mastering finance in 2 days
TRANSCRIPT
MASTERING FINANCE MASTERING FINANCE IN 2 DAYSIN 2 DAYS
Apr 15, 2023 [email protected]
Cash Flow: The Lifeblood of Organisations
Tea-Break
Developing Cost Estimates & Budgets
Lunch
Ratios: He Could Foresee Affairs Three Days In Advance Would Be Rich For Thousands Of Years
Tea-Break
Wrap Up
Why Finance Matters? 0900 – 1030
Tea-Break 1030 – 1100
Demystifying Financial Jargon 1100 – 1230
Lunch 1230 – 1330
Departmental Profit & Loss Statements 1330 – 1530
Tea-Break 1530 – 1600
Remember That Time Is Money 1600 – 1700
Why F
inan
ce M
att
ers
?
2
Who cares anyway? You should Investors will
Why? Because financial
statements tell you the
truth about your business
They allow you to plan for the future (i.e.. Do you need external funding? How much?)
Because they are the
scorecards of business and understanding their
purpose content and structure is the first step on the way to
being able to communicate and use finance in business
To play these exciting PlayStation games
we need a play station 1st!
“Getting Started With Finance”(In Less Then 5 Minutes!)
That’s how much we need
Let’s see how much we have
Play Stations Cost Money
Nothing Left From My Pocket Money
Can We Buy This From Our Pocket Money?
600 Bucks. Not Bad!
Wait! The Piggy Bank Has Some Money!!
Still not Enough !
600 Bucks
+ =1100
600 Bucks From The Piggy Bank & 500 Bucks From DadThat’s A Cool 1100 Bucks!.
500 Bucks.That’s
what Dad can spare.
Need To Ask Dad (Better Still Mom) For A Loan
?Now What ?
Where do we get that?
99 Bucks Short Tommy !His Piggy Bank’s Bursting
If Tommy Can Put In 99 Bucks
He Can Share The PlayStation
Tommy’s IN !My New Partner..I Need 99 Bucks
But Tommy Wants To Be An Equal PartnerI Put In 600 Bucks
And Here’s His 600 Bucks!
More than enough money to buy the PlayStation
+
=+
RM1700
Piggy Bank RM600
From Dad RM500
From Tommy RM600
Let’s Do Some Quick Math
Money Left Over RM501
The PlayStation Only Costs RM1199
That’s the name forWhere the money came from(also known as SOURCE)
Liability
Let’s Talk Money Language
Money that you put in is Owner’s Capital
*When you have a Partner (like Tommy) that’s
Shareholders Capital*
Loan from Mom or Dad known as Loans
Like Any LanguageMoney Language Also Has A Vocabulary
ASSETSOR
Where the Money went(also known as Application of Funds)
Time For Some More Money Language
Lets Play With The Games
That Came With The PlayStation
Where the Money went
Let’s Go Get That PlayStation And Hook It Up
Money That’s Left Over Is Also An Asset (Known As Cash Balance)
A statement BalancingWhere the money came from
withWhere the Money went
Is called a Balance Sheet
Back To The Money Language
Our Very 1st Balance Sheet
Total RM1700Total RM1700
OPENING BALANCE SHEETOPENING BALANCE SHEETAssets
(Where the Money went)PlayStation
RM1199Cash Balance
RM501(Money Left
Over)
Shareholders CapitalME RM600Tommy RM600
Shareholders CapitalME RM600Tommy RM600
Liabilities (Where the Money came from)Loans
Dad RM500
Liabilities (Where the Money came from)Loans
Dad RM500
15
Sole Trader v Limited Companies
An extension of the person who owns it
A separate legal entity to the owners with “Articles of Association”
Owns the assets AND Owes the liabilities
Profit/Loss is combined with other income for tax
No rules & regulations other than general law and activity specific
licences etc..
Owners’ liability limited to the share capital invested
Files and pays tax
Set up costs but may be well justified by protection
Subject to regulations and must submit annual returns
16
Partnerships
Two or more individuals own, run and are responsible for liabilities of the enterprise. Authorities and profit shares defined by a partnership agreement
A legal entity in and of itself – can sign contracts and borrow money
Partnership creditors usually have recourse to the personal assets of each partner for settlement of debt
Partnership must file an income tax return but does not typically pay tax: the individual partner income is part of their overall personal tax liability
Understanding the Financial Crisis.mp4
1 Dem
yst
ifyin
g F
inan
cial Ja
rgon
17
What Businesses Do
18
SellingSelling
TelephoneTelephone
BuyingBuyingRentRent
TravelTravel Wages andSalaries
Wages andSalaries
LoanInterestLoan
InterestCapital
ExpenditureCapital
Expenditure
InsuranceInsurance
Light andheat
Light andheat
New LoansNew Loans CapitalCapital Loan repayments
Loan repayments
Businesses conduct all kinds of “Transactions” (finance-speak for an action) such as buying stock, selling goods, paying salaries, renting premises and so on.
_________
The primary role of Finance is to make sense of all these transactions and answer two questions.
Are we making a profit?
What is the overall financial position of the Business i.e.. its Net Worth?
And it does this by funnelling all the transactions into two statements or “scorecards”.
19
Two Questions
Balance sheetBalance sheetProfit and Loss account
Profit and Loss account
_____
20
Who is Responsible for the Finance Function?
