Connecting the numbers to the business
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Connecting the numbers to the business Presentation Transcript

  • 1. Connecting the numbers to the business Comprehensive training in the basic concepts of financial statement relationships and analysis techniques Global Financial Bridge training
  • 2. Course Content         The why Creating value the ROCE way Profitability management Working capital Cash flow Revenue (good and bad growth) Integrating with quick books Using GFB
  • 3. The why     I have never heard a business person say “I don’t want to make more money” Yet the solution is not always obvious Our mission is to communicate, bridge and connect the numbers to the story behind the numbers. We assist in in the why (why we can improve), the what (what needs to be done) and how (how it will be done)
  • 4. The problem ? How do these statements help the business person Was growth good or bad Identify where money is been made or lost What is the quality of my cash flows How fixed are my costs Do I have good debt or bad debt Where to focus limited resources  Am I in a position to pay a dividend ?
  • 5. Our solution – the one page financial scorecard      Telling the total story in one interactive platform Perform what ifs Communicating the impact of the what if Driving the future creating the budget Setting 2 or 3 key goals   To be touched on but not the focus of this course
  • 6. The basics    The ultimate reason why people go into business in to make money The key way to measure the ability to make money is the return on capital provided into the business ROCE = Return on Capital Employed
  • 7. ROCE – how we fund the business    The only way a business can be funded in through debt and equity. Debt is defined as interest bearing debt only. It does not include non interest bearing liabilities. Calculate the funding base. See work book (WB 2)  Calculate the equity for the 2007 (WB3)
  • 8. ROCE – how the funds are used     At the end of the day we have to have a balanced balance sheet If one half of the balance sheet is how we fund the business the other half is … How the funds are used in the business Calculate how the funds are used see (WB 4)
  • 9. Calculating ROCE % ROCE % = EBIT (Earnings before interest and tax commonly called operational profit) Net operating assets (NOA) or capital employed see WB2
  • 10. How do business improve performance ROCE % = $EBIT/$NOA The heart of the scorecard DO MORE EBIT WITH LESS NOA. Think about how many decisions can be made using this guide.
  • 11. ROCE – Combining income statement and balance sheet management  ROCE=EBIT/NOA = 300,000/357,534=83.91% Expressed differently Revenue EBIT X Revenue NOA Income statement Balance sheet 300,000/1,500,000 20% x 1,500,000/357,534 4.2 = 83.91%
  • 12. ROCE – Combining income statement and balance sheet management Benchmarks In summary Business type Industrial Service Profitability Profitability x balance sheet turnover = ROCE % 10% 15% Balance sheet turns 3 4 30% 60% ROCE
  • 13. Using ROCE to diagnose Benchmarks Where is the problem? 1. In the income statement performance 2. In the balance sheet performance Compare with 1. Benchmark 2. Prior periods profitability and balance sheet turnover Business type Industrial Service Profitability 10% 15% Balance sheet turns 3 4 30% 60% ROCE
  • 14. ROCE and the scorecard Reflecting the profitability measure (EBIT %) and the balance sheet measure (Operating asset turnover) 12.16% x 2.04 = 24.85%
  • 15. EBIT NOA decision example    We are a building supplies distribution company Want to make a decision about hiring a new sales person. Facts     Cost of sales person $150,000 Sales person sales $1,500,000 PA What other information would assist you in making a good decision See WBS 5
  • 16. Working Capital
  • 17. Working Capital    Calculate the total working capital for the 2007 and 2008 periods WB 5 The working capital needs for 2008 Calculate Accounts receivable days, Inventory days and Payable days for 2008 year WB 6
  • 18. Working Capital     A quick test is to compare the the growth % of total working capital from one period to the nexxt with the annualized revenue growth rate. If WC % growth > working may be mismanaged If less determine the reason if mainly due to high increase in payables explain the risk. If less due to all components working in the right direction. Determine what actions were taken to achieve this improvement and can we do more of them
  • 19. Cash flow and funding
  • 20. Cash flow and funding    Cash Gross profit % = Gross profit per cash flow statement. (reports cash flow statement) Compare this with the accounting gross profit %. Big differences highlight the inefficiencies of working capital management. the inefficiency (difference between income statement gross profit and cash gross profit ) is quantified by working capital efficiency $
  • 21. Cash flow and funding     Operational cash flow. (reports cash flow) This is one of managements key performance measures. Always advise clients if they ever consider a performance remuneration system to include this measure in the formula. What is the operational cash capability to (a) pay interest (b) taxes (c) capital expenditures Most importantly what is the capability to pay a dividend
  • 22. Cash flow and funding !Operating cash not able to cover current period interest payment. Bankers are now paying more attention to this servicing capability. Additional debt has to be incurred to repay the cost of the debt. This is not a good indicator
  • 23. Good vs. bad debt Compare the ROCE with the average cost of debt ROCE % = (1) ability assess leverage. How much money do we make from other peoples money. Measured by difference in interest rate and ROCE% = margin of safety.
