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Financial Analysis for Management Consultants & Analysts
This document is a comprehensive guide for management consultants and business analysts focused on financial analysis, highlighting essential skills and techniques for conducting analyses using Excel. It covers various topics including financial statements, key financial ratios, modeling profit & loss statements, and valuing business units, illustrated through case studies and real-life examples. Additionally, it promotes an online course offering detailed calculations and practical case studies for further learning.
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Financial Analysis for Management Consultants & Analysts
- 1. 1 Financial Analysis for ManagementConsultants & Business Analysts Practical guide with case studies & real-life examples
- 2. 2 In business youhave to make a lot of important decisions During consulting projects you will have to do a lot of financial analyses to see whether proposed changes make sense or not
- 3. 3 In business youhave to make a lot of important decisions A lot of such analyses require some skills in Excel but also a specific approach to available data. Usually they don’t teach that at the university
- 4. 4 Luckily, there isa way to do fast and efficiently financial analyses in Excel and I will show you how to do that in this course.
- 5. 5 In business youhave to make a lot of important decisions Thanks to this presentation you will have a look at the most important essential financial analysis you need to know to work without any problems during consulting projects
- 6. 6 We will coverall the essential things that you need to know to work well during consulting Analyzing Financial Statements Financial indicators Modeling P&L Introduction to Valuation Analysis of Business Units Financial analysis related to M&A Investments Analysis
- 7. 7 What you willsee in this presentation is a part of my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
- 8. 8 General Analysis ofFinancial Statements
- 9. 9 General Analysis ofFinancial Statements – Introduction
- 10. 10 In this sectionwe will discuss the following things 3 financial statements – overview Amazon financial statements – Analysis in Excel
- 11. 11 In this sectionwe will discuss the following things 3 financial statements – overview Amazon financial statements – Analysis in Excel LPP financial statements – Analysis in Excel Disney financial statements – Analysis in Excel
- 12.
- 13. 13 There are 3financial statements that you have to look at when analyzing the firm Profit & Loss / Income Statement Balance Sheet Cash flow Shows how much money you have earned, and did you make a profit or a loss? Shows how you did it, what where the revenue and how much you had to spend in terms of costs to generate them? Shows what you have / what you need to have a legitimate business Shows you also where you got the money from to buy the things you have (shareholders, banks, suppliers, other borrowers etc.) Shows how much money the firm has actually generated and what has consumed the cash on 3 levels You can see what the firm spends the cash on: investment, paying off debts, buying back shares or maybe paying of dividends Cash is divided into 3 streams: Operating CF, Investing CF and Financing CF
- 14. 14 Financial analysis ofindicators
- 15. 15 Financial analysis ofindicators – Introduction
- 16. 16 In this sectionwe will discuss the following things Profitability ratios Liquidity ratios Activity ratios Debt ratios Case study
- 17.
- 18. 18 There are plentyof profitability ratios used. Below the most popular ones % Gross Margin % Gross Profit % EBIT Return on Sales ROS % Net Income % EBITDA ROE ROA
- 19. 19 Let’s have alook at the definition of ratios and what they tell us Gross Margin % Gross Margin = Net Sales
- 20. 20 Let’s have alook at the definition of ratios and what they tell us Operating Income EBIT % EBIT Return on Sales - ROS = Net Sales
- 21. 21 Let’s have alook at the definition of ratios and what they tell us Net Income Net Profit % Net Income Profit Margin = Net Sales
- 22. 22 Let’s have alook at the definition of ratios and what they tell us EBITDA % EBITDA = Net Sales
- 23. 23 Let’s have alook at the definition of ratios and what they tell us Net Income ROA (Return on Assets) = Assets
- 24. 24 Let’s have alook at the definition of ratios and what they tell us Net Income ROE (Return on Equity) = Equity
- 25.
- 26. 26 ROE can bedecomposed into other ratios. Below one example Net Income ROE = Assets x Assets Equity ROE = xROA Equity Multiplier Net Income Equity = Net Income Equity =
- 27. 27 ROE can bedecomposed into other ratios. Below one example Sales = Assets x Assets Equity Net Income Sales x Net Income Equity ROE = xAsset Turnover Equity Multiplierx% Net Income
- 28.