• General accounting• Cost accounting• Credit and collections• Management information systems• Trade and other payables• Corporate accounting• Internal auditing• Budgets and analysis• Systems and procedures• Planning and controlling• Interpreting financial reports• Evaluation and consultation• Preparing reports for government agencies• Reports on capital assets
• Raising capital• Investor relations• Short-term borrowings• Dividends and interest
payments• Insurance management• Analysis of investment
securities• Retirement funds• Property funds• Property taxes• Investment portfolio• Cash flow requirements• Actuarial• Underwriting policy and
manuals• Tax administration
ALL MANAGERS
CONTROLLER TREASURER
Finance Basics: The Bottom Line
You need to make profit:To maintain and repairTo develop and expand (and/or to line the shareholders pockets)
21
RevenuesRevenues
CostsCosts
-
PricePrice
VolumeVolume
x
FixedFixed
VariableVariable
+
Sell it for more
Sell more of it
Buildings, Salaries
Materials, Cost of Sales
ProfitProfit
Reduce costs
22
The 4 Financial Objectives
R.O.RR.O.AR.O.IR.O.E
Current assets RMLess: current liabilities RM
Net working capital RM
Revenue Working capital Non-current assets Profit for the year
Equity %Assets
Debt %
%
Efficiency
Liquidity
Growth
Stability
(Incubation)
(Total insolvency: debt is out of proportion)
(Financial insolvency = inaction)
(Cash shortage: must rely on credit)
23
Types of Business Decisions
Investing decisions
Operating decisions
Financing decisions
Statement of Financial Position
ManagersCEO/CFO/Treasurer
Managers
Firm Infrastructure
HRM
Technology Development
Service
Ope
r ati n
g
OutboundLogistics
Ops
InboundLogistics
Marketing&
Sales Service
Procurement
Value
adde
d –
cost
= M
argin
CLOSING BALANCE SHEET
ASSETS
Fixed AssetsWorking
Capital
SHAREHOLDERS
EQUITY
LIABILITIES
OPENING BALANCE SHEET
ASSETS
Fixed AssetsWorking
Capital
SHAREHOLDERS
EQUITY
LIABILITIES
Retained
Earnings
Asset/liability: An asset is an economic resource that a company owns. A liability is a resource that the company owes.
Fixed asset : Not sold directly to end consumer
Book value/market value: Book value is the amount of an asset or liability shown on the companies’ official financial statements based on the historical, or original, cost. Market value is the current value of the asset or liability. In most cases, book value does not equal market value.
Capital goods: These are machines and tools used to produce other goods.
Depreciation/amortization: Depreciation is a system that spreads the cost of a tangible asset, such as machinery, over the useful life of the asset. Amortization is a system that spreads the cost of an intangible asset, such as a patent, over the useful life of the asset.
Gross profit : Sales less the cost of sales
Profit margin: This is profit—what the company’s owners keep after paying all the bills—a percentage of sales or revenues.
Receivables/payables: Receivables are money owed to the company. Payables are money the company owes to others.
Revenue/expenses: Revenue is income that flows into a company. Revenue includes sales, interest, and rents. Expenses are costs that are matched to a specific time period.
Net profit : Final profit for business Bottom line
Fiscal year: A company’s financial reporting year. In most cases the fiscal year is not the same as the calendar year.
24
Some Key Terms
Understanding Book Value.mp4
25
The Profit & Loss Account Is Sometimes Called The Income Statement
Variations in Terminology
The Balance Sheet is sometimes called the
Statement of Financial Position Fixed assets are
sometimes called Non-current assets Long term liabilities are
sometimes called Non-
current liabilities
Long term liabilities are
sometimes called Long
term creditors
Retained profits are sometimes called Retained
earnings or Reserves
Look to the position in the financial statements to show the nature of the item:
use the glossary and if in doubt ask the person who used the term or provided the
statement.
Tip
Concepts
Concept What It Means
True and fair
The first principle guiding accountants when preparing a set of accounts is that they present a “true and fair “ picture of the results and position of the business
Going concern
The accounts are prepared on the basis that the entity will continue in the same business. This is important in matters like valuing assets which might have a very different value should the business fail or change its activity
Historical cost or fair
value
Assets are valued at cost or market value whichever is lower. This can cause consternation when non-accountants see a balance sheet showing e.g.. buildings at decades old values.
Matching principle
Matching is an accounting principle that requires a company to match expenses incurred within a period with the revenues arising in the same period.
PrudenceObliges accountants to take the conservative view on events to ensure that assets are not overvalued, liabilities undervalued or profits overstated
26
The Big Terms – Assets
An asset is an item owned by a business which it intends to convert into cash (a current asset such as debtors and stocks) or to generate sales and hence profits (a fixed asset such as premises, plant and vehicles).
Are the funds provided to the business i.e.. what it "owes". In some situations this would include " Owners Funds" since the company owes the share capital and retained profits to the owners of the business but it is customary to include only Long Term Loans and Current Liabilities.
27
Liabilities
OPENING BALANCE SHEET
FIXED ASSETSLand & Buildings
EquipmentVehiclesPatents
CURRENT ASSETSStocks
DebtorsCash
LONG TERM LOANS(Owners’ Funds wiped out by operating losses or asset devaluations )CURRENT LIABILITIESCreditorsOverdraft
The Big Terms – Equity
Means rights and in finance refers to the rights of the owners to the surplus of assets over liabilities i.e.. the Net Worth of the business aka Owners’ Funds.
Capital employed is the total long term funding in a business i.e.. the owners' funds + long term liabilities.
28
Capital Employed
OPENING BALANCE SHEET
FIXED ASSETSLand & Buildings
EquipmentVehiclesPatents
CURRENT ASSETSStocks
DebtorsCash
OWNERS FUNDSShare CapitalRetained Profits
LONG TERM LOANS(Owners’ Funds wiped out by operating losses or asset devaluations )CURRENT LIABILITIESCreditorsOverdraft
The Big Terms – Working Capital
This is the same as "Net Current Assets" i.e.. it is the difference between current assets and current liabilities.
A business is insolvent when it is unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets and owners funds….(More in Glossary)
29
OPENING BALANCE SHEET
FIXED ASSETSLand & Buildings
EquipmentVehiclesPatents
CURRENT ASSETSStocks
DebtorsCash
OWNERS FUNDSShare CapitalRetained Profits
LONG TERM LOANS(Owners’ Funds wiped out by operating losses or asset devaluations )CURRENT LIABILITIESCreditorsOverdraft
Insolvent
Working Capital.mp4
Is the ability of a business to meet its day-to-day obligations and determined by the adequacy of current assets to cover current liabilities (i.e.. working capital).
Fixed Costs: These are costs such as salaries and rent which do not automatically change as volume increases/decreases. They change abruptly in a steps-of-stairs pattern when their capacity is reached.
Variable costs change in direct proportion to changes in sales volume. Materials which have to be included in every unit sold would be a good example.
