Question

in 200 words or more How does a person foster an understanding of how financial documents are used in entrepreneurial ventures?

Answer 1

The entrepreneurial firms have considerable differences from the regular listed firms on the market. for example, entrepreneurial firms may very slim or negative operating profit and the regular ratios utilized to measure the strength of these firms.

The analysts check various other market factors to assess the valuation of these firms. The free cash flow based assessments may not apply as the firms are in steep growth trajectory. Some of the proxies used are the market size and the potential to capture a portion of that size

Some Valuation methods look at revenue multiples as all other financial numbers may not be relevant or negative for a high growth company.

Valuation = Revenue X (Industry relevant multiple)

Some operating profit making companies may also be valued as multiples of operating profit

Valuation = Operating Profit X (Industry relevant multiple)

The multiples are are general rule of thumb and may be subjective to valuers. But startups with higher chances to creating a larger market may get higher multiples as well.

However, the P&L, Balance Sheet and cash flows with projections are assessed for ratios similar to project evaluation like the breakeven period, NPV of the projected growth

The financials for startups may at best be called for proxies for future business potential and is more dependent on the evaluation of the investors based on the business case and founders potential to convert the business case to an enterprise.