1 / 16

BUSINESS SIZE-UP OVERVIEW

BUSINESS SIZE-UP OVERVIEW Two purposes: Understanding the past e.g. are inventory levels consistent with production process? e.g. are accounts receivables consistent with credit terms? Predicting the future: External and internal examination of key success factors and capabilities

issac
Download Presentation

BUSINESS SIZE-UP OVERVIEW

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. BUSINESS SIZE-UP OVERVIEW Two purposes: • Understanding the past • e.g. are inventory levels consistent with production process? • e.g. are accounts receivables consistent with credit terms? • Predicting the future: • External and internal examination of key success factors and capabilities • Used in conjunction withquantitative analysis (e.g., projected financial statements or projected cash flows)

  2. BUSINESS SIZE-UP FRAMEWORK • Internal (firm) factors • Operations • Management • Marketing • Past financial performance • liquidity • profitability • capacity • asset management • External factors • economy • industry • Future financial performance • key success factors? • firm capabilities? • Implications for financing

  3. EXTERNAL SIZE-UP: ECONOMY • “Business cycle”? • In a recession, inventories and accounts receivable grow relative to sales, profit margins and cash flows decline and lenders pay more attention • Future interest rates? • Depend on default risk, interest rate risk and inflation • Government? • Taxes, regulations, assistance programs • Implications for the future: key economic variables?

  4. EXTERNAL SIZE-UP: INDUSTRY • Size, growth and profitability of industry? • Competition? • Ease of entry, pressure from substitute products, bargaining power of buyers/suppliers, existing rivalries • Competitive strategies? Low cost producer or differentiated products? • Opportunities/risks • Political, economic, social, technological • Implications for the future: key success factors for industry?

  5. INTERNAL SIZE-UP: OPERATIONS • Cost vs. quality? • Process? • Job shop, line flow or project • Plant and equipment? • Capacity, scheduling • Inventory? • Raw material, work in progress and finished goods • Workers? • Skills, training, rewards, labour relations • Implications for the future: supply risk?

  6. INTERNAL SIZE-UP: MARKETING • Consumer analysis: needs, buying process • Marketing mix: • Price • discounts and allowances, credit terms • Promotion • advertising and promotion • Product • features, quality, service, warranties • Place (distribution channels) • Implications for the future: demand risk?

  7. INTERNAL SIZE-UP: MANAGEMENT • Experience of key personnel • Focus and drive • Character • Leadership • Strategy • Implications for the future: capabilities?

  8. INTERNAL SIZE-UP: FINANCE • Liquidity • Efficiency • Profitability • Capacity • Implications • From the past: financial health? • For the future: profitability and financing needs

  9. FINANCIAL SIZE UP: RATIOS • Examine relation between numbers in the income statement and balance sheet • Usefulness: • Compare to internal targets (e.g. accounts receivable management) • Consider trends for a given firm • Compare to industry and / or comparable firm

  10. FINANCIAL SIZE UP: LIQUIDITY • Current ratio • can short term claims be covered by liquid assets • Acid test or quick ratio • exclude inventories and prepaid expenses Current Assets Current Liabilities Cash + S.T. Securities + Accounts Receivable Current Liabilities

  11. FINANCIAL SIZE UP: LIQUIDITY • Collateral analysis • Compute value that could be obtained in liquidation • Can obligations be met? • Typical recovery rates • Cash 100% • Accounts receivable 75% • Inventory 50% • Land Market value • Other fixed assets 20%

  12. FINANCIAL SIZE UP: EFFICIENCY • Accounts payable turnover (days) • Accounts receivable turnover (days) • Inventory turnover (days) Accounts Payable Purchases / 365 Accounts Receivable Net Sales / 365 Ending Inventory Total Cost of Goods Sold / 365

  13. FINANCIAL SIZE UP: PROFITABILITY • Sales growth • Net profit margin • Gross profit margin Year ‘t’ Net Sales -1 Year ‘t-1’ Net Sales Net Income (after tax) Net Sales Gross Income Net Sales

  14. FINANCIAL SIZE UP: PROFITABILITY • Return on assets (ROA) • could substitute earnings before interest and taxes for net profit (removes effect of “capital structure”) • Return on equity (ROE) • equity includes preferred stock, minority interests and retained earnings Net Income (after tax) Total Assets Net Income (after tax) Net Worth

  15. FINANCIAL SIZE UP: CAPACITY • Debt to assets • Debt to equity • Interest coverage • ability to meet interest payments out of recurring profits 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. OVERALL SIZE-UP IMPLICATIONS • Opportunities • what is critical to success? • does firm have capabilities? • impact on future financial requirements? • Risks • Business risk: • focuses on Earnings before Interest and Taxes (EBIT)? • Financial risk: • focuses on capital structure (debt versus equity)

More Related