30
The Big Terms – Liquidity
OPENING BALANCE SHEET
CURRENT ASSETS
Stocks
Debtors
Cash
CURRENT LIABILITIES
Creditors
Overdraft
Fixed And Variable Costs
RM
Increasing volume of output
Sales
Variable Costs Fixed
Costs
The Big Terms – Capital vs Revenue Expenditure
31
Capital expenditure refers to "material" (significant relative to the scale of the business) expenditure on fixed assets. Such expenditure will not be charged in full to the profit and loss account in the period that it is made but will be phased or "written off" over the anticipated useful life of the asset in the form of a depreciation charge. This conforms to the principle of "true and fair" and avoids misleading distortions to profit from one period to the next.
Revenue expenditure is repetitive expenditure on day to day items such as wages, goods for resale and overheads. The test is that the benefit of the expenditure will be used in the current accounting period as opposed to capital expenditure which creates benefits for a number of accounting periods.
Why Profit Is Not The Same As Cash
Item Profit Cash
Capital expenditure
N/A In full at time of payment
DepreciationCharged over the life of the asset
N/A
Credit sales In period invoiced May be outstanding at the end of
the period
Credit Purchases In period incurredMay be outstanding at the end of
the period
GSTN/A Added to sales and purchases and
balance to or from Hasil
New Capital in N/A In full at time of receipt
Capital Grants
Credited over an appropriate period
(like reverse depreciation)
In full at time of receipt
Loan paymentsInterest amount
onlyInterest and Principal
32
33
The Operating Cycle and the Cash Cycle
TimeAccounts payable period
Cash cycle
Operating cycle
Cash received
Accounts receivable periodInventory period
Finished goods sold
Firm receives invoice Cash paid for materials
Order Placed
Stock Arrives
Raw material purchased
Limitations of Financial Information
Area What It Means
MoraleFinancial statements do not provide any direct
information on staff morale
MarketFinancial statements provide no information about market structure, trends or position.
Game Changers
Financial statements will not reveal anything about future technological, social , political or
economic events that may have a major impact on the business.
34
CASH FLOW STATEMENT
PROFIT & LOSS STATEMENT
REVENUE
OPENING BALANCE SHEET
ASSETS
Fixed AssetsWorking
Capital
Overheads payments
(Daily, weekly, monthly)
CLOSING BALANCE SHEET
Firm Infrastructure
Firm Infrastructure
HRMHRM
Technology DevelopmentTechnology
Development
Service
Service
Ope
r ati n
gO
per a
ti ng
OutboundLogistics
OutboundLogistics
OpsOps
InboundLogisticsInboundLogistics
Marketing&
Sales
Marketing&
Sales ServiceService
ProcurementProcurement
Cash in hand increases
Capital DrawingsSHARE
HOLDERS EQUITY
LIABILITIES
Retained
Earnings
Retained
Earnings
ASSETS
Fixed AssetsWorking
Capital
SHAREHOLDERS
EQUITY
LIABILITIES
Expenses
Dividend distribution to
Shareholders
Dividend distribution to
Shareholders
Cash outflow(Costs of production)
Value
adde
d –
cost
= M
argin
35
Understanding Profit Margin.mp4
Back Back by 2pmby 2pmBack Back
by 2pmby 2pm
Dep
art
men
tal Pro
fit
& L
oss
S
tate
men
ts
236
37
The Value Chain Of The Business Unit Is Only One Part Of A Larger Set Of Value-adding Activities In An Industry—the Industry Value Chain Or Value System
Type Of Business Activity
Operating activities—those that enable it to fulfill its role in the industry value chain and hence satisfy its customers, who see the direct effects of how well those activities are carried out. Not only must each activity be performed well, they must also link together effectively if the overall business performance is to be optimizedService activities—those which are necessary to control and develop the business over time and thereby add value indirectly—the value being realized through the success of the primary activities
38Porter_s Value Chain In the Dell Corp.mp4
The Traditional Value Chain Model
Inbound logistics—obtaining, receiving, storing and provisioning the key inputs and resources in the right quality and quantity to the business. This may include recruiting staff as well as buying materials, components and services and dealing with subcontractors and acquiring equipment
39
Operations—transforming the inputs into the products or services required by the customers. This involves bringing the resources and materials together to make the ‘product’ (e.g. a car) or provide the service (e.g. a banking current account)
The Traditional Value Chain Model
Outbound logistics—distributing the products to the customers either direct to the consumer or to the appropriate channel of distribution, so that the customer can obtain the product or service and pay for it appropriately (e.g. a car could go via a dealer to the customer, although it is possible for the customer to buy direct from the manufacturer and have the car delivered from the factory; or the delivery of cash to a bank customer via an Automatic Telling Machine (ATM) installed in a grocery retailer).
40
Sales and marketing—providing ways in which the customers and consumers are aware of the product or service and how they can obtain it, including how to induce them to buy or use the product or service. This would apply to a new car model, or a bank account, but also to cancer screening in the Health Service, for instance.
The Traditional Value Chain Model
Services—adding further value by ensuring the customer gets full benefit or value from the product once purchased (e.g. car warranty, or information on how to use a bank account to avoid unnecessary charges).
41
Valu
e C
hain
Gam
e
Instructions
To play the Value Chain game, you will need the following:
a.A Value Chain Game with enough pieces for all players.
b.One envelope for each player. Each player will store his/her money and Property Title Deed cards in this envelope and leave it in the room each day.
3 Rem
em
ber
That
Tim
e Is
Mon
ey
43
The Main Financial Statements
31 Dec Year 1 31 Dec Year 2 31 Dec Year 3
Turnover is vanity
Profit is sanity
But...
CASH IS KING!44
What is a Profit and Loss Statement.flv
Measures revenues andexpenses over a periodof time
Tracks profitability: is the business making a profiton what it sells?
