...9 -9 1 1 -4 1 2 REV: MAY 28, 2012 Assessing a Company’s Future Financial Health Assessing the long-term financial health of a company is an important task for management as it formulates goals and strategies and for outsiders as they consider the extension of credit, long-term supplier agreements, or an investment in a company’s equity. History abounds with examples of companies that embarked on overly ambitious programs and subsequently discovered that their portfolios of programs could not be financed on acceptable terms. The outcome was frequently the abandonment of programs mid-stream at considerable financial, organizational, and human cost. It is the responsibility of management to anticipate a future imbalance in the corporate financial system before its severity is reflected in the financials, and to consider corrective action before both time and money are exhausted. The avoidance of bankruptcy is an insufficient standard. Management must ensure the continuity of the flow of funds to all of its strategically important programs, even in periods of adversity. Figure A provides a conceptualization of the corporate financial system, with a suggested step-bystep process to assess whether it will remain in balance over the ensuing 3 to 5 years. The remainder of this note discusses each of the steps in the process and then provides an exercise on the various financial measures that are useful as part of the analysis. The final section of the note demonstrates ...
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...Joe Tagliaboschi EMBA 222 Managerial Accounting November 3, 2013 Assessing a Company’s Future Financial Health SciTronics is a medical device company. This financial evaluation will cover the period from 2005 through December 31, 2008. The evaluation will include a review of the profitability, use of assets, and financial leverage metrics. This company appears to be financially healthy and has shown improvement in many of the metrics reviewed. The company has little long term debt, and adequate cash and owners’ equity balances. However, there are also some metrics that reveal that without some additional adjustments, the growth experienced in the past may not be sustainable. This evaluation will answer the following questions as well. * What is the assessment of the performance of SciTronics during the 2005-2008 period? * Has the financial strength and its access to external sources of finance improved or weakened? * What are the 2-3 most important questions you would ask management as a result of the analysis To evaluate the company’s performance the following evaluation criteria will be used. * Has the overall profitability increased or decreased during the period? * How well does the company deploy its assets? * How sound is the company financing? Profitability How profitable is the company? The company profit continues to grow; the Return on Sales has improved by 2.3% over the 2005 period and there was sales...
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...preparation and completion of individual tax returns, corporations, partnerships, and sole proprietorships are expected to be finished in a timely manner. These are the primary means of income for this company, but I also prepare estate and trust returns when needed. Other duties and responsibilities assigned to me include the preparation and reconciliation of financial statements. I am responsible for creating and generating the general ledger, balance sheet, profit and loss, and payroll for all companies I work on. All of these financial statements have to be completed correctly and on time. I’m also in charge of the office filing system and reports. During the duration of my internship I had several special projects assigned to me. Since it is now tax season there is a lot of work to be done, it is our busiest time of the year. Instead of completing corporate returns like I normally do, I worked mostly on individual returns. There are several hundred individual returns to be completed so most of my efforts were directed and focused toward this. I would meet with several clients a day to review their financial situations and complete their tax return. Some of them were extremely easy to complete and I wouldn’t have to exert much effort. There were a few clients where I needed assistance from my employer to complete their returns. Sometimes individual returns can become very complicated. I remember working on...
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...Professor Thomas Piper prepared the original version of this note, “Assessing a Firm’s Future Financial Health,” HBS No. 201-077, which is being replaced by this version prepared by the same author. This note was prepared as the basis for class discussion. Copyright © 2010, 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1- 800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. Assessing a Company’s Future Financial Health Assessing the long-term financial health of a company is an important task for management as it formulates goals and strategies and for outsiders as they consider the extension of credit, long-term supplier agreements, or an investment in a company’s equity. History abounds with examples of companies that embarked on overly ambitious programs and subsequently discovered that their portfolios of programs could not be financed on acceptable terms. The outcome was frequently the abandonment of programs mid-stream at considerable financial, organizational, and human cost. It is the responsibility of management to anticipate a future imbalance in the corporate financial system before its severity is reflected in the financials, and to consider corrective action before both time and money...
