Sears vs. wall mart

9-911-412
REV: MAY 28, 2012

Assessing a Company’s Future Financial Health
Assessing the long-term financial health of a company is an important task for management as it
formulates goals and strategies and for outsiders as they consider the extension of credit, long-term
supplier agreements, or an investment in a company’s equity. History abounds with examples of
companies that embarkedon overly ambitious programs and subsequently discovered that their
portfolios of programs could not be financed on acceptable terms. The outcome was frequently the
abandonment of programs mid-stream at considerable financial, organizational, and human cost.
It is the responsibility of management to anticipate a future imbalance in the corporate financial
system before its severity is reflectedin the financials, and to consider corrective action before both
time and money are exhausted. The avoidance of bankruptcy is an insufficient standard.
Management must ensure the continuity of the flow of funds to all of its strategically important
programs, even in periods of adversity.
Figure A provides a conceptualization of the corporate financial system, with a suggested step -bystepprocess to assess whether it will remain in balance over the ensuing 3 to 5 years. The remainder
of this note discusses each of the steps in the process and then provides an exercise on the various
financial measures that are useful as part of the analysis. The final section of the note demonstrates
the relationship between a firm’s strategy and operating characteristics ; and its financialcharacteristics.

________________________________________________________________________________________________________________
Professor Thomas Piper prepared the original version of this note, “Assessing a Firm’s Future Financial Health,” HBS No. 201 -077, which is being
replaced by this version prepared by the same author. This note was prepared as the basis for class discussion.
Copyright ©2010, 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce ma terials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may
not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Busin ess School.This document is authorized for use only in MBA E 23-FIO by Leal Mart?n from June 2012 to December 2012.

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Assessing a Company’s Future Financial Health

Figure A

The Corporate Financial System
Analyze Goals

Step 1

Strategy

Market, Competitive Technology
Regulatory and Operating
Characteristics

Step 2

Analyze Revenue Outlook
 growth rate
 volatility,predictability

Step 3

Step 4

Analyze Investment in Assets
 to support growth
 improvement/deterioration
in asset management

Assess Economic Performance
 profitability
 cash flow
 volatility, predictability

Step 5

Step 6

Assess External Financing Need

Ensure Access to Target Sources
of Finance
 lending/investing criteria
 attractiveness of firm
to each targetsource





$ amount
timing, duration
deferability
Step 7
Assess Viability of 3 to 5-year Plan
 consistency with goals
 achievable operating plan
 achievable financing plan
Step 8
Perform Stress Test for Viability
Under Various scenarios
Step 9
Formulate Financing and Operating
Plan for Current Year

2
This document is authorized for use only in MBA E 23-FIO by Leal Mart?nfrom June 2012 to December 2012.

Assessing a Company’s Future Financial Health

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Steps 1, 2: Analyze Fundamentals
The corporate financial system is driven by a firm’s goals, business unit choices and strategies,
market conditions, and operating characteristics. The firm’s strategy and sales growth in each of its
business units will determine the investment in assets needed to...