Shows how successfully the buying and selling process has been managed
Measures the ability of your business to grow, repay debt service and support you
Top section of the P&L shows Revenue Gross revenue (Plus or minus) Adjustments to revenue (Minus) Cost of goods sold (COGS) = Gross Profit
Bottom section of the P&L shows Expenses Logical categories of expenses, including overheads
Revenue minus Expenses = Net (pre-tax) Profit or Loss
45
Profit and Loss Statement (P&L)
46
The First Accounting
Equation
LessLess
Sales DiscountsSales
Commissions
Sales DiscountsSales
Commissions
EqualsEquals
Gross ProfitGross Profit
LessLess
Expenses(Fixed & Variable)
Expenses(Fixed & Variable)
Opening StockOpening StockEqualsEquals
PlusPlus
Stock PurchasesStock Purchases
EqualsEquals
Stock available for saleStock available for sale
LessLess
Cost of Goods SoldCost of Goods Sold
LessLess
EqualsEquals
Sales
Sales
Net Sales
Net Sales
HINTOnly those businesses
that have goods (products) to sell will use the calculation of
cost of goods sold
HINTOnly those businesses
that have goods (products) to sell will use the calculation of
cost of goods sold
Net ProfitNet Profit
TIPRegularly produce profit and loss
information (monthly) and compare against previous
month’s activities to ensure your profit expectations are being met.
TIPRegularly produce profit and loss
information (monthly) and compare against previous
month’s activities to ensure your profit expectations are being met.
Closing StockClosing Stock
Answer Q1 – “Are we making a profit?"
Revenues are earned for the sale of goods or services. Note that revenues
occur when the sale is made. The payment may or may not have been
received.
REVENUE
Expenses
Income Statement Overview_ Sales, Profit, Loss.mp4
P & L
Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made.
47
Examples of revenues include sales, service revenue and interest revenue.
Examples of expenses include salaries expense, utility expense and interest expense.
Most businesses require more information from their businesses than a simple Profit & Loss Statement can provide. Therefore, they use a multi-step Profit & Loss Statement format.
A format for a multi-step Profit & Loss Statement is:
Cost of goods sold represents the expense a business incurred to buy or make a product for resale.
Example - a book store buys a book for RM25 and then sells it for RM32. The cost of goods sold is RM25.
Operating expenses are the usual expenses incurred in operating a business.
Accounts such as salaries expense, utility expense, and depreciation expenses are all shown in this section.
_______________
Net Profit is a GOAL!
Net profit pays for: Loan principal repayment Future income taxes Owner’s Salary (LLC [S Corp] / Corporation) Owners / Shareholders Dividends Owners Draw (sole proprietor / partnership) Future expansion and equipment
48
Non-operating items are revenue, expenses, gains and losses that do not relate to the company’s primary operations.
Accounts include interest expense and gains and losses of the sale of equipment and investments.
Income taxes are computed by multiplying Income before taxes by the income tax rate.
Example – Income before taxes is RM50,000. The income tax rate is 30%. Income taxes = RM50,000 * 30% = RM15,000.
______
Income Statement, Cont_d_ Cost of Goods Sold, Gross Profit, .mp4
Use presentations to suit their business activity.
In Service firms we just deduct overhead expenses from turnover.
Retail businesses will have physical inventory and therefore have a cost of sales
Manufacturing business may break direct expenses (Cost of Sales) down further e.g.. into Materials and wages.
49
Profit and Loss Account – different industries
Service Retail Manufacturing
50
Profit and Loss Account– detailed
Sales
Cost Of Sales
Gross Profit
Overheads
Net Profit
SellingFinancialAdministration
Function Activity
SalariesRentTelephoneTravellingAccounting feesLight heat and powerEtc.
Net Profit before Interest, Tax, Depreciation and Amortisation (PBITDA)Net profit after Tax…
Income Statement, Cont'd EBITDA, Net Income.mp4
“Capital Expenditure i.e.. buying fixed assets such as vehicles will be phased over its useful life to avoid distorting profit for any one year. This charge is called “Depreciation”
For a period - “Profit and Loss account for the period ending…”
Based on invoiced sales and expenses not cash transactions (called the “accrual principle”)
Matches revenues and expenses for the period to seek a true and fair presentation
51
Key Accounting Principles Relating To Profit And Loss Accounts
_________
Fixed Assets Depreciation.mp4
Answer Q2 – “What is the net worth of the business?"
AssetsCurrent assetsCashShort-term investmentsStock on handAccounts receivableOtherNon-current assetsLand and building at costPlant and equipment at costMotor vehicle at costOffice equipment at costLeasehold improvements at costLess depreciationIntangible assetsGoodwillOtherTotal assetsLiabilitiesCurrent liabilitiesBank overdraftShort-term loansTrade creditorsOtherNon-current liabilitiesProprietor's loansSecured loansOtherTotal liabilitiesOwner's equityTotal assetsLess total liabilitiesOwner's equity 52
The Second Accounting EquationCLOSING BALANCE SHEET
ASSETS
Fixed AssetsWorking
Capital
SHAREHOLDERS
EQUITY
LIABILITIES
What is a Balance Sheet.mp4
Assets minus Liabilities equals EquityA - L = E
Assets equals Liabilities plus EquityA = L + E
Balance Sheet
The purpose of the balance sheet is to report the financial position of an accounting entity at a particular point in time.
53
The basic format for the balance sheet is: Assets = Liabilities + Equity
Assets are economic resources owned by a company.
Examples include cash, accounts receivable, supplies, buildings and equipment.
Liabilities are the company’s debt or obligations.
Examples are accounts payable, unearned revenues and bonds payable.
Equity is the residual balance. Assets – liabilities = equity. Equity is commonly called stockholders’ equity if the business is a corporation as it represents the financing provided by the stockholders along with the earnings from the business not paid out as dividends.
There are two different types of assets shown on a balance sheet. These are current assets and non-current assets.
Current assets+ Non-current assets
Total assets
__________
Balance Sheet
Current assets are assets that will be used or turned into cash within one year.
54
Examples include cash, accounts receivable, inventory, short-term investments, supplies and prepaids.
Non-current assets comprise the remainder of the assets.
These include accounts such as: long-term investments, land, building, equipment and patents.
There are two different types of liabilities shown on a balance sheet – current liabilities and long-term liabilities.
Current liabilities+ Long-term liabilities
Total liabilities
Current liabilities are obligations that will be paid in cash (or other services) or satisfied by providing service within the coming year.
Examples include accounts payable, short-term notes payable, and taxes payable.
