In this chapter you will: Understand important financial performance measures and their users, by life cycle stage; describe how financial ratios are used to monitor a venture’s performance; identify specific cash burn rate measures and liquidity ratios and explain how they are calculated and used by an entrepreneur;. | Chapter 5 EVALUATING FINANCIAL PERFORMANCE 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher CHAPTER 5: Learning Objectives Understand important financial performance measures and their users, by life cycle stage Describe how financial ratios are used to monitor a venture’s performance Identify specific cash burn rate measures and liquidity ratios and explain how they are calculated and used by an entrepreneur Identify and describe the use and value of conversion period ratios to the entrepreneur Identify specific leverage ratios and explain their usage by lenders and creditors Identify and describe measures of profitability and efficiency that are important to the entrepreneur and equity investors Describe limitations when using financial ratios 2 Financial Measure by Life Cycle 3 Financial Ratio & Analysis Financial Ratios: show the relationship between two or more financial variables Trend Analysis: used to examine a venture’s performance over time . | Chapter 5 EVALUATING FINANCIAL PERFORMANCE 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher CHAPTER 5: Learning Objectives Understand important financial performance measures and their users, by life cycle stage Describe how financial ratios are used to monitor a venture’s performance Identify specific cash burn rate measures and liquidity ratios and explain how they are calculated and used by an entrepreneur Identify and describe the use and value of conversion period ratios to the entrepreneur Identify specific leverage ratios and explain their usage by lenders and creditors Identify and describe measures of profitability and efficiency that are important to the entrepreneur and equity investors Describe limitations when using financial ratios 2 Financial Measure by Life Cycle 3 Financial Ratio & Analysis Financial Ratios: show the relationship between two or more financial variables Trend Analysis: used to examine a venture’s performance over time Cross-sectional Analysis: used to compare a venture’s performance against another firm at the same point in time Industry Comparables Analysis: used to compare a venture’s performance against the average performance in the same industry 4 MPC Income Statements 5 MPC Balance Sheets 6 MPC Statements Of Cash Flow 7 Cash Burn Cash Burn: cash a venture expends on its operating and financing expenses and its investments in assets Cash Burn Rate: cash burn for a fixed period of time, typically a month 8 Cash Burn / Build / Burn Rate Cash Burn = Inventory-related expenses + Admin expenses + Marketing expenses + R& D expense + Interest expenses + Change in prepaid expenses – (Change in accrued liabilities + Change in payables) + Capital investment + Taxes MPC for 2010: Cash burn = 425,000 + 65,000 + 39,000 + 27,000 + 20,000 + 0 – (1,000 + 27,000) +50,000 + 8,000 = 606,000 Note 425,000 = 380,000 (COGS) + 45,000 (Change in Inv.) 9 Cash Burn / Build / Burn Rate Cash Build = Net sales – Change in .
