receivables if the sales are
on credit
27. Cash Conversion Cycle:
sum of the inventory-to-sale conversion period
and the sales-to-cash conversion period less the
purchase-to-payment conversion period
Conversion Period Ratio:
indicates the average time it takes in days to
convert certain current assets and current liability
accounts into cash
27
28. Inventory-to-Sales Conversion Period:
is the period required to convert purchased
materials into the sale of finished costs and
represents the amount of cash tied up in
inventories
= Average Inventories/(CoGS / 365)
= ((140,000 + 95,000)/2) ÷ (380,000/365)
= 112.9 days
What drives this number?
28
29. Sales-to-Cash Conversion Period:
measures the average days of sales committed to
the extension of trade credit
= Average Receivables/(Net Sales/365)
= ((105,000 + 75,000)/2) ÷ (575,000/365)
= 57.1 days
What is the significance of this measure?
29
30. Purchase-to-Payment Conversion Period:
measures the average time from a purchase of
materials and labor to actual cash payment and
represents the days of production costs financed
by trade credit and accrued wages/liabilities
= (Average Payables + Average Accrued Liabilities) /
(COGS / 365)
= ((84,000+57,000)/2 + (10,000+9,000)/2) ÷
(380,000/365)
= 76.8 days
30
31. Cash Conversion Cycle (C3)
C3 indicates the average time it takes a venture to
complete its operating cycle less a deduction for days
supported by trade credit and delayed payroll
financing
Goal is to keep C3 as close to ~0 days as possible
= Inventory-to-Sale Conversion Period + Sale-to-Cash
Conversion Period – Purchase-to-Payment Conversion
= 112.9 days + 57.1 days – 76.8 days
= 93.2 days
31
33. Leverage Ratio:
indicates the extent to which the venture is in
debt and its ability to repay its debt obligations
Loan Principal Amount:
dollar amount borrowed from a lender
Interest:
dollar amount paid on the loan to a lender as
compensation for making the loan
33
34. Leverage (Total-Debt-to-Total-Asset) Ratio:
indicates the amount of assets “pledged” to debt
holders and other creditors and also indicates the
percentage of the assets left for equity holders
= Average total debt / Average total assets
= ((204,000 +110,000)/2 + (80,000 +90,000)/2) ÷
((446,000 + 343,000)/2)
= .6134 or 61.34%
34
35. 35
How Does Company ABC ‘s Performance in 2010 Compare with Industry Peers?
36. 36
How Does Company ABC Compare with Industry Peers? (cont.)