income statement= P&L

Chapter 7

Assessing a New
Venture’s Financial
Strength and
Viability
Bruce R. Barringer
R. Duane Ireland
Copyright © 2016 Pearson Education Ltd. 8-1
efficiency? compared to competitiors?
efficiency has direct line with how new ex tetra pack plc machine the new ones are way better. old machines need major and top overall.
BOM bill of material
set up wen be fout bl costing (COGS)
labor be fout? Financial Management
cost of goods sold=direct material, labor that is manufacturing but not engineer that design+ machine setup time per unit (energy electricity different
2 of 2
then total time cause it depends on cause the quantity produced we want to increase this quantity to max effeciency
we also want to decrease changeover

The financial management of a firm deals with questions

such as the following on an ongoing basis:
=positive P&L or net profit of 25%, they understand
% better. to be able to tell if we are making or
loosing we go to income statement . they are asking
• How are we doing? Are we making or losing money? for short term obligations like salaris utility bills like
water rent electricity (loan is long term)
• How much cash do we have on hand? this is different from how we are doing.
here he is asking about liquidity. the money = cash=bank+bonds(from the
gov)+ cash on hand+gold= whatever we can turn into paper quickly
• Do we have enough cash to meet our short-term obligations?
if 30 days short. if 90 days medium. the accountant says what is
short term usually. taxes every month in big firms. every 3 month
• How efficiently are we utilizing our assets? in sarl. social insurance every month so short

• How do our growth and net profits compare to those of our industry peers?
• Where will the funds we need for capital improvements come from?
• Are there ways we can partner with other firms to share risk and reduce the
= joint venture ex: labs milk wants to do yogurt he needs expertise of yogurt labs to share risk cause
amount of cash we need? lots of research experimentation so sientists from yogurt lab come in and do the formula. they merge
for some time not aquisition. another way is to outsource, pay them once not sharing profits.
partnership are many in automotive industry GM gets its radios from outside.
• Overall, are we in good shape financially?
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 Financial Objectives of a Firm
1 of 3

lots of companies fail cause they're not liquid to sustain dont invest in huge machine for
themselves in the short term. a few parts. ex: cnc cuts all your
ex: i do yogurt, carrefour comes in and wants to pay in 180 month's demand in an hour. low
days. the small company wil put all its ressources to produce, efficiency and utilization
not enough planning and employees dont get paid so company
files for bankrupcy.
equity= how much money owners
not mpaying employees does a culture chock
put in the company
debt= loan
A firm must to keep enough For a firm to be
.. And its all
become money to meet its stable, it must not
relative to its
profitable to routine only earn a profit
revenue and its
remain viable obligations in a and remain liquid
profits.
and provide a timely manner. but also keep its
return to its debt in check.
owners 8-3
Copyright © 2016 Pearson Education Ltd.
 In class exercise
• Assume a company has $100,000 of bank
lines of credit and a $500,000 mortgage on
its property. The shareholders of the
company have invested $1.2 million.
Calculate the debt to equity ratio

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 Answer
debt to equity ratio=stability ratio=safe side cause
debt=50% of equity, the lower the better

$100,000 +$500,000
__________________ = 0.5
1,200,000
line of credit= is a loan for when you need it you pay it back when you use it. need to have proof of income. you pay it back the exact same
amount if you pay it at the end of the month. if you pay late you start paying interest APR. there is also an annual fee paid per year at the
beginning, first few years. then it goes away.
different from debit card= youre using the money in your account

• What does it mean?

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 The Process of Financial Management
1 of 4

• Importance of Financial Statements

– To assess whether its financial objectives are being met,
firms rely heavily on analysis of financial statements.
• The income statement, the balance sheet, and the statement of cash
flows are the financial statements entrepreneurs use most
commonly.
• Forecasts
– Are an estimate of a firm’s future income and expenses,
based on past performance, its current circumstances, and
its future plans.

