Finance for the Product Manager

Book Review

Presented by - Susheel R

(Chp 6)

Introduction

PM need not have a formal education in FM.

Solid Understanding of Numbers.

It leads to evaluate the performance of the products.

Decisions are made purely on Financial Data.

Familiarity with words like

• Depreciation• Working Capital• Cash Flow• Gross Profit• NPV• ROI

Leads earning respect from Cross Functional Team Members as well as from Management

Language of Business

Understanding the Financial Statements leads to

Create Product Budgets (Current)

Analyze Results

Make Decisions when results don’t align with

projections.

Income Statement (P&L A/c)

Sample P&L A/c

Sales Revenue XXX(-)COGS (Material, Labour, Overhead) XX

(-) Expenses (Mrktg, Sales, R&D) XX

EBIDTA (Less Dep,Int,Tax) X

Net Income X

P&L tracks Product or business performance (montly, quarterly, or yearly)

Product (Profit/Loss)

Balance Sheet

Snapshot of Assets & Liabilities

It shows the net worth of the company.

Like Human Body Balance sheet should be Balanced

Important Terms – Assets & Liabilities

Terminologies

Fixed Assets (Land, Building, Mfg Equipment)

Intangible Assets – Intellectual Property

Current Assets (Converted in cash in 1 year)

Quick Assets

Long Term Liabilities

Equity/Pref Shares Long Term Loans Debentures, Bonds

Current Liabilities (Should be paid within a year)

Payments for Operating ExpensesShort Term LoansCreditors

Net Working Capital

Money required for Day to Day Operations

Formula (Current Assets – Current Liabilities)

Little WC - Obligations

High WC - Can indicate Problems such as

(Excess or slow selling Inventory Slow payments by customers)

A PM should be easily able to

Analyse &

Rectify

Financial LeverageMoney Borrowed

Purchase a Asset ( To Create Value)

Repay the Money (with Overall Net Gain.)

Eg: Pencil (Borrow More and repay)

Product Managers & FL

Important to know from Competitors point of view.

Whether they are overly leveraged (In Debt) or not?

If yes then they cannot invest in

New ProductsNew Marketing Programs

It’s a reference tool (purchase of new equipment)

High Inventory (Figures)– Sales are not materialising

Low Inventory – Lag in Production or High Sales.

Why Balance Sheets are Imp?

Inflow & Outflow of Money on monthly Basis

Inflow – RevenueOutflow – Business Expenses (Ideal Situation Revenues should exceed Investments)

PM should Just have a fair understanding (CFO is mainly responsible)

Cash Flow (Present Value)

• Product Team Borrows money from CFO

• Money repaid with interest = Discount Rate

Eg: Suppose Product Team need $ 100,000 for a new product. (Discount Rate: 12%)

Money is received in future hence its discounted back to present.

Demystifying Discounted Cash Flow

Note: In the 2nd year money is discounted twice – (Compunding Discount)

The Mechanics of Cash Flow

• Create Business cases for Product Investments

• Assemble Forecast

• Test Planning Assumption (Sensitivity Analysis)

• Derive product Cost Models

• Establishing Pricing Models

• Prepare Product Budgets

Financial Planning for PM

Business case = Primary Document

Investment = Requesting Money from Management

Cases should be realistic & believable.

Creating Business cases for Product Investments

Assembling Forecast

PM Forecast

Market shareVolume

SalesDemand

Product Forecast

Testing Planning Assumptions

PM tackles with What if questions?

What if Cost of Material goes up in 6 months?What if we increase the price by 10%?

When you change the variable what is the impact on Profitabilty? (Sensitivity Analysis)

Change only 1 variable. (Price/Qty)

Deriving Product Cost Model

Standard Costing Std Cost Vs Actual Discrepancy is analysed

Target CostingMarket Price- $100Profit - $75TC should not exceed $25

Activity Based Costing It can be helpful for Cost Reduction & Process Improvement

Establishing Pricing Models

Pricing is done with well researched customer needs & Competitive Pressure.

New Product at low Price = Market Share

Luxury Consumer Segment = High Price

PM sits with Financial Specialist.

Product Revenue is dependent on Pricing Forecast.

GP is calculated on the units you sell.

Preparing Product Budgets

PM submits the budget in OctoberExplains Variances between Actual Vs Budget

PM Budgets for next Fiscal Year.

Short Term Planning Co-ordinating Functional Activities. Communicating to Management / Team Members

Tracking Progress

Budgets are done for”

Managing the Business

PM ensures – Product achieves the Business Goals as Budgeted.

PM should determine the product on PLC.

Makes sure the Product is Achieving its Financial Goals.

PM evaluates the Product Financial Performance by asking 3 Questions….

What is the Variance?What Happened?What is the Action Plan for remedying the Situation?

Financial Ratios

PM is concerned only with 4 Ratios.

Gross Profit % Ratio = GP / Total Revenue

Net Profit % Ratio = NP/Total Revenue

Activity based ratios

(How fast the customer pays)

Inventory Turnover Ratio = COGS/Avg Inv

How many times the Inventory is refreshed? How fast you are moving your product?

Maturity Assesment - PLC

• PM analyze Product Performance • Visual Clues

The depiction provides

7 Qtr

8 QTR Slow Growth

Decline from Qtr 13 to Qtr 19

Followed by 8 + Qtr’s By Renewed Growth

Summary

• Product Managers need not be Financial Experts • They should have some Financial Acumen

• They should draw their team into Number Game

• PM should overcome Financial Challenges.