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 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.