MBA MFL 2012

Session Three : Finance

Conceptually
General Management
Strategic Thinking

Marketing

Finance

Human Resources

Operations

Overall Approach
MFL Session 1
Introduction to the principles behind General Management Intro to Marketing, Finance, Human Resources and Operations

MFL Session 2 - Overview of Marketing Management MFL Session 3 - Finance theory and workshops MFL Session 4 Operations and Human Resources Individual and Syndicate Assignment MFL Session 5 Syndicate presentations - Marketing MFL Session 6 Practical Issues in Human Resources MFL Session 7 Finance workshop analysing statements MFL Session 8 Operations case, and summary integration

Intro to Accounting video

http://www.youtube.com/watch?v=vLv6CqCK1Sc

Principles
Financial accounting vs management accounting
External view, vs being the pilot Overall view Historical view

Accounting is a language; money is the common denominator

Some events defy expression in monetary terms Figures may be approximations Figures may reflect opinions

Principles
Time is an artificial compartment Figures tell a story what is the figure intended for?
Insurance (replace) Tax?

So, accounting routines, produce:

Profit and loss and their sources Cash flow generated, and source and uses Capital employed: owed and owing by whom

Question for Discussion

What is the difference between Finance and Accounting? What is the role of Finance? What do they do in your organisation? What are the three financial statements and what is the major role for each? What has always intrigued you about the figures in your organisation?

Income Statement Basics

Sales (when is a sale a sale?) - Cost of Goods Sold (COGS) = Gross Profit - Other expenses = Net profit Records must match the same period of time Any remaining profit belongs to the owner

 After completing the Income Statement from General Ledger, snapshot of financial position created at a particular time Equity plus liabilities = Assets
Equity + Liabilities Owners equity Original capital Retained profits Current Liabilities 1500 50 200 Assets Fixed assets Building Equipment Current Assets Stock (inventory) 100 Debtors Cash 150 400
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Balance Sheet

1000 1000

Long term liabilities 900

2650

2650

Balance Sheet Principles

Snapshot of financial position at a particular time Assets must = equity plus liabilities (accounting equation) Shareholders equity = share capital plus retained earnings Current and long term assets and liabilities are recorded, monitored and tracked to ensure protection of company assets
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BS Wots a Balance Sheet??

http://www.youtube.com/watch?v=mxsYHiDVNlk&feature=fvsr

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Conventions
Going concern Matching Prudence Historical cost Depreciation
Account for asset over its working life = original cost- estimated scrap value Estimated years useful life

Goodwill

Balance sheet structures

UK Oriented US oriented

Owners Equity +Liabilities

Assets

Fixed Assets Current assets Total assets

Non current liabilities Current liabilities

The Profit Family

Gross Profit = Sales minus COGS Operating profit before Interest, Tax, Depreciation and Amortisation (EBITDA) Operating profit before Interest and Tax (EBIT) Profit before Tax (PBT) Profit after Tax (NPAT) Profit attributable to Ordinary shareholders; dividends are paid of of this Profit retained

Profit versus cash flow

Dual Motives for an organisation:
Need to make a profit in the long run Need to stay solvent in the short term Cash flow is a fact, not an opinion, like profit!!

Adjustments to Profit to correct into cash:

Capital Expenditure (Capex) fully paid at the time Add back depreciation Net Movements in stock and Work in Progress (WIP) Changes in debtors and creditors

Ratios

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What to look for in ratio analysis

Four categories: Operating Efficiency how well run? Liquidity - can it pay its way? Financial structure split between shareholders and debt safe? Shareholder satisfaction:
Profitability Dividends Share price

What to look for

Operating Efficiency
Profitability
Margins (express as % of sales) ROCE (RONA) = EBIT X Sales
Sales Net Operating Assets (velocity ratio)

Asset productivity
Stock turn (inventory) Debtors days (customers supplied on credit) Creditor days (credit granted by suppliers)

Cash flow

What to look for cont

Liquidity
Current ratio Quick ratio, if you have stock

Financial structure (Capital gearing)

Debt:equity

Shareholder perspective
ROE Dividend payout ratio EPS

Operating Management perspective

Revenue (sales) Profit Resources employed Cashflow

 Margins

Desirable ratios
Gross margins: 20%+ EBIT: 10-15% NPAT: 5-10%

Asset productivity
Stock turn (inventory) 20-60 Debtors days (payment terms 30?) 30-45 Creditor days (credit granted by suppliers) 45+

ROCE (RONA): 15-20% Liquidity: current ratio at least 1:1, preferably 2:1 Fin structure debt:equity < 50/60%

Shareholder perspective ROE 20%+ Dividend payout ratio EPS

 Practical Issues
Meeting funds shortfall
Bank loan New shareholders or more from existing (rights issue) Less dividends Suppliers extend payment terms

Sustainable growth Rate (extra*)

The growth rate at which the organisation can grow without exceeding financial resources is dependent on:
Any external sources of finance loan or even equity Dividend payout ratios (Reduce or stop?) Maximum Debt to equity limits Assets being squeezed to max Have to improve margins to self fund Growth = dividend ratio* ROE