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Financial Statement Analysis & Projections
Ashraf HelekaGOL Trainer
26 March, 20133/26/2013
What Can You Measure with Financial Statement Analysis (FSA)?
Sales & Profitability
Asset Efficiency
Liquidity
Solvency & Financial Structure
Why Is FSA Important?
Set targets
Measure progress
Compare to peers or industry
Risk analysis/problem identification
Getting Started with FSA
Accounting Knowledge
Business Life Cycle
Industry Analysis
Financial Ratios
Business Life Cycle
SalesProfits
0
Start-Up PhaseGrowth PhaseMaturity PhaseDecline Phase
Start-Up Growth Maturity Decline
Focus Survival Build Client Base
Sustainability Preservation
Leader Entrepreneur Marketer Controller Asset Stripper
Using Porter’s 5 Forces for Industry Analysis
Rivalry Among
Competitors
Threat of Potential Entrants
Bargaining Power of Buyers
Threat of Substitutes
Bargaining Power of Suppliers
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Industry Analysis Terminology Cyclical
Seasonal
High Operational Leverage
Differentiated
Commoditized 3/26/2013
Sales & ProfitabilityRatio Formula What it Measures? If Increases…
Sales Growth
Growth in sales from year to year
Selling more quantity; selling at higher or more efficient price;
Gross Profit Margin
Profitability in core operations before overheads
Higher sales prices, cost efficiencies (top-line)
Operating Profit Margin
Profitability in core operations including overheads
Higher sales prices, cost efficiencies, better operating performance, changes in product mix
Net Profit Margin
Profitability for shareholders of the company
Above + successful management of the business (bottom- line)
Return on Equity (ROE)
How much profit a company generates with the money shareholders have invested.
Increased bottom line profitability, improved asset efficiency, and/or reduction in equity
Asset Efficiency
Ratio Formula What it Measures? If Increases…
Working Investment
(Accounts Receivable + Inventory)- (Accounts Payable + Accrued Exp.)=Trading Assets – Spontaneous Finance
The amount of trading assets that are not financed by spontaneous finance
Giving longer credit terms; greater inventory levels (stock up, longer production period); paying suppliers in advance to get discounts
A/R= 100INV = 200A/P = 50A/E = 100
Working Investment = 100 + 200 – (50 +100) = 150
Example 1 – Sales Growth 2010 -2011
2008 2009 2010 2011 2012
Sales 500 600 620 750 700COGS (100) (100) (110) (130) (130)SG&A (75) (90) (80) (90) (80)Other Operating Costs
(25) (30) (30) (30) (30)
Interest Expense
(20) (30) (30) (30) (30)
Interest Income
10 10 20 20 10
Taxes (70) (80) (70) (70) (70)
== 20.97%
Example 1 - Net Profit Margin for 2012
2008 2009 2010 2011 2012
Sales 500 600 620 750 700COGS (100) (100) (110) (130) (130)SG&A (75) (90) (80) (90) (80)Other Operating Costs
(25) (30) (30) (30) (30)
Interest Expense
(20) (30) (30) (30) (30)
Interest Income
10 10 20 20 10
Taxes (70) (80) (70) (70) (70)
Net Profit = 700 - 130 - 80 -30 – 30 +10 – 70 = 370Net Profit Margin =
Example 1 - Gross Profit Margin for 2008
2008 2009 2010 2011 2012
Sales 500 600 620 750 700COGS (100) (100) (110) (130) (130)SG&A (75) (90) (80) (90) (80)Other Operating Costs
(25) (30) (30) (30) (30)
Interest Expense
(20) (30) (30) (30) (30)
Interest Income
10 10 20 20 10
Taxes (70) (80) (70) (70) (70)
Gross Profit = 500 – 100 = 400Gross Profit Margin =
Why Use Financial Projections?
Assess feasibility of a business or
project
Required by most investors and
banks
Set targets
Scenario analysis
Information Needed Before Projecting – Creating Projection Assumptions
Understanding of Business Life Cycle
Industry Analysis
FSA
Marketing Research
Educated Estimations
Marketing Research For Projections
Who are my customers?
What are their spending habits?
How much are they willing to pay for my products/services?
What quantity of my product/service are they willing and
able to purchase?
Financial Projections - Mechanics
Start with Sales
Economic Environment?
Competition in Market?
Customer Demand?
Past Performance?
Volume vs. Value?
Capacity?
Division Volume Value
A 100 units 10 EGP
B 300 units 5 EGP
C 500 units 1 EGP
A = 100 * 10 = 500B = 300 * 5 = 1500C = 500 * 1 = 500Total Sales = 2500
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Financial Projections - Mechanics
Continue with Costs
COGS/COS
▪ Cost needed in producing product or rendering a
service
Selling & Distribution Costs
General & Administrative Costs3/26/2013
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Financial Projections - Mechanics
Other/Special Factors that May Affect Costs Major macro issues that can increase costs▪ Legal, regulatory, or insurance-related factors
Commodity prices ▪ If dealing with commodities, fluctuation in price can harm business)
FX rates ▪ If dealing with customers or companies abroad
Labor environment ▪ Shortage of qualified labor can increase costs
R&D
3/26/2013
Example 2 Quarter 1
2010December 2009 – February 2010
Quarter 2 2010March - May
Quarter 3 2010June-August
Quarter 4 2010September – November
Sales 100,000 40,000 30,000 60,000COGS (20,000) (15,000) (15,000) (15,000)SGA (15,000) (10,000) (10,000) (25,000)What quarter in 2011, do you
anticipate will have the greatest sales? Profit?What are possible explanations?
Example 2
What trend do you notice when comparing data for 2010 with 2011? What explanation can you give for the difference between the 2 years?
Quarter 1 2011December 2010 – February 2011
Quarter 2 2011March - May
Quarter 3 2011June-August
Quarter 4 2011September – November
Sales 40,000 35,000 25,000 35,000COGS (20,000) (15,000) (15,000) (15,000)SGA (15,000) (10,000) (10,000) (15,000)
Example 2
What other information would you gather to
project Shariff Travel Sharm’s 2013 sales?
What information would you gather to project
costs? Hint: list all potential costs for this
business, then think how you would project each
cost.
Other Financial Tips
Manage your Cash Monitor inflows and outflows Trade Credit Terms (A/P and A/R)
Focus on Sales and Margins Constantly Monitor Progress
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Ashraf Heleka
3/26/2013
GOL Trainer