______
Balance Sheet
Long-term liabilities are obligations that will not be paid or satisfied within the year.
55
Examples include mortgage payable and bonds payable.
Contributed capital+ Retained earnings
Total stockholders’ equity
Stockholders’ Equity is divided into two categories: contributed capital and retained earnings.
Contributed capital is the amount of cash (or other assets) provided by the shareholders.
Common Stock and Additional Paid in Capital are accounts in this section.
Retained earnings is the total earnings that have not been distributed to owners as dividends.
_______________
Example Problem
Cash 5,000 Sales100,00
0
Utility Expense 8,000 Buildings 65,000
Common Stock45,00
0Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable40,00
0Supplies Expense 3,000
Salaries Expense16,00
0Accounts Receivable 10,000
Inventories45,00
0Retained Earnings (beg.
bal.)5,000
Income Tax Rate 30%56
Assets
Cash 5,000 Sales100,00
0
Utility Expense 8,000 Buildings 65,000
Common Stock45,00
0Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable40,00
0Supplies Expense 3,000
Salaries Expense16,00
0Accounts Receivable 10,000
Inventories45,00
0Retained Earnings (beg.
bal.)5,000
Income Tax Rate 30%
Classify the accounts as assets, liabilities, equity, revenue or expenses.
57
Assets, Liabilities,
Cash 5,000 Sales100,00
0
Utility Expense 8,000 Buildings 65,000
Common Stock45,00
0Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable40,00
0Supplies Expense 3,000
Salaries Expense16,00
0Accounts Receivable 10,000
Inventories45,00
0Retained Earnings (beg.
bal.)5,000
Income Tax Rate 30%
Assets, Liabilities, Equity
Cash 5,000 Sales100,00
0
Utility Expense 8,000 Buildings 65,000
Common Stock45,00
0Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable40,00
0Supplies Expense 3,000
Salaries Expense16,00
0Accounts Receivable 10,000
Inventories45,00
0Retained Earnings (beg.
bal.)5,000
Income Tax Rate 30%
Assets, Liabilities, Equity, Revenues
Cash 5,000 Sales100,00
0
Utility Expense 8,000 Buildings 65,000
Common Stock45,00
0Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable40,00
0Supplies Expense 3,000
Salaries Expense16,00
0Accounts Receivable 10,000
Inventories45,00
0Retained Earnings (beg.
bal.)5,000
Income Tax Rate 30%
Assets, Liabilities, Equity, Revenues, Expenses
Cash 5,000 Sales100,00
0
Utility Expense 8,000 Buildings 65,000
Common Stock45,00
0Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable40,00
0Supplies Expense 3,000
Salaries Expense16,00
0Accounts Receivable 10,000
Inventories45,00
0Retained Earnings (beg.
bal.)5,000
Income Tax Rate 30%
58
Profit & Loss Statement
Sales100,00
0
- Cost of Goods Sold -58,000
Gross Margin 42,000
- Operating Expenses -27,000
Income from Operations
15,000
- Non-operating Items -5,000
Income before Taxes 10,000
- Income Taxes -3,000
Net Income 7,000
Operating expenses include:RM
Utility expense 8,000Salaries expense 16,000Supplies expense 3,000
Non-operating items include:
Interest expense 5,000
Income taxes = Income before taxes * Income tax rate
10,000 * 30% = 3,000
Sales
- Cost of Goods Sold
Gross Margin
- Operating Expenses
Income from Operations
- Non-operating Items
Income before Taxes
- Income Taxes
Net Income
Balance Sheet
Current Assets: Current Liabilities:
Cash 5,000 Accounts Payable 12,000
Accounts Receivable 10,000 Long-term liabilities:
Inventories 45,000 Bonds Payable 40,000
Supplies 4,000 Stockholders’ Equity:
Non-Current Assets:
Common Stock 45,000
Buildings 65,000 Additional Paid in Capital 20,000
Retained Earnings12,000
Total Assets 129,000
Total Liabilities and Equity 129,00
0
59
End. Bal. is brought forward from the Statement of Retained Earnings
Current Assets: Current Liabilities:
Cash Accounts Payable
Accounts Receivable Long-term liabilities:
Inventories Bonds Payable
Supplies Stockholders’ Equity:
Non-Current Assets:
Common Stock
Buildings Additional Paid in Capital
Retained Earnings
Total AssetsTotal Liabilities and
Equity
Balance Sheet, Cont'd Current Assets, Long-Term Assets, Total Assets.mp4
Balance Sheet Overview_ Assets, Liabilities, Owner_s Equity.mp4
Interim Plenary
Profit and loss account explaining game.
With a partner each have 3 mins to explain what a profit and loss account is, it’s purpose component parts and calculations used in the account.
60
MASTERING FINANCE MASTERING FINANCE IN 2 DAYSIN 2 DAYS
Cash Flow: The Lifeblood of Organisations
Tea-Break
Developing Cost Estimates & Budgets
Lunch
Ratios: He Could Foresee Affairs Three Days In Advance Would Be Rich For Thousands Of Years
Tea-Break
Wrap Up
Why Finance Matters? 0900 – 1030
Tea-Break 1030 – 1100
Demystifying Financial Jargon 1100 – 1230
Lunch 1230 – 1330
Departmental Profit & Loss Statements 1330 – 1530
Tea-Break 1530 – 1600
Remember That Time Is Money 1600 – 1700
Imp
rovin
g C
ash
-flow
Show financial flows when they actually happen
E.g. so a transaction occurring in April but not paid until May
would be recorded as a transaction in May
Most important
You must NOT run out of cash!
When do you collect payments?
When do you pay your debts?
How do you finance your company?
62
What is cash flow?
Moving cash in or out of a business including sales revenue receipts and expense transactions
Balance of cash received less the amount of cash paid out over a period of time
Cash flow can be positive or negativeduring the period
Generate Cash Flow reports at least monthly with your accounting software
Compare your Actual business performance to your Budget in all categoriesWhere were the gaps?What impact did business performance have on Cash Flow?What needs to change to increase positive cash flow?
