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.