  • 24. Larry help   Way to automate this process Provide red and green lights
  • 25. Step 2- Profitability review
  • 26. BHT Techniques     The what if on the best The comparative what if The challenge what if The price volume what if
  • 27. Work books (WB)
  • 28. Workbook –income statement
  • 29. Workbook - balance sheet
  • 30. WB 1 – Funding calculation 2007 Debt Equity Total funding 2008
  • 31. WB 2– calculate how the funds are used 2007 2008
  • 32. WB 3 – Calculate equity 2008 Equity
  • 33. WB 4 Calculating working capital Working Capital components 2007 2008 Movement
  • 34. Work book solutions (WBS)
  • 35. WBS 1 Funding solution 2007 2008 Short term debt $ 348,000 $ 304,931 Long term debt $ 500,000 $ 800,000 Total debt $ 848,000 $ 1,104,931 Total equity $ 445,000 $ 705,946 Debt plus equity $ 1,293,000 $ 1,810,877
  • 36. WBS 2 Capital Employed/net operating assets calculation Funding 2007 2008 Short term debt $ 348,000 $ 304,931 Long term debt $ 500,000 $ 800,000 Total debt $ 848,000 $ 1,104,931 Total equity $ 445,000 $ 705,946 Debt plus equity $ 1,293,000 $ 1,810,877 Capital employed (net operating assets) Cash at bank $ 22,000 $ 8,000 Accounts receivable $ 380,000 $ 557,000 Inventory $ 420,000 $ 7,770,000 Other current assets $ 56,000 $ 62,000 Total current assets $ 878,000 $ 8,397,000 Fixed assets $ 850,000 $ 1,050,000 Other Non current assets $ 55,000 $ 61,000 Total non current assets $ 905,000 $ 1,111,000 Accounts payable $ 380,000 $ 567,123 Other current liabilities $ 65,000 $ 75,000 other non current liabilities $ 45,000 $ 55,000 Total other liabilities $ 490,000 $ 697,123 Total capital employed $ 1,293,000 $ 8,810,877 investments
  • 37. WBS 3 Calculating retained earnings 2008 Retained earnings per current period (2008) income statement $ 260,946 Retained earnings per balance sheet previous period (2007) $ 425,000 Retained earnings per the balance sheet for the current period 2008 $ 685,946
  • 38. WBS 4 Working capital Working Capital component 2007 2008 Variance Variance % Accounts Receivable $380,000 $557,000 ($177,000) 47% Inventory $420,000 $770,000 ($350,000) 83% ($380,000) ($567,123) $187,123 49% $420,000 $759,877 ($339,877) 81% Accounts payable Working Capital
  • 39. WBS 5 – EBIT NOA decision example   Further information- EBIT driven  What is the margin on the sales  Answer 30% Further information NOA driven  Are we selling to our existing customers  If what is the average collection period  Answer 55 days  Will the salesperson be selling our existing product range  Answer – no  What is the average inventory holding of the new product line  90 days  The average payable days is 30
  • 40. WBS 5.1 – EBIT NOA decision example   Is this a good decision Things to consider     Income statement contribution Balance sheet (NOA) impact Cash flow. You have just performed a customer or product one unit analysis at the same time .
  • 41. WBS 5.2 – EBIT NOA decision example        Go to a blank GFB scorecard Enter $1,500,000 into revenue Enter 70 into COGS % Enter $150,000 into operating cost Enter 55 in receivable days Enter 90 into receivable days Enter 30 into payable days
  • 42. WBS 5.3 – EBIT NOA decision example