VI.

FINANCIAL
STUDY
A. Overview of the Financial Study- ANNY
B. Components of the Financial Study - ANDRIA
1. Financial Assumptions - HARRISTON
2. Project Cost - MILDRED
3. Source of Finance – MICHELLE and ROLAND
4. Financial Statements - RAFFY
5. Financial Projections and Analysis - FATIMA
A. OVERVIEW OF THE FINANCIAL STUDY
● Financial analysis involves using financial data to assess a company’s
performance to make recommendations about how it can improve going
forward.

TYPES OF FINANCIAL
ANALYSIS;
7. Efficiency
1. Vertical
8. Cash Flow
2. Horizontal
9. Rates of Return
3. Leverage
10.Valuation
4. Growth
11. Scenario and
5. Profitability
Sensitivity
6. Liquidity
12. Variance
1. VERTICAL ANALYSIS

This types of financial analysis

involves looking at various
components of the income
statement and dividing them by
revenue to express them as
percentage.

This process is also sometimes

called a common sized income
statement as it allows an analyst to
compare companies of different
sizes by evaluating their margins
instead of their dollars.
2. HORIZONTAL ANALYSIS

Involves taking several

years of financial data
and comparing them to
each other to determine
a growth rate.
3. LEVERAGE ANALYSIS

Leverage ratios Common examples of

are one of the most ratios include:
common methods ● Debt/equity
analysts use to ● Debt/EBITDA
evaluate company ●EBIT/interest (interest
performance. coverage
● Dupont analysis –
a combination of ratios,
often referred to as the
pyramid of ratios,
including leverage and
liquidity analysis.
 4. GROWTH RATES

Analyzing historical growth rates

and projecting future ones are big part
of any financial analyst’s job

Common examples of analyzing

growth include:
● year-over-year
● regression analysis
●bottom-up analysis (starting with
individual drivers of revenue in the
business
● top-down analysis (starting with
market size and market share
● other forecasting methods
5. PROFITABILITY ANALYSIS

Is the type of income statement analysis where an analyst assesses

how attractive the economics of a business are.

Common examples
of profitability
measures include:

● gross margin
● EBITDA margin
● EBIT margin
● net profit margin
6. LIQUIDITY ANALYSIS

This type of financial analysis that focuses on the balance sheet,

particularly, a company’s ability to meet short-term obligations
(those due in less than a year).

Common examples
of liquidity analysis
include:
● current ratio
● acid test
● cash ratio
● net working
capital
7. EFFICIENCY ANALYSIS

Efficiency ratios are an essential part of any robust financial

analysis. These ratios look at how well a company manages its assets
and uses them to generate revenue and cash flow.

Common efficiency ratios

include:
● asset turnover ratio
Asset Turnover Ratio = Net Sales
● fixed asset turnover ratio Average Total Assets
● cash conversion ratio
● inventory turnover ratio
8. CASH FLOW
The Statement of Cash Flows is a great place to get started, including
looking at each of the three main section: operating activities,
investing activities, and financing activities.

Common examples of cash

flow analysis include:
● Operating Cash Flow
(OCF)
● Free Cash Flow (FCF)
● Free Cash Flow to the
Firm (FCFF)
● Free Cash Flow to Equity
(FCFE)
9. RATES OF RETURN

At the end of the day, investors, lenders, and Common examples of

rates of return measures
finance professionals, in general, are focused on what
include:
type of risk-adjusted rate of return they can earn on
their money. ● Return on Equity (ROE)
● Return on Assets (ROA)
● Return on Invested
Capital (ROIC)
● Dividend Yield
● Capital Yield
● Accounting rate of
return
● Internal Rate of Return
(IRR)
10. VALUATION ANALYSIS

This process of estimating what business is worth is a major component of financial analysis,
and professional industry spend a great deal of time building financial models in excel.

Approaches to valuation include:

● Cost Approach
◦The cost to build/replace
● Relative Value (market
approach)
◦Comparable company
analysis
◦Precedent transactions
● Intrinsic Value
◦Discounted cash flow
analysis
11. SCENARIO and SENSITIVITY
ANALYSIS

Another component of financial modeling and

valuation is performing scenario and sensitivity
analysis as a way of measuring risk.