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 The Process of Financial Management
2 of 4

• Forecasts (continued)
– New ventures typically base their forecasts on an estimate
of sales and then on industry averages or the experiences of
similar start-ups regarding the cost of goods sold and other
expenses.
• Budgets
– Are itemized forecasts of a company’s income, expenses,
and capital needs and are also an important tool for
financial planning and control.
why do we do budget?
sales staff set the forcast for each year based on market salesforce and historical data, this number is their commitement to company. this number
also needs a budget to be fullfiled .
budgeting includes operations: look at machines and maintenance they need and labor they need. tetra peg machines top overall change the pieces,
major overall few chnges every 20hrs/few hrs.
it also includes raw material
budget and forecast have safety : higher for startups and higher if machine from china
budget is expectation Copyright © 2016 Pearson Education Ltd. 8-7
P&L is actual
 The Process of Financial Management
3 of 4

• Financial Ratios
– Depict relationships between items on a firm’s
financial statements.
– An analysis of its financial ratios helps a firm
determine whether it is meeting its financial
objectives and how it stacks up against industry
peers.

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The Process of Financial Management
4 of 4

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 Financial Statements

• Historical Financial Statements

– Reflect past performance and are usually prepared on a
quarterly and annual basis.
• Publicly traded firms are required by the SEC to prepare financial
statements and make them available to the public.
• Pro Forma Financial Statements
– Are projections for future periods based on forecasts and
are typically completed for two to three years in the future.
• Pro forma financial statements are strictly planning tools and are
not required by the SEC.

Copyright © 2016 Pearson Education Ltd. 8-10

Importance of Keeping Good Records

The first step toward

prudent financial
management is keeping
good records.
Entreprise ressource planning
SAP
GD edwards
oracle
microsoft
how does it work:
accountants enter them credit or debit
opertaion enter how much they produced
links BOM and cost
small companies can also use it and get per user
payment

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 New Venture Fitness Drinks

• New Venture Fitness Drinks

– To illustrate how financial statements are prepared, we
used New Venture Fitness Drinks, the fictitious sports
drink company introduced in Chapter 3.
• New Venture Fitness Drinks has been in business for five years.
• Targeting sports enthusiasts, the company sells a line of nutritional
fitness drinks.
• The company’s strategy is to place small restaurants, similar to
smoothie restaurants, near large outdoor sports complexes.
• The company is profitable and is growing at a rate of 25% per year.
serves energetic drinks while watching the match

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 Historical Financial Statements
Three types of historical financial statements

Financial Statement Purpose

Reflects the results of the operations of a firm over a

Income Statement specified period of time. It records all the revenues and
gives revenue-cost related to
production=gross profit-exp= expenses for the given period and shows whether the
net profit can be negative meaning
there is a loss
firm is making a profit or is experiencing a loss.

Is a snapshot of a company’s assets, liabilities, and

Balance Sheet
owner’s equity at a specific point in time.
ASSET = LIABILITY + OE

Summarizes the changes in a firm’s cash position for

Statement of cash flows a specified period of time and details why the changes
occurred.
depreciation is a cash position

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 PET plastic 250$ per ton

internal audit check for tax Historical Income Statements

evation but it is legal to put high
marketing expenses (unethical)

revenues - return = sales-return

=COGS=What is related to production of
product, the production labor+ the
machines and boiler are better/cheaper on
heavy fuel but they are messy

=engineers
lawyers
of assets ex furnuture: 10 years directors
IT 5 years, 10% salvage accountants,
food utilities..
because i
need them
= from money in the bank whether i
produce 500
we are paying back a loan or 0.

to get rid of watse or oil, 10$

per ton of oil
=operating
income+other+int+int+other
if negative before tax
if joint stock or SARL they dont pay,
if partnership or propriotorship offshore(sal they pay , made in
lebanon but all production is outsie, buy from china sell in ksa
pay 1,500$) they pay regardless, not as a percentage

after full depreciation, we can sell it. the price comes in other
Copyright © 2016 Pearson Education Ltd. income. if expired just remove it from system and put8-14 0. .
everything i sell without producting it
 Historical Balance Sheets
1 of 2

Assets

=gold, money in bank, bonds

doesnt go into income statement, except if you by it

this year then COGS
not equal to net income

everything depreciates except land

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 patents, 1000 every year. assume
25 total for 25 years in income
statemnt
license
Historical Balance Sheets
permits 2 of 2
trademark, no one can name same
name, 25 years