Prepare a Cash Flow projection to help adjust performance when neededHelps you manage your cash so you can pay your bills on a timely basis and keep the doors
of your business open
63
Understand & ManageCash Flow
Cash Flow Analysis
Statement of Cash Flows Why Is This Financial Statement Required.mp4
Starter
Women's clothing retailer Ellie Louise has gone into administration. Administrators from restructuring firm Zolfo Cooper said Ellie Louise had suffered "cash flow problems arising from the current challenging fashion retail environment". Ellie Louise has 97 stores throughout the UK, and employs 439 staff. It was founded in 1980 and is based in Leeds. Zolfo Cooper said Ellie Louise's finances woes were "exacerbated" by its 2010 purchase of the Trade Secret brand. Graham Wild, Partner at Zolfo Cooper said: "Unfortunately, as with many other fashion retailers exposed to declining consumer spend, challenging trading conditions have led to increased financial pressure on this well-known brand.”
64
1. What is a cash flow problem?
2. What were Ellie Louise’s cash flow problems caused by?
65
Improving Cash Flow
A typical operating cash flow cycle for an inventory based business buying and selling on credit
Receive good for Inventory
Pay supplier (45 days?) Sell goods (Within 60 days?)
Receive payment for goods (Within 45 days of the sale?)
Overheads payments (Daily, weekly, monthly)
And you will have non-operating cash flows from capital receipts (share capital and loans) and capital expenditure (purchase of fixed assets, taxes and loan principal
repaying loan principal)
66
Causes of Cash Flow Problems
___________
_____________
_________________________________
_______
______________
In groups brainstorm factors you feel may cause cash flow problems.
67
Ways of Improving Cash Flow
BE CAREFUL: IMPROVING CASH FLOW IS NOT THE SAME AS IMPROVING SALES PROFIT. EG. INCREASING ADVERTISING
WILL INCREASE SALES IN THE LONG RUN BUT IN THE SHORT RUN WILL WORSEN CASH FLOW!
Methods of Reducing Cash Outflows
For each of the following in your groups decide on which method is being described.Display on your white boards after the count of 10.
68
May reduce any discount offered with future purchases.Delay payments to suppliers
Expansion become very difficult.Delay spending on capital equipment.
Future demand may be reduced by failing to promote the products effectively.Cut overhead spending that does not directly affect output.
They may insist on cash on delivery or refuse to supply at all.Delay payments to suppliers.
Efficiency of the business may fall if outdated equipment is not replaced.Delay spending on capital equipment.
The asset is not owned by the business.Use leasing.
_______________________
_____________________________
______________________________________________
______________
_______________________
_____________________________
Possible Ways to Increase Cash Flow
Increase the number of items sold
Increase the price
Reduce expenses
Change the timing of expenses
Obtain sources of cash other than sales (e.g., line of credit)
Reduce or change timing of Owner’s Draw
Buy inventory from vendor at lower price
Obtain credit from vendor(s)
Establish policy to get paid sooner by customers
69
_________
For the Year Ending Cash at Beginning of Year
Cash flows from OperationsCash receipts from customers (enter positive amounts) Cash Sales Cash collected from customers (debtors) Funding from Creditors Stock purchased, not yet paid Cash paid for (enter negative amounts) Total Expenses Inventory (stock)purchases Funding to Debtors
Sales made not yet collected Net Cash Flow from Operations -
Investing ActivitiesCash receipts from
(enter positive amounts) Sale of property and equipment Matured Investments
Cash paid for (enter negative amounts) Purchase of property and equipment
Purchase of investments Net Cash Flow from Investing Activities -
Financing ActivitiesCash receipts from
(enter positive amounts) Increase in short term debt Increase in long term debt Increase in equity (proceeds from owners)
Cash paid for (enter negative amounts) Repayment of loans
Dividends Net Cash Flow from Financing Activities - Net Increase in Cash -
Cash at End of Year -
70
Wo
rking
Cap
ital C
ycle
Yearly C
ash
Flo
ws
Debtors CASH POOL Creditors
Work in Progress Raw Materials Finished Goods
Sales
Capital Dividends Loans/Overdrafts Investment Taxation Rights Issues Interest Govt. Grants
Equity 71
The Company’s Cash-Cycle
Exercise 1 How Do You Manage Cash Flow?
Discussion:
How many of you have had cash flow problems?
What were the causes?
What did you do?
Did it work?
5 minutes
72
4 Develo
pin
g C
ost
Est
imate
s &
B
udg
ets
73
A Plan
A Limit
A Schedule
A Reality Check
An Allocation
“A planned expression of money”Wright.D 1994 “A practical foundation in costing” Routledge
For a defined activity
Shows;
Income & Expenditure
Total estimated costs
Defined period of time
74
What Is A Budget?
Want
Need
Can
Budget
A Budget Helps
What is a Budget.flv
Budgeting in Context
75Controlling operations
Plus Effects of Outside Environment
Current Operating Data
76
Linking Operations to Strategy
BusinessStrategy
Product,Market
Strategies
Multi-YearProfitplans
Long-TermCapital
Budgets
AnnualOperatingBudgets
VarianceAnalysis
77
Annual Budget Process
Sales Budget
Production Budget
MaterialsBudget
OverheadBudget
LabourBudget
CashBudget
Pro-FormaFinancial
Statements
S&ABudget
CapitalBudget
Top-Down Budgeting is the term given to a budgeting process based on estimating the cost of higher level tasks first and using these estimates to constrain the estimates for lower level tasks
A crucial factor for successfully implementing this method for estimating budgets is the experience and judgement of those involved in producing the overall budget estimate.
78
Top Down Budgeting
Sometimes called Zero Based Budgeting
Bottom-up budgeting begins with identifying all the constituent tasks that are involved in implementing a project and working out the resources and funding required by each
Provides the opportunity to create organisation level budgets by rolling up project budgets
Create centralised project level budgets from their sub-project budgets (WBS)
79
Bottom Up Budgeting
Top Down & Bottom Up Compared
Bottom-up Top-down
- Annual - Multi-year
- Time consuming - Delegated authority
- Ownership of proposals is - Creates joint ownership of specific proposals
- Reactive - Proactive
80
Top-down Bottom-up
Problems of Bottom-up Budgeting Difficult to control aggregate spending Allocations may not be optimal Hard to keep multi-year perspective
Activity Orientated Budget
The traditional budget is activity based
Individual expenses classified and assigned to basic budget lines e.g.. phone, materials, personnel, clerical, utilities, direct labour, etc.
