Assessing A Company’s Future Financial Health-Part 1-Yuan and Kate (1).doc

3Assessing A Companys Future Financial HealthPart 1Yuan Wang, Cuixia Zhang (Kate)MBA 634 Entrepreneurial Finance Professor Mo Sattar, Executive in MBA ProgramApril 4, 2015“I submit this paper is entirely my own work and agree it may be submitted to Turnitin for the purpose of checking for plagiarism and further it may be maintained on the Turnitin database to check for future plagiarismOverall Process of Analyze A Companys Financial HealthIf you want to formulate future goals and strategies for the company, the first step is to assess the companys long-term financial health. There are 9 steps to go.For assessing a companys future financial health, usually use the corporate financial system. There are nine steps for the corporate financial system. Step 1 & 2 is to analyze the basic situation of the company. The companys goals the departments choice and strategies, the condition of the market and special characteristics are driving to become the corporate financial system. If the company determent the strategy, then each departments has make sure the asses enough to support the strategy. Also need to keep the effectively and enhance the influence of competitors and regulators. In addition, the company need the external finance, and access to debt and equity markets.Step 3 is to analyze investment to support the business unit strategy. Business units strategies require the investment in account receivable, inventories, plant and equipment, and acquisitions. Actually, the step 3 is equal to “attempt to estimate the amount tied up in each asset types, by virtue of sales growth and the improvement/deterioration in asset management”. Analyst can take a rough estimate by studying “the past pattern of the collection period, days of inventory, plant and equipment % of COGS, and applying a “reasonable value” for each category to the sales forecast or forecast of COGS”. Also, in the future potential market, the conditions of the competitive and regulatory will not be change by the influenced for past performance. Step 4 is assessing future profitability and competitive performance. Why the company wants the strong sustained profitability? Because that first, it is the important factor for the company access to debt or equity finance on acceptable terms. Second, it can grow through the retention of earning. Third, it can to assess the risk for new technologies, markets, or products. Fourth, it is the valuation of the company. There are five basic questions to help assess the companys future profitability by its past pattern of profitability. For example, like the questions “1) what has been the average level, trend, and volatility of profitability? 2) Is the level of profitability sustainable, given the outlook for the market and for competitive and regulatory pressures? 3) Is the current level of profitability at the expense of future growth and/or profitability? 4) Has management initiated major profit improvement programs? Are they unique to the firm or are they industrywide and may be reflected in lower prices rather than higher profitability? 5) Are there any “hidden” problems, such as suspiciously high levels or buildups of accounts receivable or inventory relative to sales, or a series of unusual transactions and/or accounting changes?”Step 5 is to assess future external financing needs. The company has the future external financing need depends on 1) the future sales growth, 2) the length of the cash cycle; 3) the future level of profitability and profit retention. If the company has the rapid sales growth with a long cash cycle and low profitability or low profit retention that means the company continues increasing external finance, raised loans, debt issues, or sales of shares. Because that the rapid sales growth results in rapid growth of large level of total assets. The increase in total assets will offset some part by through increase in accounts payable and accrued expenses, and by a small increase in owners equity. A need for additional external finance does not always become High sales growth.Step 6 is to ensure access to target sources of external finance. There are four basic questions the management should be considered: “1) How sound is the firms financial structure, given its level of profitability and cash flow, its level of business risk, and its future need for finance? 2) How will the firm service its debt? To what extent is it counting on refinancing with a debt or equity issue? 3) Does the firm have assured access on acceptable terms to the equity markets? How many shares could be sold and at what price in “good times”? Or in a period of adversity? 4) What criteria are used by each of the firms target sources of finance to determine whether finance will be provided and, if so, on what terms?” the evaluation can be different by perspective of the lender or investor. For example, the bank may consider a seasonal credit a very safe bet.Step 7 is to assess the viability for the 3- to 5-year plan. The management should consider the following questions: “1) is the operating plan on which the financial forecasts are based achievable? 2) Will the company achieve its strategic, competitive, and financial goals? 3) Will the resources required by the plan be available? 4) How will the firms competitive, organizational, and financial health at the end of the 3 to 5 years compare with its condition at the outset?”Step 8 is to perform stress test under scenarios of adversity. Only assumptions based turn out to be accurate, and then the financing plans will work well. But how about if the situations marked by the volatile and unpredictable conditions? The test can detect the 3- to 5-year plan is able to make the continuity of the cash flow to all strategically important programs, or at least be maintained as well as ones competitors can maintain the funding