Shahid Nawaz
Entrepreneurship
Chapter 8: Assessing a New Venture
Financial Strengths and Viability
Financial Management deals with two
activities: raising money and managing
companys finances in a way that achieves
the highest rate of return.
The FM of a firm deals with following
questions on an ongoing basis:
How are we doing? Are we making or losing
money?
How much cash do we have on hand?
How efficiently are we utilizing our assets?
Overall, are we in good shape financially?
Financial Objectives of a Firm:
Profitability
Liquidity
A/R & Inventory
Efficiency
Stability
The Process of Financial Management:
Financial statement (historical financial
statements, pro forma financial statements),
Forecasts, Budgets, Financial Ratios
1. Preparation of Historic Financial
Statements
2. Preparation of Forecasts
3. Preparation of Pro Forma Financial
Statements
4. Ongoing Analysis of Financial
Results
Step 1: Historical Financial Statements:
i. Income Statement (reflects the
results of the operations of a firm
over a specified period of time)
Net sales
Cost of sales (or CGS)
Operating expenses
In evaluating a firms income statements, 2
ratios are most important:
Profit margin
Price-to-earnings ratio (or P/E Ratio)
ii. Balance Sheet (is a snapshot of a
companys assets, liabilities, and OE
at a specific point in time)
Major categories of Assets:
Current, Fixed, Other Assets
Major categories of Liabilities:
Current, Long-term liabilities
When evaluating a Balance Sheet, The 2
primary Qs. are:
i. Whether a firm has sufficient
short-term assets to cover its
short-term debts?
ii. Whether it is financially sound
overall?
The answer to the 1st Q. is provided by these
2 ratios: Working Capital & Current
Ratio.
iii. Statement of Cash Flows (summarizes
the changes in a firms cash position for
a specified period of time and details
why the change occurred)
Operating activities (include net
income (or loss), depreciation,
changes in current assets and current
liabilities other than cash and short-
term debt)
Investing activities (include the
purchase, sale, or investment in fixed
assets, such as real estate, equipment,
and buildings)
Financing activities (include cash
raised during the period by
borrowing money or selling stock
and/ or cash used during the period
by paying dividends, buying back
outstanding stock, or buying back
outstanding bonds)
Ratio Analysis
Comparing a Firms Results versus Plans
Comparing a Firms Financial Results to
Industry Norms
Step 2: Preparation of Forecasts:
Forecasts are predictions of a firms future
sales, expenses, income, and capital
expenditures.
Completely new firms typically base their
forecasts on:
A good-faith estimate of sales, and
On industry averages,
Or the experiences of similar start-
ups for cost of goods sold and other
expenses.
Assumption Sheet
Types of Forecasts:
i. Sales Forecast:
Regression analysis
ii. Forecast of CGS and Other items:
Percent-of-sales method
Constant ratio method of
forecasting
In addition to computing sales forecasts, a
new venture should calculate break-even
point to determine if the proposed venture is
feasible?
BEP = TFC/ (P-AVC)
Step 3: Preparation of Pro Forma
Financial Statements
Step 4: Ongoing Analysis of Financial
Results