- 29. 29 There are plentyof liquidity ratios used. Below the most popular ones Current Ratio (CR) Quick Ratio (QR) Cash Ratio (CshR) Operating Cash Flow Ratio
- 30. 30 Let’s have alook at the definition of ratios and what they tell us Current Assets Current Ratio (CR) = Current Liabilities
- 31. 31 Let’s have alook at the definition of ratios and what they tell us Current Assets Quick Ratio (QR) = Current Liabilities - Inventory & Prepayments
- 32. 32 Let’s have alook at the definition of ratios and what they tell us Cash & Cash Equivalents Cash Ratio (CshR) = Current Liabilities
- 33. 33 Let’s have alook at the definition of ratios and what they tell us Operating Cash Flow Operating Cash Flow Ratio = Total Debt
- 34. 34 Activity / Efficiencyratios – Overview
- 35. 35 There are plentyof activity / efficiency ratios used. Below the most popular ones Inventory conversion period Receivables conversion period Payables conversion period Cash Conversion Cycle Asset turnover
- 36. 36 Conversion periods havealternative names that are widely used Inventory conversion period Receivables conversion period Payables conversion period Days Inventory Outstanding (DIO) Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) = = =
- 37. 37 Let’s have alook at the definition of ratios and what they tell us Inventory Inventory conversion period = COGS x 365 days
- 38. 38 Let’s have alook at the definition of ratios and what they tell us Receivables Receivables conversion period = Net Sales x 365 days
- 39. 39 Let’s have alook at the definition of ratios and what they tell us Account Payables Payables conversion period = COGS x 365 days
- 40. 40 Cash Conversion Cycle(CCC) we calculate using previous ratios Cash Conversion Cycle (CCC) = - Receivables conversion period Payables conversion period + Inventory conversion period Cash Conversion Cycle (CCC) = - Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) + Days Inventory Outstanding (DIO)
- 41. 41 Let’s have alook at the definition of ratios and what they tell us Net Sales Asset Turnover = Assets
- 42.
- 43. 43 There are plentyof debt ratios used. Below the most popular ones Debt Ratio Debt to Equity ratio (D/E) Net Debt-to-EBITDA Ratio
- 44. 44 Debt Ratio canbe defined in 2 ways Debt Debt Ratio = Assets Liabilities Debt Ratio = Assets
- 45. 45 Let’s have alook at the definition of ratios and what they tell us Debt Debt to Equity ratio (D/E) = Equity
- 46. 46 Let’s have alook at the definition of ratios and what they tell us Debt Net Debt-to-EBITDA Ratio = EBITDA - Cash & Cash Equivalents
- 47. 47 For more detailsand content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
- 48. 48 Modeling of Profit& Loss statement in practice
- 49. 49 Modeling of Profit& Loss statement in practice – Introduction
- 50. 50 In business youhave to make a lot of important decisions You can learn a lot by analyzing the business model in Excel. This is one of the most insightful yet also most difficult financial analysis
- 51. 51 Modeling of thebusiness in Excel should be done in stages. You first have to understand the drivers # transactions Average revenue per transaction Total revenuex % Fee of the marketplace Average transaction value Total searches % conversion x x Total Costs Total margin - Rent People Cost of traffic Ratio of visitors to searches Average cost of 1 visit + x Development
- 52. 52 In this sectionwe will discuss the following things How to model Retail in Excel How to model SMCG businesses in Excel Moving from SMCG to selling services – financial analysis
- 53. 53 Main challenges inthe business model Main drivers / KPIs for the business model The model of the business in Excel Short introduction to the business model For every business model we will do the following things
- 54. 54 Main challenges inRetail
- 55. 55 Let’s have alook at the main challenges in Retail Margin Management Stock / Inventory Management Multichannel Strategy Managing price across channels Expansion to new markets Saturation of existing markets New product development Managing customer experience across channels Format evolution (possible death) People rotation and knowledge management Disruption esp. from external forces / business models Automation
- 56. 56 Business model ofa Retailer in Excel
- 57. 57 The retail businessmodel is driven by some basic KPIs # Transactions Average Value Transaction Total store revenue Total store costs x Store EBITDA Average Value Transaction of basic purchase Average Value Transaction of additional purchase # of Visitors % Conversion Rent People # of People Average wages + x x Others + # of sq. m Fee per sq. m x % Gross Margin Gross Margin generated by the store x -
- 58. 58 Modeling SMCG BusinessModel in Excel – Introduction
- 59. 59 SMCG are allbranded goods that you consume infrequently during your life. In this category we have cars, domestic appliances and other similar products
- 60. 60 There are 2ways in which you can model SMCG SMCG – sold as a product SMCG – sold as a service
- 61. 61 In this sectionI will talk about 3 main things Main challanges in SMCG KPIs for SMCG business Business models of SMCG in Excel
- 62.
