ASSESSING A NEW VENTURE’S

FINANCIAL STRENGTH AND VIABILITY

Presented by Group - 8 (MBA 8th Batch)

 Learn about the importance of understanding the
financial management of an entrepreneurial firm.
 Identify the four main financial objectives of
entrepreneurial ventures.
 Describe the process of financial management as
used in entrepreneurial firms.
 Explain the difference between historical and pro
forma financial statements.
 Describe the different historical financial
statements.
 Discuss the role of forecast in projecting a firm’s
future income and expenses.
 Explain the purpose of pro forma financial
statements.
 General financial management & financial objectives of a
firm

 The steps involved in the financial management process

Financial management deals with two activities :raising
money and managing a company’s finances in a way
that achieves the highest rate of return
Chapter – 10 focuses on raising money . This chapter
focuses primarily on:
How a new venture tracks its financial progress
through preparing ,analyzing and maintaining past
financial statements.
How a new venture forecasts future income and
expenses by preparing pro forma (or projected)
financial statements.
 The financial management of a firm deals with questions
such as the following on an ongoing basis:
 How are we doing ?Are we making or losing money?
 How much cash do we have on hand ?
 Do we have enough cash to meet our short-term obligation?
 How efficiently are we utilizing our assets?
 How do our growth and need 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 amount of cash we need?
 Overall , are we in good shape financially?
 Profitability
Is the ability to earn a profit.
 Many start-ups are not profitable during their first one to
three years while they are training employees and building
their brands.
 However , a firm must become profitable to remain viable
and provide a return to its owners.
 Liquidity
 Is a company’s ability to meet its short-term financial
obligations.
 Even if a firm is profitable , it is often a challenge to keep
enough money in the bank to meet its routine obligations in a
timely manner.
 Efficiency
 Is how productively a firm utilizes its assets relative to its
revenue and its profits.
 Southwest Airlines, for example ,uses its assets very
productively . Its turnaround time, or the time its airlines sit
on the ground while they are being unloaded ,is the lowest in
the airline industry.
 Stability
 Is the strength and vigor of the firm’s overall
financial posture.
 For a firm to be stable, it must not only earn a profit
and remain liquid but also keep its debt in check.
 Importance of Financial Management
 To assess whether its financial objectives are being met,
firms rely heavily on analysis of financial statements.
 A financial statement is a written report that quantitatively describes a
firm’s financial health.
 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.
 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 , expense, and
capital needs and are also an important tool for financial
planning and control.
 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
stakes up against industry peers.

 Importance of Financial Management

 Many experienced entrepreneurs stress the importance of
keeping on top of the financial management of the firm.
 Historical Financial Statement
 Reflect past performance and are usually prepared on
quarterly and annual basis.
 Publicly traded firms are required by the Securities and
Exchange Commission (SEC) to prepare financial statements
and make them available to the public
 Include income statement , the balance sheet, the statement
of cash flows
 Prepared in this order because information flows logically
from one to the next
 To monitor the financial progress of the firm
  was opened on 24th February 2015.
 to establish a Systematic Capital Market in Myanmar ,
 to protect investor through rules and laws and
 to regulate market participants such as Public Companies,
Securities companies and Stock Exchange
 Listed Companies –
1. First Myanmar Investment Co ., Ltd.
2. Myanmar Thilawar SEZ Holdings Public Ltd.
3. Myanmar Citizens Bank Ltd.
4. First Private Bank Ltd.
5. Myanmar Agribusiness Public Corporation
6. Great Hor Kham Public (Risk Management)
 comprehensive filing is G-5
 similar to the annual report except that it contains more detail
information about the company’s business
 quarterly filing is 10-Q
 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
 to be confidential and reveal them to outsiders, such as
lenders & investors
 new ventures offer pro forma statement
 well-managed established firms maintain to their routine
financial planning and to help prepare budgets
 help firms rethink their strategies and make adjustment
if necessary
 should not be isolated
 should be created in conjunction with the firm’s
overall planning
 Reflects the results of the operation of a firm
over a specified period of time.
 Net Sales
 Cost of Sales (or Cost of good sold)
 Operating Expenses

 Profit Margin
 Price-to-earning ratio or P/E ratio
 Is merely a matter of plugging in the numbers
once a firm forecasts its future income and
expenses.
 Constant ratio method of forecasting is used to
forecast the cost of sales and general and
administrative expense
 Is a snapshot of a company’s assets, liabilities,
and owners’ equity at a specific point in time.