Diffused control so widely that it was frequently non-existent.
81
_____________
Also known as Program Budgeting.
Aggregates income and expenditures across programs (projects).
The project has its own budget.
Pure project organisation, the budgets of all projects are aggregated to the highest organisational level.
Functional organisation income/expense for each project are shown.
82
Task Orientated Budget
Only way a detailed budget can be produced.
Can monitor budget usage against project activity.
Can be done when the project schedule has been determined.
Direct relationship of these items.
Will affect the final budgeted figure.
Is a “trade off”.
83
Budget PlanningLinked To Project Activity Completion Times,
Project Activities, Costs
The ability to control anticipated expenditures for your project using a project cost budget.
The Projects Budgetary Controlsfeature includes the following:Flexible Setup of Controls
Defines Control Amounts Defines Control Levels
Funds Check - Performs the available funds verifications.Maintenance of Available Balances - Maintains the available balance for
each project budget line.
84
Budgetary Control
Actual Transactions; are recorded project costs. Examples include labour, expense report, usage and miscellaneous
costs.
Commitment Transactions;are anticipated project costs. Examples include purchase requisitions and purchase orders or contract commitments.
Freeze spending
Freeze activity
Put off “unnecessary” projects activity
Re-schedule/cost your project
Downsize your project
A budget is a tool that helps you:
Plan for the future – usually monthly for the next year
Forecast and then track your actual financial transactions
Adjust activities when needed Marketing to attract more customers to increase sales Reducing costs
Consider the impacts of expansion
Estimate profitability
85
Response To Budget WarningsPreparing a Budget
Primary Elements Of A Budget
CATEGORY MONTHLY BUDGET MONTHLY ACTUAL
SALES
COST OF GOODS SOLD
RENT/MORTGAGE
UTILITIES
PROFESSIONAL HELP
ADVERTISING
PAYROLL
INSURANCE/TAXES
OTHER
PROFIT
86
Your accounting software will provide detailed accounts for each category
Exercise 2 How Do You Budget for Your Business?
Discussion:
Do you currently prepare an annual budget?
Do you track your results compared to budget monthly?
How does this help with your business decisions / forward plans?
5 minutes
87
5R
ati
os:
He C
ou
ld F
ore
see A
ffair
s
Th
ree D
ays I
n A
dvan
ce W
ou
ld B
e
Ric
h F
or
Th
ou
san
ds O
f Years
88
Back Back by 2pmby 2pmBack Back
by 2pmby 2pm
We made RM20k net profit last year
That was 10% of sales
And grew from 3% to 6% to 10% over the last 3 years
The average for our industry is 7%
Ratio
Trend
Comparison
We will cover in detail
Not easily obtained for private
companies
89
Levels Of Information
Studying “Listed” companies will require different ratios to private ones
Share price
P/E Ratio
Market
Capitalisation
Enterprise
value
Gross Margin Quick ratioDebtor days
Stock turn
We need to focus on management as they show all the elements of the business model
90
Published v. Management Accounts
P E Ratio .mp4
Enterprise Value.mp4
Gross Margin.mp4
Market Cap.mp4 Quickratio.mp4
Debtor Days.flv
91
Classifying And Exploring Ratios
Profitability
Stability
Asset Utilisation
Income and Assets andExpenditure Liabilities(Revenues & Costs) (Company Worth)
Financial Ratios
92
ROI Model, IncludingThe Strategic Profit Model
Net SalesNet Sales
Cost ofgoods sold
Cost ofgoods sold
Variableexpenses
Variableexpenses
Fixedexpenses
Fixedexpenses
Grossmargin
Grossmargin
Totalexpenses
Totalexpenses
Net profitNet profit
Net SalesNet Sales
Net profitmargin
Net profitmargin
Assetturnover
Assetturnover
Return onassets
Return onassets
-
-
+
InventoryInventory
Accountsreceivable
Accountsreceivable
Other currentassets
Other currentassets
Total currentassets
Total currentassets
Fixedassets
Fixedassets
Net salesNet sales
Totalassets
Totalassets
+
+ +
x
FinancialLeverage
FinancialLeverage
x Return onNet WorthReturn onNet Worth
=
Which is … the P&L? Balance sheet? SPM?
ROI = Net Profits x 100 Total Assets
ROI = Net Profits x 100 x Sales Sales Total Assets
Net Margins Asset Turnover(Marketing Effectiveness) (Production Effectiveness)
93
ROI and its Derivatives
94
Financial Objectives:The Strategic Profit Model
Return onInvestment
LeverageRatio
Return onAssets= x
Net Profit Net Worth
Net Profit Total Assets
Total AssetsNet Worth
Return onAssets
=
Net Profit Total Assets
and so ...
Net ProfitMargin
AssetTurnover x
Net Sales Total Assets
Net ProfitNet Sales
The RM salesgenerated
by each RM of assets
The net profitgenerated
by each RM of sales
Return On Equity is perhaps the most important ratio from the strategic management point of view and understanding how it is linked to :
The Capital Structure Return on Assets Dividend Payout
ROE issues are essential for formulating strategic plans.