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...INTERNATIONAL JOURNAL OF MANAGEMENT, BUSINESS, AND ADMINISTRATION VOLUME 8, NUMBER 1, 2005 Assessing A Firm’s Future Financial Health Alicia Kritsonis MBA Graduate Student California State University, Dominquez Hills ABSTRACT The purpose of this article is to explain a step-by-step process that can assess whether a firm will remain in balance over the next two to three years. Various financial ratios will be discussed as a critical aspect of this process analysis. A case study of assessing the future health of the Harley Davidson, Inc. using a ratio analysis is included in the article to explain the step-by-step process used by managers to ensure a firm’s success. A great analogy comes to mind when considering the effects of assessing your firm’s future health. It is helpful to think of your firm as a three-legged stool. The legs are operations, marketing, and finance/accounting. As you, the leader, try to sit atop the stool, it must be balanced so that you can shift your position and sit comfortably. However, if one of the legs of the stool is too short or too long, then the stool is difficult to manage and unstable (http://www.thefullermangroup.com). Here is an example of an unbalanced firm. A firm borrows cash in order to expand its facility and operating capacity. However, sales remain constant resulting in a cash shortage. Consequently, the increased overhead costs diminish the working capital. Purchase discounts are missed resulting in decreased margins. The...
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...INTERNATIONAL JOURNAL OF SCHOLARLY ACADEMIC INTELLECTUAL DIVERSITY VOLUME 8, NUMBER 1 2004-2005 Assessing A Firm’s Future Financial Health Alicia Kritsonis MBA Graduate Student California State University, Dominquez Hills ABSTRACT The purpose of this article is to explain a step-by-step process that can assess whether a firm will remain in balance over the next two to three years. Various financial ratios will be discussed as a critical aspect of this process analysis. A case study of assessing the future health of the Harley Davidson, Inc. using a ratio analysis is included in the article to explain the step-by-step process used by managers to ensure a firm’s success. A great analogy comes to mind when considering the effects of assessing your firm’s future health. It is helpful to think of your firm as a three-legged stool. The legs are operations, marketing, and finance/accounting. As you, the leader, try to sit atop the stool, it must be balanced so that you can shift your position and sit comfortably. However, if one of the legs of the stool is too short or too long, then the stool is difficult to manage and unstable (http://www.thefullermangroup.com). Here is an example of an unbalanced firm. A firm borrows cash in order to expand its facility and operating capacity. However, sales remain constant resulting in a cash shortage. Consequently, the increased overhead costs diminish the working capital. Purchase discounts are missed resulting in decreased margins...
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...& Yves Pigneur, 2010. Available @ http://www.businessmodelgeneration.com/downloads/businessmodelgeneration_preview.pdf | Operating and Investing Decisions: Business Model Canvas Building Blocks | May 8th Lecture AL 116 [6:00 – 6:50PM]Topic: Why AFM 211? Why Week 3 exam? | May 12 – 16 | * Read: Strategy and Your Stronger Hand,” Geoffrey A. Moore, Harvard Business Review, December 2005. Available for free through UW library’s Business Source Complete electronic database. See LEARN for instructions. * Read: “Assessing a Company’s Future Financial Health,” Thomas Piper, Harvard Business School, May 2012. Available in AFM 211 Courseware Package; AND, * Complete ratio analysis for SciTronics in “Assessing a Company’s Future Financial Health” on pages 6-10 and use that analysis to answer questions 1 and 3 framed as “broad questions” at the top of page 6. * Try the “Case of the Unidentified Industries” in “Assessing a Company’s Future Financial Health” on page 11 and Exhibit 3. | Operating and Investing Decisions: Value Chain, Profit Model, and Profit Driver Analysis | May 15th Lecture AL 116 [6:00 – 6:50PM]Topic: Relevant – It Depends. On what? | May 19 – 23 | * Complete Online Module # 1 – Learning with Cases | No face-to-face class [Note: allocate your class and prep time to complete Online Module # 1] | May 22nd AFM 211 Exam # 1 [7:00 – 9:00PM]Location TBAExam # 1: Exercises. Document Business Model Canvas; Ratio Analysis; Identifying Unidentified Companies...
