Question

Zaheer Co has been an audit client of Mohsin & Co for the last eight years, preparing financial statements to 31 March each year. Throughout this period, the managing partner at your firm, Frances Stein, has taken personal responsibility for the audit and has increased the total fee income from the client to the level where it represented 16·2% of Mohsin & Co’s total fee income in 2015 (15·4%: 2014). In addition to performing the annual audit, Mohsin & Co also provides accounting and bookkeeping services for Zaheer Co. The accounting and bookkeeping services include the preparation of the monthly payroll for the client and maintaining all of the financial records of a small, immaterial division of the company.

The managing director of Zaheer Co, Ahsan Ali, has asked your firm for assistance in the preparation of the share prospectus document which will be used to support the company’s flotation. The contents of the prospectus document will include the following elements:

– Key historical financial information prepared to 31 August 2015;

– Profit forecasts;

– A summary of the key risks relating to the client’s business; and

– A business plan outlining the future prospects of the company and recommending the shares to investors.

Answer 1

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Historical financial information to Hypothetical assumptions

Term	Definition
Historical financial information	information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.
Historical financial information (in the context of ASAE 3450)	information expressed in financial terms in relation to a particular entity, which is derived primarily from that entity’s accounting system and relates to events occurring in past time periods or about conditions or circumstances at points in time in the past.
Historical financial information, other than a financial report	includes: (a) Specific components, elements, accounts or items of a financial report, such as: (i) A single financial statement, for example, an income statement or balance sheet. (ii) Accounts receivable. (iii) Impairment of asset accounts. (iv) Inventory. (v) The liability for accrued benefits of a defined benefits plan. (vi) The recorded value of identified intangible assets. (vii) Pro-forma historical financial information and adjustments. (viii) The liability for “incurred but not reported” claims in an insurance portfolio, including related explanatory notes. (b) Other information derived from financial records, such as: (i) A schedule of externally managed assets and income of a private pension plan, including related explanatory notes. (ii) A schedule of net tangible assets, including related explanatory notes. (iii) A schedule of disbursements in relation to a leased property, including related explanatory notes. (iv) A schedule of profit participation or employee bonuses, including related explanatory notes. (c) Financial statements prepared in accordance with a financial reporting framework that is not designed to achieve fair presentation, such as condensed financial statements and an entity’s internal management accounts.
Hypothetical assumptions	assumptions made by the responsible party in preparing prospective financial information in the form of a projection about future events and management actions which may not necessarily be expected to take place or that may be expected to take place, and may not be based on reasonable grounds.

##### 2.

There are four main types of forecasting methods that financial analysts use to predict future revenues, expenses, and capital costs for a business. While there are a wide range of frequently used quantitative budget forecasting tools, in this article we focus on the top four methods: (1) straight-line, (2) moving average, (3) simple linear regression, and (4) multiple linear regression.

Technique	Use	Math involved	Data needed
1. Straight line	Constant growth rate	Minimum level	Historical data
2. Moving average	Repeated forecasts	Minimum level	Historical data
3. Simple linear regression	Compare one independent with one dependent variable	Statistical knowledge required	A sample of relevant observations
4. Multiple linear regression	Compare more than one independent variable with one dependent variable	Statistical knowledge required	A sample of relevant observations

######3.

Business risk refers to a threat to the company’s ability to achieve its financial goals. In business, risk means that a company’s or an organization’s plans may not turn out as originally planned or that it may not meet its target or achieve its goals.

Such risks cannot always be blamed on the owner of the company, as risk can be influenced by various external factors, which may include rising prices of raw materials for production, growing competition, or changes or additions to existing government regulations.

How to Identify Business Risks

Risks are inherent to every environment and business. They cannot be avoided and, therefore, must be addressed head-on to minimize their impact. The first step in risk management is to identify the risks in order to come up with a risk management strategy.

1. Analyze the sources that may trigger problems

It is important to identify and analyze the sources that can cause a problem. Risk triggers can be internal or external.

2. Act now

Managers shouldn’t wait for potential problems to become actual problems before they start doing something. The moment a problem is deemed to be a threat, it should immediately be dealt with by the company’s executives by devising a plan of action in the event that the risk becomes an actual full-blown concern facing the company.

3. Involve employees

Identifying risks is not the sole responsibility of the managers and top-ranking officials. Management should involve their employees in identifying the risks that they see in their respective departments and train them to handle such risks at their level.

4. Make a list of industry-specific risks

By looking into the industry where the company operates, managers will be able to identify the possible risks that the business may face. If the same risks happen to other companies in the same industry, there is a likely chance that it will happen to your company as well. Therefore, businesses should be ready with a list of solutions or steps to address the risks.