95
ROE and its Derivatives
ROE = Net Profit x 100 Total Equity
ROE = Net Profit x 100 * Sales x Total Assets Sales Total Assets Total Equity
ROI Leverage
Marketing Production Financial Effectiveness Effectiveness Effectiveness
Return On Equity (ROE).mp4What Is A Dividend.mp4
Total Assets/Total Equity =Leverage proxy
Net Profits/ Total Assets= ROI
Firm BFirm A
Firm A & Firm B have thesame ROI but not ROEdue to the leverage effect
96
ROI-ROE Curves for two firms A & B
Used to measure the quality and adequacy of current assets to meet current obligations as they come due
Current ratio – overall liquidity Current Assets / Current Liabilities
Quick ratio – short term liquidity (Cash + AR) / Current Liabilities
Days of cash (Cash x 360) / Sales
Used to measure performance of a company and how well its assets are being used to generate revenues
Gross profit margin (Sales minus Cost of Good Sold) / Sales
Pre-tax profit margin EBT / Sales
Return on Equity EAT / Equity
Compare to historical & Industry
97
Liquidity RatiosProfitability Ratios
____________
Financial Ratios in 3 Minutes_ Financial Ratio Analysis Expl.mp4
Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs
Debt to Equity - Leverage Liabilities / Equity
Compare to historical, or industry averages and trends to assess your risks
Measurements of the effectiveness of managing current assets and current liabilities
Days of accounts receivable (A/R) 360 / (Sales/Accounts Receivable)
Days of inventory 360 / (Cost of Goods Sold/Inventory)
Days of accounts payable (A/P) 360 / (Cost of Goods Sold/Accounts Payable)
Compare to terms, historical and industry
98
Leverage RatiosEfficiency Ratios
Fixed Charge coverage and debt service coverage ratios used to measure borrowing ability
Earnings before Interest and Taxes (EBIT) / Interest
Generally 2.5 is the minimum credit standard
Earnings Before Taxes / Current Maturities
Debt Service payment coverage from traditional cash flow:= Earnings after taxes / current maturities
Valuable for all businesses so you know how much you need to sell to cover your total costs!
Breakeven when total costs (fixed + variable) = total revenue
Breakeven = Fixed Cost/ Gross Profit Margin
Important calculation if you have high fixed costs and variable sales
99
Efficiency Ratios: Debt Service Ratios used by Banks
Breakeven Analysis
Break Even Analysis in 2 Easy Steps_ Cost Volume Profit Anal.mp4
Sales revenue over time for our example.
Breakeven - when total costs (fixed + variable) = total revenue
RM20,000 sales or 200 units
Note: May be additional “Semi Fixed Costs” influenced by volume but not associated per unit (example - commission tiers, temporary labour, office supplies)
100
Breakeven Chart
Breakeven - A View of the Analysis
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Units Sold (x100)
Rev
enu
e ($
)
Revenue Fixed Cost Fixed + Variable
How to Determine a Breakeven Point.mp4
Leverage Management
Leverage or gearing is about managing the debt in the company. It reflects the ability of the firm to successfully employ debt in its capital structure.
Leverage or gearing can effect the ROE Firms with similar ROIs may have different ROEs due to the gearing effect
Growth strategies and debt funding are related
101
_______
Financial Strategy 1: Boost growth by raising the debt to equity ratio
Financial Strategy 2: Reduce the interest paid on debt by seeking
cheaper sources of funds - shareholders
Marketing Strategy - increase rates of return by doing the following:
Volume Strategy selling more through lower prices
Revenue Strategy raising prices
102
Growth Strategy and Finance
Manufacturing Strategy: Increase rates of return on assets by: Improving production efficiency through reducing unit costs Improving production by increasing volume using fewer assets Contracting out hollowing out____________
ROA.mp4
Income smoothing – move profit from one year to another
Changing accounting policies, particularly depreciation, asset valuations
Overstating costs, particularly in regulated industriesMaking expenses into Assets - ‘capitalisation’
103
Creative Accounting
What do we want to create?
More profit? Less profit?
More assets? Fewer assets?
More liabilities? Fewer liabilities?
Directors are responsible for preventing crime and fraud
They are required to have a system of internal controls
Who controls executive directors for honesty? Audit committees, Non-executive Directors, Supervisory Board
Creating fictitious contracts
Fictitious Assets, inaccurate valuations
Omitting Liabilities, misleading valuations
Raid the employees’ pension fund
104
Corporate Crime / Fraud
6W
rap
Up
105
Success in handlingmoney requires understanding the field you’re playing on, which likely is not level or balanced.
Traveling around the Value Chain teaches you that adversity not only lurks, it happens. The board is a vehicle that carries you from decision point to decision point. If you make the most of each choice encountered, you improve the odds of winning the game.
106
Lesson #1: Know the real playing field.
Lesson #2: You must be prepared to take losses on the “road,” if you are to
ultimately win.
Like any business, you have assets and debt.
In the game, your assets consist of CASH, DEEDS and PLANTS. Your liabilities will be MORTGAGES. The difference is your NET WORTH. As long as your net worth is positive, you are in the game.
If your net worth goes “in the red” you go bankrupt! Good-bye.
107
Lesson #3: Before you can make money, you have to steadily think about, and apply yourself, to making money.
In other words, you can’t succeed by assuming you can manage your nest egg when the whim strikes. You
need to commit yourself to making intelligent decisions daily, through careful study and application
of sound financial principles.
Lesson #4: Think of your Personal Finances as if You were a Business
Playing VALUE CHAIN GAME makes you think about MONEY.1. Know your real playing field.2. Be prepared to accept losses on your road to winning.3. Apply yourself daily to the task of making money.4. Think of your personal finances as a business.5. Know the rules of the “game” you’re playing.6. Know your “Game Persona”7. Establish a Game Plan.8. Have Fun!
108
Lesson #5: Know the rules of the game you’re playing.
By the time the fool has learned the game, the players have dispersed.
– African Proverb–Working Capital Management explained..mp4
Plenary:QuestionsTake-awayThoughtsInputsFollow-ups
Write down
3 things you have learnt today
2 things you are not sure about
1 way you can link what you have done today to your work place
109
THANK YOU
Cash Flow: The Lifeblood of Organisations
Tea-Break
Developing Cost Estimates & Budgets
Lunch
Ratios: He Could Foresee Affairs Three Days In Advance Would Be Rich For Thousands Of Years
Tea-Break
Wrap Up
Why Finance Matters? 0900 – 1030
Tea-Break 1030 – 1100
Demystifying Financial Jargon 1100 – 1230
Lunch 1230 – 1330
Departmental Profit & Loss Statements 1330 – 1530
Tea-Break 1530 – 1600
Remember That Time Is Money 1600 – 1700
Learn Unlearn Relearn EvaluationPlease rate the following aspects of the course
excellent good not good poor
1.Organisation & domestics
2.Content
3.Notes
4.Presentation
5.Overall enjoyment
Any other comments
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