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...Users of Financial Information Managers Managers require Financial Statements to manage the affairs of the company by assessing its financial performance and position and taking important business decisions. Shareholders Shareholders use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis. Investors Prospective Investors need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Furthermore, risks associated with the investment may be gauged from the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions of potential investors. Financial Institutions Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a loan or credit to a business. Financial institutions assess the financial health of a business to determine the probability of a bad loan. Any decision to lend must be supported by a sufficient asset base and liquidity. Suppliers need Financial Statements to assess the credit worthiness of a business and ascertain whether to supply goods on credit. Suppliers Suppliers need to know if they will be repaid. Terms of credit are set according to the assessment of their customers' financial health. Customers use Financial Statements...
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...Assessing a Company’s Future Financial Health SciTronics Inc. Case #1 Prepared by James Elias Prepared For Babak Lotfaliei Fin 423 MW: 10:00 AM- 11:50 AM 02/11/2015 Table of Contents Company Overview and Analysis Objective 1 Assessing the Company’s Profits and Sales Growth 1-2 Assessing the Company’s Use of Assets 2-3 Determining Solvency and Liquidity 3-4 Matching Companies Exercise 5 Appendix 6-14 Company Overview and Analysis Objective SciTronics is a company that operates in the medical device industry; they sell to hospitals and other medical centers with the goal of manufacturing and supplying quality goods. Being in the medical market from 2005-2008, SciTronics has been forced to keep up with an ever-changing and highly competitive industry. For this reason I found it necessary to conduct an assessment of the company’s past and present performance. Our group’s objective was to assess the overall health and financial stability of SciTronics incorporated, to achieve this I implemented the Corporate Financial System Framework (See Appendix I) and calculated four groups of ratios: Profitability, Asset Management, Leverage and Liquidity. Assessing the Company’s Profits and Sales Growth First and foremost I looked at the company’s profitability ratios starting with sales growth from 2005-2008 (See Appendix D). Knowing how well the medical industry did during this period of time, it wasn’t a surprise...
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...Industry Environment: The computer industry includes all of the world's businesses that are involved in manufacturing, developing, selling, and maintaining computer hardware and software, computer accessories, and network infrastructures. Many economic and financial experts believe this to be one of the most quickly growing and profitable industries in existence. Computer industry analysis is the practice of monitoring the industry for trends, technological developments, and potential risk. The monitoring of trends is an important part of computer industry analysis. Trends can refer to a number of different factors that impact pricing, manufacturing, and investments related to the industry. The world PC industry expanded 6% in 2010 to exceed $175 billion, according to MarketLine. The market is expected to fall to just over $174 billion in 2015, marking more than a 0.5% decline. The industry is expected to exceed 446 million units in terms of volume in 2015, representing a near 52% increase compared with 2010. The Americas represent almost 40% of the overall market, which is highly competitive due to large scale outfits and a diverse market environment. The computer industry market also has trends that can be monitored and recorded in computer industry analysis. Factors such as stocks, investments, and pricing may be taken into account. This information can serve relevant businesses in forming business plans and strategies concerning when to introduce products, how to price...
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...the issues III. Recommendations with reasons IV. Executive Summary INTRODUCTION/ BACKGROUND What is the case about? In July 1994, the president of National Fabricators Inc Mr. Tom Kruger called his bank manager of the confederation Bank of Canada, Mr.Jim Kashmar to ask that the bank continue to extend a temporary line of credit of $ 1,000,000 for a period of sixty days. They needed this extension because there had been some delays in the collection of the company’s holdbacks for that period. After the sixty days they hoped to have collected their holdbacks and other receivables so they would return to their normal line of credit which was $800,00. In the month before however, national fabricators had asked for the same extension in credit as a result of delays in the collection of some payments for locker room installations done. The bank had reluctantly extended the credit on the basis of the confidence in the new president of the company, relations with client and the company’s impact on community. They however stated that, nothing in the application warranted the extension of further credit. As such this new appeal for an extension had to be very compelling. Background National fabricators was reorganised after Canadian Metal fabricators’ ltd, a family business whose shareholders gave up on and resulted in the company going bankrupt. Mr Kruger bought a substantial amount of shares with his savings from shareholders and assumed the position of...
