Firm Evaluatin & Financial Statement Analysis Evaluate Cmmunity ED Benefits: Triple Bttm Line Assess Business Plan and Prspects Diagnse financial cnditin, perfrmance, debt capacity f firm Analyze financial prjectins re: needs & capacity t supprt financing 1
Ecnmic Develpment and Cmmunity Benefits Reflect lcal gals and strategy Size & type f cmmunity benefits number & quality f jbs emplyee benefits and wealth creatin pprtunities cmmitment and resurces t hire targeted grups psitive envirnment impacts wnership lcatin ther benefits Several screcard tls exist TBL Tl, CDVC Measuring Impact Tlkit 2
Cmmn Capital Lending Criteria 1. Create jbs with a living wage and/r pprtunities fr career and incme grwth 2. Multiplier effect n the dllars created in the regin 3. Prvide services t ther businesses 4. Purchase services frm ther lcal businesses 5. Psitive impact n the envirnment 6. Lcally wned 7. Cntribute t blight eliminatin 8. Prvide gds and services beneficial t cmmunity Annual survey t evaluate gal fulfillment 3
Business Plan Analysis Key t assess business ptential & capacity t succeed Is the market well defined & quantified? What market share is implicit in prjected sales? Wh are majr cmpetitrs (current & future)? What is the basis fr cmpetitin and strategy fr cmpetitive success? Des management have the apprpriate skills & expertise Are investment and financing plans cnsistent with the business plan and feasible? 4
Surces fr Business Plan Evaluatin Firm s written business plan Prir experience and references f entrepreneurs and key managers Speak with current custmers, suppliers, and lenders Review industry studies and trade press Interview industry & cmmunity experts n emerging trends and develpments 5
Financial Statement Analysis: Rati Analysis Assess business financial perfrmance & cnditin Trends ver time fr the business Cmpare t ratis fr similar firms & industry average Fur categries f ratis: Shrt term liquidity and cash needs Prfits and perating results Capital structure & debt service capacity Cmmn size financial statements Pine Tree Lumber analysis 6
Shrt term Liquidity and Cash Needs Key issue fr small enterprises: less equity & lng term debt; rely mre n shrt term financing with need t carefully manage shrt term cash flw Current Rati: Current Assets/Current Liabilities Quick Rati: (Current assets inventry)/current Liabilities Days Receivables (average cllectin perid t cnvert receivables int cash) Calculate average daily sales = ttal sales in perid/days in perid (365 fr a year) Days receivable = accunts receivable/sales per day Inventry Turnver = COGS/Average inventry Shws hw fast inventry investment is being used 7
2012 Pine Tree: Shrt Term Liquidity Net wrking capital amunt 288,000 Current rati 2.57 Quick rati 1.39 Days receivable 18 Inventry turnver 12 What d these ratis indicate abut the firm? 8
Rati Analysis: Prfits & Operating Results Grss Margin %: (Revenue COGS)/Revenue Net Prfit n Sales: Net incme (prfit)/revenue Investment turnver: Sales/Ttal Assets Return n assets: Net incme/assets Return n investment: Net incme/sharehlder equity Ratis measure prfitability in several ways: prfit margin n direct csts is it large enugh t cver verhead & ther csts and leave a prfit verall prfit margin n sales return n assets and equity d investrs earn a gd return What are trends in prfitability and margins? What is the utlk fr sustaining prfitability given the envirnment? 9
Pine Tree: Prfits & Operating Results Net prfit amunt 17,000 Grss margin percent 5.6% Net prfit n sales percent 0.6% Return n assets 1.7% Return n equity 2.2% What d these ratis indicate abut the firm? 10