Liabilities and Shareholders’ Equity

loans,
anything more than a year

=we dont pay taxes on retained earning

company pays tax on net income. shareholder pays tax on retained earning. net income=dividends+retained earning

Copyright © 2016 Pearson Education Ltd. 8-16

off shore companies sell and buy aborad. can only design in lebanon. pay 1mil lbp regardless of income
salvage? Historical Statement of Cash Flows

from income statement

its still a transaction positive cause we didnt pay it yet

the difference from last year.
decrease if negative
we didnt pay yet so pos
positive cause we gained money

neg cause we paid

Copyright © 2016 Pearson Education Ltd. 8-17

 Ratio Analysis

• Ratio Analysis
– The most practical way to interpret or make sense of a
firm’s historical financial statements is through ratio
analysis, as shown in the next slide.
• Comparing a Firm’s Financial Results to Industry
Norms
– Comparing a firm’s financial results to industry norms
helps a firm determine how it stacks up against its
competitors and if there are any financial “red flags”
requiring attention.

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addendum: comp index, feasibility screen

Historical Ratio Analysis

if it goes up it is good, compare it with previous year and with company alike
first 3 are profitability ratios and justify it. better or worse than indsurty average. acceptable or not

means that X % is the protion of net income form total asset

current asset=in hand+bank+inv+receivable not goofwill not fixed

quick asset= in hand+bank+gold not inv not receivable not non current(goodwill and fixed assets)
should go down. if 100% theres a problem else we
cant get loans anymore
shirt term and long term debt

3 or 4...

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 Forecasts
1 of 4

• Forecasts
– The analysis of a firm’s historical financial statements are
followed by the preparation of forecasts.
– Forecasts are predictions of a firm’s future sales, expenses,
income, and capital expenditures.
• A firm’s forecasts provide the basis for its pro forma financial
statements.
• A well-developed set of pro forma financial statements helps a firm
create accurate budgets, build financial plans, and manage its
finances in a proactive rather than a reactive manner.

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 Forecasts
2 of 4

• Sales Forecast
– A sales forecast is a projection of a firm’s sales for a
specified period (such as a year).
– A sales forecast for an existing firm is based on (1) its
record of past sales, (2) its current production capacity and
product demand, and (3) any factors that will affect its
future product capacity and product demand.

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 Forecasts
3 of 4
Historical and Forecasted Annual Sales for New Venture Fitness Drinks

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 Forecasts (COGS)
4 of 4

• Forecast of Costs of Sales and Other Items

– Once a firm has completed its sales forecast,
it must forecast its cost of sales (or cost of
goods sold) and the other items on its
income statement.

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 Pro Forma Financial Statements

• Pro Forma Financial Statements

– A firm’s pro forma financial statements are similar to its
historical financial statements except that they look forward
rather than track the past.
– The preparation of pro forma financial statements helps a
firm rethink its strategies and make adjustments if
necessary.
– The preparation of pro forma financials is also necessary if
a firm is seeking funding or financing.

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Types of Pro Forma Financial Statements

Financial Statement Purpose

Pro Forma Income Shows the projected financial results of the

Statement operations of a firm over a specific period.

Shows a projected snapshot of a company’s

Pro Forma Balance assets, liabilities, and owner’s equity at a specific
Sheet point in time.

Pro Forma Statement Shows the projected flow of cash into and out of a
of Cash flows company for a specific period.

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Pro Forma Income Statements

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 Pro Forma Balance Sheets
1 of 2

Assets

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 Pro Forma Balance Sheets
2 of 2
Liabilities and Shareholders’ Equity

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Pro Forma Statement of Cash Flows
1 of 2

Operating Activities

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Pro Forma Statement of Cash Flows
2 of 2

Investing Activities and Financing Activities

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 Ratio Analysis

• Ratio Analysis
– The same financial ratios used to evaluate a firm’s
historical financial statements should be used to evaluate
the pro forma financial statements.
– This work is completed so the firm can get a sense of how
its projected financial performance compares to its past
performance and how its projected activities will affect its
cash position and its overall financial soundness.

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Ratio Analysis Based on Historical and
Pro-Forma Financial Statements

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