 Must always “balance”, meaning that a firm’s

assets must always equal its liabilities plus
owner’s equity.
 Current assets
 Cash + items that are readily convertible to cash such
as account receivable, marketable securities, and
inventories.
 Fixed assets
 Assets used over a longer time frame such as real
estate, buildings, equipment and furniture
 Other assets
 Miscellaneous assets, including accumulated
goodwill.
 Current liabilities
 Payable within a year
 Long-term liabilities
 Repayable beyond one year
 Owner’s equity
 Equity invested in the business by its owners plus the
accumulated earnings retained by the business after
paying dividends.
 1st – company’s assets are recorded at cost
rather than fair market value.
 2nd – firm’s intellectual property receive value
on the balance sheet in some cases and in many
cases they don’t.
 3rd – intangible assets are not recognized on its
balance sheet.
 Finally – goodwill (single most valuable asset)
is not reported on balance sheet.
1. Whether a firm has sufficient short-term assets
to cover its short-term debts.

2. Whether it is financially sound overall.

2 calculations to answer 1st question

Working capital = current asset – current liabilities

Current ratio= current asset/ current liabilities

To answer 2nd question

Debt ratio = Total debt/ Total asset

Liabilities and Shareholder’s Equity
 Shows a projected snapshot of a company’s assets,
liabilities, and owner’s equity at a specific point in time.

 Provides a firm a sense of how its activities will affect its

ability to meet its short-term liabilities and how its
finances will evolve over time.

 is also used to project the overall financial soundness

of a company.

 If rapid growth and profitability push the firm’s

debt ratio to 75%, investor may conclude that there
is too much risk involved for the firm to be an
attractive investment.
Liabilities and Shareholder’s Equity
 It traces the flow of funds (or working capital)
into and out of your business during an
accounting period.
 For a small business, a cash flow statement
should probably be prepared as frequently as
possible.
 This means either monthly or quarterly. An
annual statement is a must for any business.
The cash flow statement explains the change during the period in cash and cash
equivalents. Cash includes currency on hand and demand deposits. Cash equivalents
are short-term, highly liquid investments that are readily convertible to cash.
Operating Activities : The statement provides information
about the cash generated from a company’s daily operating
activities. Operating activities are those which produce either
revenue or are the direct cost of producing a product or service.

Investing Activities : Investing activities include buying

and selling noncurrent assets which will be used to generate
revenues over a long period of time; or buying and selling
securities not classified as cash equivalents.

Financing Activities : Financing activities include

borrowing and repaying money, issuing stock (equity) and
paying dividends.
 Most practical way to interpret or make sense
of a firm’s historical financial statement
 Comparing its financial results to industry
norms helps firm determine how it stacks up
against its competitors and if there are any
financial “red flags” requiring attention.
 Future Sales
 Expenses
 Income
 Capital Expenditures
 Pro forma Financial
Forecast
IS Planning
Existing New start
firm up

Historical
Assumption
data

Assumption
Forecast
sheet
 Prediction of sales over a specified period
 Make forecast 2-5 years into the future
 Based on
 Past sales
 Current production capacity & Product demand
 Factors that can affect future production capacity &
Product demand
 Used regression analysis between two
variables
 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.

 The most common way to do this is to use the

percentage-of-sales method, which is a method
for expressing each expense item as a
percentage of sales.
 For example, in the case of New Venture
Fitness Drinks, its cost of sales has averaged
47.5 percent over the past two years.
 In 2011, its sales were $586,600 and its cost of
sales was $268,900.
 The company’s sales are forecast to be $821,200
in 2012.
 Therefore, based on the percent-of-sales
method, its cost of sales in 2012 will be
$390,000,
 After forecasting with percent-of-sales method,
there are opportunities to make more precise
forecasts.
 Other expenses item (eg. hiring new
supporting staff) will increase along with the
sales
 If a firm determines that it can use the percent-
of-sales method and its follows the procedures
described previously, then the net result is that
each expense item on its income statement will
grow at the same rate as sales.
 This approach is called the constant ratio of
forecasting.
 Total fixed cost/ (Price-Average variable costs)
 Average variable costs ~ Average COGS