Cash Flw Statement Pine Tree Lumber 2012 Incme Befre Interest & Taxes 23,224 Subtract taxes -6,224 Add back nn-cash expenses (depreciatin) 33,000 Less Change in Accunt Receivables -12,000 Less change in inventries -7,000 Less Change in ther current assets -2,000 Plus Change in accunts payable -16,000 Plus Change in Accrued Taxes Payable 3,000 Plus Change in Deferred Incme Taxes 2,000 Net Cash Flw frm Operatins 18,000 Less increase in land, buildings, equipment, grss -7,000 Net Cash Flw After Investing 11,000 11
Cash Flw and Debt Capacity Sizing debt t cash flw Net cash flw/dscr = cash available fr debt service PV (NCF/DSCR, n, i) = supprtable debt Pine Tree Lumber: $11,000/1.30 = $8,462 PV (8,462/12, 5*12,.06/12) = $36,473 Equipment cst = 100,000; gap f $63,527 Lan at 7%, 10 year amrtizatin: PV (8,462/12, 10*12,.07/12) = $60,730 Gap reduced t $39,270 12
Pine Tree Cllateral and Recmmendatin Cllateral at time f lan: Sale value f existing fixed assets : $49,830 Sale value f new equipment: $75,000 Ttal cllateral: $124,830 Lan t Value with $60,730 lan.49 Cllateral at year five: Sale value f existing fixed assets : $30,200 Sale value f new equipment: $25,000 Ttal cllateral: $55,200 Lan principal (pv(.07/12,5*12, 705) $35,610 Lan t Value with $60,730 lan.65 Recmmend a lan? Fr what amunt & terms? 13
Rati Analysis: Capital Structure and Debt Capacity Debt/ttal assets: (ttal current & LT debt)/ttal assets Debt t equity rati: (ttal current & LT debt)/ttal equity Times interest earned: EBIT/Interest expense Debt service cverage: e: annual cash flw/(annual l principal payments & interest expense) Use cash flw after peratins & investment activities Maturity structure f firm s debt Debt cvenants and their implicatins fr new investment and brrwing Current assets pledged and available cllateral 14
Rati Analysis Cmmn Size Financial Statements Present financial statement figures as percentages f ttal revenue r ttal assets Useful way t track trends ver time Cmpare cmpany t industry wide ratis Use t prepare financial prjectins Use a firm s histric ratis t create prjectins (last part f crystal clear financial analysis) Apply industry averages fr a start up firm Surces f rati data: D&B, RMA, Try s Almanac 15
Preparing Financial Prjectins Frecast cash flw Will it supprt the financing plan? Hw des it stand up t dwn side risks? Begin with sales frecast Calculate perating expenses (cmmn size ratis) Cnvert frecast int cash flw frecast Prject cash cllectins frm sales Prject cash expenditures frm peratins Include ther cash inflws and utflws New investments & debt service under plan Cnsider tax impacts: increased taxes & tax savings Sensitivity analysis under different scenaris 16
Prjecting Cash Receipts Cash Receipts = Cllectin f Beginning Perid Accunts Receivable + Sales Revenue End f Perid Accunts Receivable Prjected 2004 Cash Receipts (in $ millins): Cllectin f 2003 Year End Accunts Receivable: $ 75 Plus 2004 Prjected Sales $2,400 Less 2004 Year End Accts Receivable (@ 20 days) ($ 132) (($2.4 millin/365)*20) Prjected Cash Receipts $2,343 Firm with sales grwth: AR at year end > AR at start f yr thus cash receipts < sales; need t finance this AR grwth 17
Prjecting Cash Expenditure Cash Expenditures = Payment f Beginning Perid Accunts Payable + Csts f Sales + Other Expenses End f Perid Accunts Payable Prjected 2004 Cash Expenditures (in $ millins): Payment f 2003 Year End Accunts Payable: $ 100 Plus 2004 Prjected Expenses $2,150 Less 2004 Year End Accunts Payable (@ 30 days) ($ 177) (($2.15 millin/365)*30) Prjected Cash Expenditures $2,073 Grwing accunts payable => cash utflw < expenses; a way t finance grwth but ften can be expensive 18
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