Building scenario and performing sensitivity

analysis can help determine what the worst-case or
best-case future for company could like.
12. VARIANCE ANALYSIS

Is the process of comparing actual results to a budget or forecast. It is a very

important part of the internal planning and budgeting process at an operating
company, particularly for professionals working in the accounting and finance
departments.
B. COMPONENTS OF THE FINANCIAL STUDY

Three Essential Components of a

Financial Analysis

BALANCE
SHEET
INCOME CASH FLOW
STATEMENT STATEMENT
 INCOME STATEMENT

An income statement reports the company’s financial performance over a given

period of time and showcases a business’s profitability. It can be used to predict
future performance to and assess the capability of future cash flow.

Ratios to compute your income statement: ● Revenue growth

● Gross profit margin Revenue Growth (%) = (Revenue from the current
Gross Profit Margin = Gross Profit ÷ Revenue from Period – Revenue from Previous Period) ÷ Revenue
Sales from Previous Period
● Operating Profit Margin ● Revenue Concentration
Operating Profit Margin = Operating Earnings ÷ Revenue Concentration (%) = Revenue from one client
Revenue ÷ Total Revenue
● Net Profit Margin ● Revenue per employee
Net Profit Margin = Net Profit ÷ Revenue Revenue per Employee = Revenue ÷ Number of
employees
 BALANCE SHEET

A balance sheet reports the company’s assets, liabilities, and shareholder equity at a
specific point in time. In every balance sheet, assets must equal the total of your
liabilities and equity.

●Liquidity ratios are portions of the company’s assets and current

liabilities. They are used to measure a business’s ability to pay
short-term debts.
Three types of
● Leverage ratios look at how much capital comes in the form of a
ratios that can be
debt (or loan). Too much debt can be dangerous for a business and
computed from
turn off investors.
your balance sheet.

● Efficiency ratios measure a company’s ability to use its assets and

manage liabilities to generate income.
Three types of ratios that can be
computed from your balance sheet.
LIQUIDITY RATIOS
● Current ratio measure
Current Ratio = Current Assets ÷ Current
Liabilities
● Quick Ratio
Quick Ratio = ( Cash Equivalents + Marketable
Securities + Accounts Receivable) ÷ Current
Liabilities
● Net working capital
Net Working Capital = Current Assets – Current
Liabilities
LEVERAGE RATIOS
● Debt to equity
Debt to Equity Ratio = Total Liabilities ÷
Shareholder Equity
● Debt to capital
Debt to Capital Ratio = Company’s Debt ÷ Total
Capital
● Interest coverage
Interest Coverage = EBIT ÷ Interest Expenses
EFFICIENCY RATIOS
● Inventory turnover
Inventory Turnover = COGS ÷ Average Inventory
● Account receivable days
Account Receivable Days = Net Value of Credit
Sales ÷ Average Accounts Receivable
● Total asset turnover
Total asset Turnover = Net Sales ÷ Average Total
Assets
 CASH FLOW STATEMENT

A cash flow statement reports the amount of cash generated during a given period of time.

There are three main components

of a cash flow statement:
● Cash from operations refers to all
cash flows regarding business
operations.
● Cash from investing arises from
actions where money is being put
into something with the expectation
of a gain over long period of time.
● Cash from financing results from
borrowing, repaying, or raising
money for the business.
This can help you start measuring
the quality of your cash flow and
create a cash flow analysis:
● Operating cash flow to net sales
Operating Cash Flow to net Sales
(%) = Operating Cash Flow ÷ Net
Sales
1. FINANCIAL ASSUMPTIONS
Financial projections are well-
educated guesses . While
developing the assumptions , it is
important to remember that your
financial projections do not exist
in vacuum.
They must be tied in some
fashion to the data you provided
through your business plan. By
utilizing the data you have
presented in your market
research, you can create some
well-reasoned guesstimates on
certain financial data such as:
Sources of revenue
Sales projections
Basis of all variable costs (such as
manufacturing)
Basis of all fixed costs (such as
personnel salaries)
Investment requirements (start-up
costs and working capital)
Sources of investment
Fixed, one-time start—up costs
Costs of office space and related
services (such as telephones)
Costs of professional services (such
as legal, accounting, etc.)
 2. PROJECT COST

Project Cost is the total

funds needed to complete
the project or work that
consists of a Direct Cost and
Indirect Cost.

