marvin ryder assistant professor, marketing & entrepreneurship
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MBA P715 Entrepreneurship Week 11. Marvin Ryder Assistant Professor, Marketing & Entrepreneurship. Financial Ratios. Liquidity: Current Ratio = Current Assets Current Liabilities Acid-Test Ratio = (Current Assets – Inventories) Current Liabilities - PowerPoint PPT PresentationTRANSCRIPT
Marvin RyderAssistant Professor, Marketing & Entrepreneurship
MBA P715Entrepreneurship
Week 11
Financial RatiosLiquidity:
Current Ratio = Current Assets Current Liabilities
Acid-Test Ratio = (Current Assets – Inventories) Current Liabilities
Collection Period = Accounts Receivable x 365 Annual Sales
Debt:
Debt to Equity Ratio = ______Total Debt ______ Total Equity – Goodwill
Predicting Failure – Acid-Test Ratio
Source: Beaver, “Market Prices, Financial Ratios and the Prediction of Failure”, Journal of Accounting Research, Autumn, 1968
Predicting Failure – Cash Flow Ratio
Source: Beaver, “Market Prices, Financial Ratios and the Prediction of Failure”, Journal of Accounting Research, Autumn, 1968
Causes of Business Failure I Heavy Operating Expenses
(48%) Inadequate Sales (37%) Inventory Problems (5%) Receivables Problems (3%) Excessive Fixed Assets (2%) Bad Location (1%) Disaster (1%)
Causes of Business Failure II Improper Pricing (too high/too low) Lack of Knowledge About
Product/Service Costing Inability/Unwillingness to Plan Poor Communication Among
Partners/Management Lack of Self-Discipline/Motivation Dishonesty
Causes of Business Failure III Losing Focus/Losing Sight of
Customers Shallow “Pockets” – not enough
equity or cash in business Inability to Prioritize/Delegate Inability to Accept
Advice/Criticism from Employees, Customers, etc.
Too Much Ego
Ending the Business
It is always better to end the business yourself rather than be forced into it by a third party! Chance to cash in on goodwill.
Valuing the Business as an Ongoing Entity Book Value Market Value Price/Earnings Multiples Discounted Cash Flows Expected ROI Payback Period
Forced Business Closure
Usually two options – Receivership or Liquidation
Receivership – Court-appointed manager – tries to improve the business so it can be sold as an ongoing entity – possibility to get value for an operating business
Liquidation – After court transfers business to third party, the business is deemed “unsaveable.” It is broken into pieces and sold. Usually the pieces are worth less than the operating whole.
Reacting to Business Failure Keep it in perspective. Not the “worst
thing in the world.”
Do not withdraw into isolation.
Find a confidante.
Act slowly. Don’t oversteer when in a spin.
Don’t obsess about “where I went wrong.”
Have a life plan along with a business plan. Entrepreneurship is a means to an end – not an end in itself.