Mastering finance in 2 days

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


FIXED ASSETSLand & Buildings

EquipmentVehiclesPatents

CURRENT ASSETSStocks

DebtorsCash

LONG TERM LOANS(Owners’ Funds wiped out by operating losses or asset devaluations )CURRENT LIABILITIESCreditorsOverdraft

http://www.fabeducation.com/userhome.php

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





DebtorsCash

OWNERS FUNDSShare CapitalRetained Profits


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





DebtorsCash

OWNERS FUNDSShare CapitalRetained Profits


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


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


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)


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.


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


0


Common Stock45,00




Bonds Payable40,00




Inventories45,00


bal.)5,000

Income Tax Rate 30%

Classify the accounts as assets, liabilities, equity, revenue or expenses.

57

Assets, Liabilities,


0


Common Stock45,00




Bonds Payable40,00




Inventories45,00


bal.)5,000

Income Tax Rate 30%

Assets, Liabilities, Equity


0


Common Stock45,00




Bonds Payable40,00




Inventories45,00


bal.)5,000

Income Tax Rate 30%

Assets, Liabilities, Equity, Revenues


0


Common Stock45,00




Bonds Payable40,00




Inventories45,00


bal.)5,000

Income Tax Rate 30%

Assets, Liabilities, Equity, Revenues, Expenses


0


Common Stock45,00




Bonds Payable40,00




Inventories45,00


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


Tea-Break


Lunch


Tea-Break

Wrap Up


Tea-Break 1030 – 1100


Lunch 1230 – 1330


Tea-Break 1530 – 1600


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.

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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


Tea-Break


Lunch


Tea-Break

Wrap Up


Tea-Break 1030 – 1100


Lunch 1230 – 1330


Tea-Break 1530 – 1600


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Mastering finance in 2 days

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