Indirect Cost means that are not

Direct Cost (DC) is a directly
directly involved in a specific
involved in a specific task or
task or project, and can not be
project, and can be identified a
accurately attributed to a
specific cost centre.
specific centre.
3. SOURCES OF FINANCE

Debt vs Equity
Finance

Two main types of Finance:

Debt finance – money provided by an
external lender, such as a bank, building
society or credit union.
Equity finance – money sourced from within
the business.
DEBT FINANCE

RETAILER FACTOR COMPANIES

If your required to finance to purchase good Offer a form of finance where they purchase a
such as furniture, technology or equipment, business outstanding invoices at a discount.
many store credit though a finance company. While factoring is a way to get quick access to
This is a higher interest option and suits cash, it can be quite expensive compared to
business that can pay the loan off quickly traditional financing options.
within the interest-free period.
FAMILY OR FRIENDS
SUPPLIERS If a friend or relative offers you a loan, it’s
Most suppliers offer trade credit that allows called a debt finance arrangement.
business to delay payment for foods. If you decide on this option , carefully
Trade credit terms often vary and may only consider how this arrangement could affect
go to business that have a reputable your relationship.
connection with the supplier
EQUITY FINANCE

SELF FUNDING
Often called ‘bootstrapping’, self funding is often the first step in seeking finance and involves
funding purely through personal finances and revenue from the business. Investor and lenders
will both expect some amount of self-funding before they agree to offer you finance.

FAMILY OR FRIENDS
Offering a partnership or share in your business to family or friends in return for equity is often
an easy way of obtaining finance . However , consider this option carefully to ensure your
relationship is not adversely affected.

PRIVATE INVESTORS
Investor’s can contribute funds to your business in return for a share in your profits and equity
investors such as business angels can also work in the business providing expertise or advice as
well as funds.
VENTURE CAPITALISTS
Venture capitalists are usually large corporations that invest large sums in start-
up businesses with the potential for high growth and large profits.

STOCK MARKET
Also known as an Initial Public Offering(IPO), floating on the stock market
involves publicly offering shares to raise capital.

GOVERNMENT
In general, the government doesn’t provide finance for starting up or buying a
business. However, you may be suitable for a grant, such as business expansion,
research and development, innovation or exporting.

CROWDFUNDING
Some social media websites offer entrepreneurship a crowdfunding platform for
their products prototypes or innovative projects. And budget details and inviting
people to contribute to a startup capital pool.
 4. FINANCIAL STATEMENTS

Financial statements are the end Nature of Financial

products of the accounting process, Statement
which reveals the financial results of
the specified period and financial
position as on particular date. It is 1. Recorded facts
the basic and formal annual report 2. Accounting conventions
through which a business 3. Postulates
communities financial information (Assumptions)
to its various user groups. 4. Personal Judgements
FINANCIAL STATEMENTS

Framework for preparing

Financial Statement Characteristics of Ideal
financial statements
● Objectives of financial
statements 1. Relevancy
● Qualitative characteristics 2. Reliability
of financial statements 3. Understandability
● Components of financial 4. Comparability
statements
 FINANCIAL STATEMENT

Limitations of
Importance of financial statement
financial statements
1. Provide only interim
reports
1. Importance to management 2. Aggregate information
2. Importance to Creditors 3. No qualitative information
3. Importance to Bankers 4. Personal biasness
4. Importance to Government 5. Historical cost
FINANCIAL STATEMENT

Components of Financial
Statements

1. Income Statement
(a)Trading account
(b)Profit and loss account
2. Statement of Financial
Position
(a)Balance
 5. FINANCIAL PROJECTIONS AND ANALYSIS

Financial projections are Financial projections should

based on compiling the include a forecasting of the
income statement, the balance
internal and external
sheet, and the cash flow
accounting data you already
statement. Projections are
use in the day-to-day made by the month for the
management of your first year and then by the year
business. for the next two years.
 FINANCIAL PROJECTIONS AND ANALYSIS

For Established Business For Startup Business

If you own an established Many entrepreneurs
business, we help you to meet complain that building
creditor requests for historical
accurate revenue and
data related to your company’s
performance for the last five
expenses forecasts requires
years, depending on the length too much time that would be
of time you have been in better spent selling rather
business. than planning.
 FINANCIAL PROJECTION AND ANALYSIS

What financial experts can do for

Future Projections you:

Creditors and investors will Forecast income statements,

also want to see the balance sheets, cash flow
prospective financial data that statements and capital expenditure
budgets for each year you’ve been
reflects expectations of in business
revenue and profit.
For the first year of business, we
include monthly or quarterly
financial projections.
THANK YOU
!!!