Financing and Accounting Comparison
The way how a company spends their financial resources can spell the difference between failure and continuous operational expansion. This is why it is important to compare the financing and accounting methods of a startup firm to one that is already established and continuously earning like UPS.
Accounting Methods
A more sensible accounting method-related variable would be the use of resources or the cash flow statement. The cash flow statement shows how a company is making use of the financial resources that it obtains from its operations (if the company managed to earn a profit for that period), financing activities, and investing activities. One clear difference between the two companies in this regard would be their use of cash. The Change in Cash (bottom line in a cash flow statement computed after all cash-intensive activities such as financing, investing, and operations have been considered) for LARRG has been projected to be always net negative compared to that of UPS which has always been net positive, at least for the past three years between 2013 and 2015.
This means that LARRG is a company that is barely surviving because the cash it generates from its operations is mathematically not enough to cover for its operating expenses, capital expenditures (i.e. all expenses related to operational expansion), and financing and investing activities. This is why it relies more on investing and financing activities to generate just barely enough cash to finance its most essential operations. This is in contrast with UPS which generates its own cash flow with very little help from financing and investing activities.
Legal
All companies, regardless of their size and tenure, are expected to follow the same set of rules, especially when they are operating in the same market. UPS, for example, operates mainly in the United States. A company like UPS assuming that it operates only in the United States, would most likely have a similar legal framework and issue handling strategies with companies within the same jurisdiction . UAP simply do not have much choice when it comes to the legality of things. The only thing that they can modify would be their willingness to abide by those rules and policies. UPS, considering that it is already an established company in its industry, has managed to get itself involved in pension-related legal battles and other ones concerning the way how it drives its business activities, something which it still addresses.
Tax
Income Tax Expenses, both nominally and as a percentage of their Income before Income Taxes (i.e. EBITDA), were significantly different for the two companies. Between the two, the latter is the more important because it only makes sense for UPS to pay a nominally large income tax. The latter, however, talks about the overall income tax rate. For the year ended December 31, 2015, UPS’ tax expenses as a percentage of its EBITDA was at 34%.
All companies have to pay taxes; it is something that is mandatory. Failure to pay taxes, either voluntarily and involuntarily often leads to sanctions and penalties; this rule applies to all businesses, regardless of their size and tenure.
Auditing
The company’s auditing structure follows a certain set of standards. This is something that can be unique between one company and another. What is important, however, is that the adopted accounting standards are well-explained in the company’s annual report so that the person reading the statements (e.g. income and cash flow statements) within the report would be able to do so accurately. One of the most important parts of auditing is the determination of the fair value of the company’s assets and liabilities. UPS’ internal audit committee and external auditor make use of the Discounted Cash Flow Model (DCF) to establish uniformity in obtaining fair value.
Financial Statements
In terms of the balance sheet of UPS and LARRG, they would normally tend to be significantly different because of the fact that the latter is in its startup stages. One of the observations that can be easily seen would be LARRG’s continuously growing total liabilities. This figure (i.e. total liabilities) includes long term debt. This shows how the company relies on debt in order to finance its operations, mainly as a consequence of having a less than solid customer base and revenue figures from sales. The same variable was more stable for UPS .
For the income statement, net income for LARRG (based on projections) is not expected to be positive until the first twelfth month of operations—a phenomenon called cash burning which is fairly common among startups. UPS’ net income has been largely positive for the past three years. The cash flow statement for LARRG shows its increasing reliance on financing (i.e. debt acquisition) and investing activities to finance its operations—still resulting to a net negative cash flow. UPS, on the other hand, exhibits a state where it relies more on the sales it generates to maintain a net positive cash flow for the past three years.
Financial Plan
Market Capitalization
Shows how the public values the company; obtained by multiplying number of outstanding shares to the current stock price. This is a more unbiased but sentiment-based form of valuation. If, for example, the company’s total number of shares is 1,000,000 and the current stock price is $1.45 per share. Then the market capitalization for LARRG would be $1,450,000.
EBITDA Valuation
This valuation method uses the company’s income levels as a measure of its value . The enterprise value is obtained first (market capitalization minus debt and cash and cash equivalents) then gets divided by the EBITDA. The lower the Enterprise Value Multiple, the better. This means that the company’s income reflects the way how the company is valued. Using the market cap example above, the company’s total long term debt would be deducted (i.e. $593,997). This means that the EV would stand at $856,003 for the first year. The company’s EBITDA for the period based on projections was $(6,168,356). This means that the Enterprise Value Multiple using the EBITDA valuation is (0.096).
3e. Finance and Accounting
Accounting changes
Accounting changes for the company all point to a scenario where it is burning cash, increasingly relying on debt to finance its operations. This, again, is common among startup firms. After the first 12 months, however, it is expected that the company’s net income would already be in net positive territory.
ROI
The total sum of the funds used to invest in the business was $695,000. By the end of the first year, for example, this would be valued (in terms of assets) at $(3.8 Million). ROI can be obtained by using this equation: (Investment Gain – Investment Cost)/Cost of Investment. This means that the resulting Return on Investment based on the startup funds alone (even without any recent asset acquisition) is at (546%). This only shows that the startup company is indeed in a stage where it is burning money.
References
Klonsky, E. (2016). How to Use EBITDA to Value Your Company. INC, http://www.inc.com/guides/2010/10/how-to-understand-earnings-or-ebitda.html.
UPS. (2015). Navigate Tomorrow - 2015 Annual Report. UPS, 01-148.
