Marvin Ryder Assistant Professor, Marketing & Entrepreneurship MBA P715 Entrepreneurship Week 11.
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Transcript of Marvin Ryder Assistant Professor, Marketing & Entrepreneurship MBA P715 Entrepreneurship Week 11.
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Marvin RyderAssistant Professor, Marketing & Entrepreneurship
MBA P715Entrepreneurship
Week 11
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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
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Predicting Failure – Acid-Test Ratio
Source: Beaver, “Market Prices, Financial Ratios and the Prediction of Failure”, Journal of Accounting Research, Autumn, 1968
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Predicting Failure – Cash Flow Ratio
Source: Beaver, “Market Prices, Financial Ratios and the Prediction of Failure”, Journal of Accounting Research, Autumn, 1968
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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%)
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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
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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
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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
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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.
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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.