EntrepreneurialFinance.pdf FIN 457
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This 3 page One Day of Notes was uploaded by Tiffany Ho on Wednesday November 5, 2014. The One Day of Notes belongs to FIN 457 at University of Washington taught by Diane Legg in Fall. Since its upload, it has received 280 views. For similar materials see Entrepreneurial Finance in Finance at University of Washington.
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If Tiffany isn't already a tutor, they should be. Haven't had any of this stuff explained to me as clearly as this was. I appreciate the help!
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Date Created: 11/05/14
Entrepreneurial Finance 9292014 3 Main Financial Statements Balance sheet 0 Point in time Assets liabilities shareholders equity 0 Tells you the net worth of a company Income statement 0 Over a period of time Profitability of a company 0 Net loss net income Cash Flow statement 0 Over a period of time 0 Operating cash investing activities and financing activities Equity section of the Balance Sheet Accumulated deficit Accumulation of losses over a period of time Retained Earnings Accumulated profits and loss over time and its positive Financial Skills for Entrepreneurs Analysis of past financial performance 0 What is our current financial position 0 How did we get here 0 What are the key drivers of our performance 0 What are our strengths Weaknesses Projections of the future 0 How much funding are we going to support our ongoing operations and achieve our goals 0 Where39s funding going to come from 0 Performance metrics 0 Stock price is not useful for small entrepreneurial firms They aren t in the news as much not enough info to rely on They could be too small to have a stock price 0 Alternative Net income Profit margin Return on equity 0 Net income Shareholder s equity 0 Directly linked to value 0 Measures efficiency in deployment of shareholders funds to generate income 0 3 component pieces 0 Profit Margin 0 Asset turnover 0 Financial leverage Analysis of Past Performance 0 ROE profit margin x Asset turnover x Financial leverage 0 Profit margin NIRevenue Earnings from each dollar of revenue 0 Asset turnover Revenue assets Revenue generated from each dollar of assets employed Day sales in cash cashsales365 Days sales outstanding AR sales365 You want to collect money as fast as you can Inventory turnover COGS Inventory Fixed asset turnover sales fixed assets 0 Fixed assets tangible assets more than one year 0 Tangible assets are depreciated Intangible assets are amortized o Leverage Assets stockholder s equity Amount of entrepreneur39s capital equity used to finance the assets 0 Payables period AP purchases or COGS365 Debt to Assets Debt Assets 0 Times Interest Earned EBIT int exp 0 Current Ratio Current Assets current liabilities 0 Liquidity ratio 0 Liquidity is inversely related to profitability ROA return on assets Profit margin x Asset turnover 0 Typically they are negatively related 0 A company that generates ROA in excess of their cost of capital builds value ROA needs to be greater than cost of capital 0 Over the long term decisions that do not generate ROA in excess of the cost of capital at least at some point destroy value 0 What about financial leverage 0 Can we really increase profitability by adding debt 0 Increasing leverage increases risk to the entrepreneur Increases cost of equity capital 0 Finance theory and common sense suggest that beyond a certain point increasing leverage hurts the value of the firm What to do when confronted with financial statements 0 Compute the above ratios 0 Analyze How have they changed over time What areas stand out the most as trouble spots What tradeoffs might there be What opportunities there are for improvement Projections of the Future 0 Just because growth I sustainable doesn t necessarily mean that it adds value 0 Just because growth isn39t sustainable doesn t necessarily mean that it doesn t add value In order to build value ROA must be in excess of the cost of capital Synapse example no contracts with customers unbilled accounts receivable Mechanics 0 Sales growth requires increased asset base 0 Increased asset based must be financed Retained earnings Additional liabilities 0 Thus sustainable growth is determined by ROE and dividend policy
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