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Chapter 5 EVALUATING FINANCIAL PERFORMANCE FOCUS In this chapter, we focus on identifying and understanding the financial ratios used to evaluate the venture’s financial performance over time. Venture performance and efficiency is important to a variety of constituencies including lenders and creditors, equity investors, and the entrepreneur. Lenders and creditors want to be repaid in full and on time; investors want a sufficient return on their investments as compensation for the risks they are taking; the entrepreneur initially wants to survive and then build value in the venture. LEARNING OBJECTIVES 1. Understand important financial performance measures and their users, by life cycle stage 2. Describe how financial ratios are used to monitor a venture’s performance 3. Identify specific cash burn rate measures and liquidity ratios and explain how they are calculated and used by the entrepreneur 4. Identify and describe the use and value of conversion period ratios to the entrepreneur 5. Identify specific leverage ratios and explain their usage by lenders and creditors 6. Identify and describe measures of profitability and efficiency that are important to the entrepreneur and equity investors 7. Describe limitations when using financial ratios CHAPTER OUTLINE 5.1 USERS OF FINANCIAL PERFORMANCE MEASURES BY LIFE CYCLE STAGE 5.2 USING FINANCIAL RATIOS 5.3 CASH BURN RATES AND LIQUIDITY RATIOS A. Measuring Venture Cash Burn and Build Amounts and Rates B. Beyond Burn: Traditional Measures of Liquidity C. Interpreting Cash-Related and Liquidity-Related Trends 5.4 CONVERSION PERIOD RATIOS A. Measuring Conversion Times B. Interpreting Changes in Conversion Times 5.5 LEVERAGE RATIOS A. Measuring Financial Leverage B. Interpreting Changes in Financial Leverage 5.6 PROFITABILITY AND EFFICIENCY RATIOS A. Income Statement Measures of Profitability B. Efficiency and Return Measures C. Operating Return on Assets D. Interpreting Changes in Profitability and Efficiency 5.7 INDUSTRY COMPARABLE RATIO ANALYSIS 5.8 A HITCHHIKER’S GUIDE TO FINANCIAL ANALYSIS SUMMARY 71
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Chapter 5: Evaluating Financial Performance DISCUSSION QUESTIONS AND ANSWERS 1. Describe the types of financial ratios and other financial performance measures that are used during a venture’s successful life cycle. Who are the users of financial performance measures? Refer to Figure 5.1. Development and Startup Stages: Type of Financing: Seed and startup financing Financial Ratios and Measures: Cash burn rates and liquidity ratios Conversion period ratios Users of Financial Ratios and Measures: Entrepreneur Business angels Venture capitalists (VCs) Survival Stage: Type of Financing: First-round financing Financial Ratios and Measures: Cash burn, liquidity, and conversion ratios Leverage ratios Profitability and efficiency ratios Users of Financial Ratios and Measures: Entrepreneur, angels, and VCs Commercial banks Rapid-Growth Stage: Type of Financing: Second-round, mezzanine, and liquidity-stage
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This note was uploaded on 12/05/2009 for the course FIN Fin 595 taught by Professor Shabbir during the Spring '09 term at CSU Dominguez Hills.

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