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...Assessing a Company’s Future Financial Health 911 - 412 3 Steps 1, 2 : Analyze Fundamentals The corporate financial system is driven by a firm’s goals, business unit choices and strategies, market conditions , a n d operating characteristics. The firm’s strategy and sales growth in each of its business units will determine the investment in assets needed to support these strategies; and the effectiveness of the strategies, combined with the response of competitors and regulators, will strongly influence the firm’s competitive and profit performance, its need for external finance, and access to debt and equity markets. Clearly, many of these questions require information beyond that contained in a compan y’s published financial reports. Step 3: Analyze Investments to Support the Business Unit(s) Strategy(ies) The business unit strategies inevitably require investments in accounts receivable, inventories, plant & equipment, and possibly, acquisitions. Step 3 of the proces s is an attempt to estimate the amount that will be tied up in each of the asset types by virtue of sales growth and the improvement/de terioration in asset management. An analyst can make a rough estimate by studying the past pattern of the collection period, the days of inventory, and plant & equipment as a percent age of cost of goods sold; and then applying a “reasonable value” for each category to the sales forecast or the forecast of cost of goods sold. E ...
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...ACCOUNTING: Accounting is famously known as the "language of business". Through the financial statements, the end-product reports in accounting, it delivers information to different users. Accounting is a means through which information about a business entity is communicated. Accounting Definition: Technical definitions of accounting have been published by different accounting bodies. The American Institute of Certified Public Accountants (AICPA) defines accounting as: "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof." To further understand what accounting is, we must take a look at the different definitions. Accounting as a Science: Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information. Accounting as an Art: Accounting is the art of recording (journalizing), classifying (posting to the ledger), summarizing in a significant manner and in terms of money, transactions and events which are, in part, at least of a financial character, and interpreting the results thereof to interested users. Accounting as an Information System: Accounting is a service activity, which functions to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic...
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...accounting and financial statements. Able to understand and properly use these statements is a critical component in truly knowing a business and properly assessing its total performance. In the accounting world there are four main financial statements commonly understood and prepared for most corporations and many small and medium-sized businesses: the income statement, the balance sheet, the statement of cash flows, and the statement of retained earnings, which may be referred to as shareholders’ equity. An essential ability to interpret properly the information these statements contain allows internal and external users to make a wide range of decisions affecting company operations and decisions on whether or not to invest. Financial Statements Descriptions The balance sheet can be used by executives or investors to define the total of assets, liabilities, and stockholder equity that a business has. Also it can give an organization’s leaders a chance to know financial health of the company. The income statement is used for tracing the statement of present operations. The documentation provides leaders with information on revenue, income, and expenses. The document provides the reports of shareholding positions in the company. It is also likely to be used because the supportive information, such as interest payments, tax payments, and offers a report on shares. The statement of equity shows the activity, which the company’s owners...
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...stakeholders may use in assessing corporate reputation. Are these factors consistent across stakeholders? Why or why not? A corporation’s reputation will weigh heavily on the overall performance of the company as the various stakeholders will interact or transact purchases from the company base on their reputation. Essentially the reputation will determine the flow of business for the company. Customers and/or clients will prefer a company with a positive reputation and will likely remain loyal to the company. The company will also have a competitive advantage with a positive reputation as they will be able to charge premium prices for their products. The various stakeholders will also support the company through difficult times or when the company is dealing with controversial issues. A company with a positive reputation will also be financial sound allowing its overall performance to continue to grow. A company with a poor reputation may be inclined to contrast its negative views by strengthen its commitment with more social responsibility. Often when a company’s reputation is suffering the company makes an additional effort to distract from the negativity and tries to introduce the company in a positive light which is usually in the form of becoming more socially responsible. The current status of the company’s reputation may impact the level of commitment the company has to social responsibility. The following list will aid in assessing the health of a corporate reputation: ...
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