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Financial Management for New Ventures

The document discusses assessing the financial strength and viability of a new venture through financial statement analysis. It addresses two key questions: 1) Whether a firm has sufficient short-term assets to cover its short-term debts, which can be determined using working capital and current ratios. 2) Whether a firm is financially sound overall. This involves analyzing historic financial statements, preparing forecasts and pro forma financial statements, and ongoing analysis of financial results and key ratios to evaluate profitability, liquidity, efficiency and stability. The financial management process involves preparing historic income statements and balance sheets, sales and cost forecasts, and projected pro forma financial statements to evaluate feasibility and break-even point for new ventures.

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10 views2 pages

Financial Management for New Ventures

The document discusses assessing the financial strength and viability of a new venture through financial statement analysis. It addresses two key questions: 1) Whether a firm has sufficient short-term assets to cover its short-term debts, which can be determined using working capital and current ratios. 2) Whether a firm is financially sound overall. This involves analyzing historic financial statements, preparing forecasts and pro forma financial statements, and ongoing analysis of financial results and key ratios to evaluate profitability, liquidity, efficiency and stability. The financial management process involves preparing historic income statements and balance sheets, sales and cost forecasts, and projected pro forma financial statements to evaluate feasibility and break-even point for new ventures.

Uploaded by

WaleedKhalid
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Shahid Nawaz i.

Whether a firm has sufficient


Entrepreneurship short-term assets to cover its
Chapter 8: Assessing a New Venture short-term debts?
Financial Strengths and Viability

Financial Management deals with two


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

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