5. Create a record of risks

Sometimes, the same risks arise over and over. By creating a record of all the risks experienced by the company since it started, management will be able to do a regular review of past events in order to detect patterns that may better prepare the company for future risks.

Types of Risks in Business

Risks come in different forms. Below are the different types of business risks:

1. Strategic risk

Strategic risks can occur at any time. For example, a company manufacturing an anti-mosquito lotion may suddenly see a decline in its sales because people’s preferences have changed, and they now want a spray mosquito repellent rather than a lotion. To deal with such risks, companies need to implement a real-time feedback system to know what its customers want.

2. Compliance risk

Compliance risk involves companies having to comply with new rules that are set by the government or by a regulatory body. For example, there may be a new minimum wage that must be implemented immediately.

3. Financial risk

Financial risk is about the financial health of the company. Can the company afford to offer installment payments to its customers? How many customers can it offer such an installment scheme? Can it handle business operations when two or three of these customers are not able to make their payments on time?

4. Operational risk

Operational risk occurs within the business’ system or processes. For example, one of its production machines may break down when the target output is still unmet. What will the company do if one of its machine operators has an accident during work hours?

Causes of Business Risks

There are basically three causes of business risk:

1. Natural causes

Natural causes of risk include flooding, earthquakes, cyclones, and other natural disasters that can lead to the loss of lives and property. For example, a delivery truck is on its way to deliver the order of a customer but is met with a cyclone along the way, causing an accident. In order to counter such causes, businesses need to take out comprehensive insurance coverage.

2. Human causes

Human causes of risk refer to negligence at work, strikes, work stoppages, and mismanagement.

3. Economic causes

Economic causes involve things such as rising prices of raw materials or labor costs, rising interest rates for borrowing, and competition.

########4

Use a business plan template to create your business plan by adding the detailed information behind the pitch deck and executive summary outline.

To attract investors a business plan should include the following:
1. Cover page: Include the company’s name, contact information and company logo.

2. Table of contents

3. Company background and opportunity summary: Provide a quick history of the company and describe the basic market need and your company’s solution. Answer the question,“What is your company’s value proposition?”

4. The market opportunity: Address the following areas and answer the questions,“Who are your customers? How are you going to make money?”

• Market and industry: Include relevant research on your market and industry, such as market size, market segments, your product’s niche, the market’s growth prospects, new trends and technologies, and any barriers to entry.
• Competition: Demonstrate that you fully understand the challenges from outside competitors, both large and small. Include a description of competitors’ products, distribution channels, pricing and partnership. Consider developing a competitive matrix that lists the key attributes of your product and your competitive advantage and positioning.
• Customers and end users: Provide an outline for the target customers for your product or service. Refer to any customer testimonials in this section and include the document in the appendix or the due diligence package.
• Sales and marketing strategy: Explain how you will get the product into the customers’ hands. Provide a revenue model and describe the sales cycle and process. Include a description of the channels to market and your marketing communications strategy.

5. Products and services: Describe your product or service; include photos or screen shots if it is a software product. Detail how your product is scalable and when you plan to launch if you have not already done so. Outline the next R&D steps to further build on or improve your offering. Include a discussion of intellectual property (for example, patents, copyrights, trademarks) and any technology partnerships. You may also highlight your competitive advantages.

6. People: Investors are putting their money behind you, so be sure to highlight how you’ve recruited the best team available to build the company. Include the list of advisors or board members as well as service providers. Get the approval of any directors and advisors before including their information in the document. If you are planning any key hires in the near future, and you will be using the funding to build out the team, include the roles in this part of the discussion.

7. Financials: Include your key assumptions and provide two scenarios.

8. Sources of funding and use of proceeds:

• Sources of funding: Describe investment by principals, prior equity investments, debt (if any), cash from operations and total funds raised to date.
• Use of proceeds: Describe how you will use the funding. Examples may include sales and marketing, research and development, recruiting costs and salaries of new hires, equipment, capital expenses, legal and accounting, which will total to the amount you are targeting to raise in outside financing.

9. Milestones: Based on the appropriate timelines for the individual milestones, detail the actions your team will focus on to further build the organization’s value. Actions include key hires, new financing, sales milestones, new product launches and strategic partnerships.

10. Appendices: Include anything relevant, such as biographies of founders and key management, patent information and customer testimonials.

For further details and support on developing a business plan, download the MaRS workbook, The Business Plan and Executive Summary. The information and exercises in this workbook guide will provide a framework to help you organize and articulate your thoughts

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