- 63. 63 Brand Awareness & Reach Controlingand constantly lowering production costs Your strategy across many channels Managing customer experience across channels Saturation point in consumption and penetration Spreading beyond original target group and leveraging brand Taking care of faulty products Managing older versions of your product Switch from product to service The software part of the product / IoT The value of your customer base Below a list of the most important aspect for SMCG business model
- 64. 64 Main KPIs forthe SMCG business model
- 65. 65 The SMCG businessmodel is driven by some basic KPIs # sold Unit production cost Gross Margin Head office Operational profit Fixed Cost / Quantity produced Unit variable cost + Cost of sales & marketing Net Margin - - Average price Unit Gross Margin - x Market share Market size
- 66. 66 SMCG business model– modeling in Excel
- 67. 67 There are 2ways in which you can model SMCG SMCG – sold as a product SMCG – sold as a service
- 68. 68 Vaccum cleaner producer– modeled as product seller Smartphone firm– modeled as a provider of a service We will go through those 2 approaches using different cases
- 69. 69 SMCG business modelin Excel – basic assumptions
- 70. 70 Vaccum cleaner producer– modeled as product seller Smartphone firm– modeled as a provider of a service Let's start with the modelling vacuum cleaner producer
- 71. 71 Vaccum cleaner producer– modeled as product seller Smartphone firm– modeled as a provider of a service Let's start with the modelling vacuum cleaner producer
- 72. 72 Let’s go throughbasic assumptions of the model. We want to get to the operational profit SMCG product MarketingSales Channels Vacuum cleaners 1 production site Own e-commerce Retail chain TV ads Market research Social Media Mailing Loyalty program Outdoor campaigns
- 73. 73 Modeling the SMCGas service – Introduction
- 74. 74 Vaccum cleaner producer– modeled as product seller Smartphone firm– modeled as a provider of a service We said we will do modelling for 2 different products and also in different way
- 75. 75 Vaccum cleaner producer– modeled as product seller Smartphone firm– modeled as a provider of a service We said we will do modelling for 2 different products and also in different way
- 76. 76 He currently sellsaround 600 K smartphones and has a bas of around 1 M customers He has to acquire new customers to cover for the lost ones and grow He considers switching to offering annual subsription model To make the change more obvious we will first do a case of a firm that moves from product to service and wants to do calculate whether it makes sense
- 77. 77 To make thechange more obvious we will first do a case of a firm that moves from product to service and wants to do calculate whether it makes sense Why moving from product to service makes sense? Case study of a smartphone producer Solution in Excel to the case study Modeling Head Office costs Modeling Head Office profit & loss statement
- 78. 78 For more detailsand content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
- 79.
- 80. 80 Business Units Analyses– Introduction
- 81. 81 In many casesthe business you want to analyze are very complicated. You have to look deeper. You have to analyze specific business units to understand the result and the future
- 82. 82 This obviously meansthat you have to divide into business units that you want to analyze separately and draw conclusions on their performance
- 83. 83 In this sectionwe will discuss the following things Why analysis of Business Units makes sense Analysis of Business Units – Disney Analysis of Business Units – Grocery Discounter
- 84. 84 Why analysis ofBusiness Units makes sense
- 85. 85 Let’s have alook why it makes sense to look at business units in details On aggregated level you have averaging effect Business units may have different business models Business units may have different growth perspectives Business units may have different margins Business units may require different Capex Business units may have different competitors Business units usually have different drivers & KPIs You can sell some business units
- 86. 86 Overview of Businessmodels
- 87. 87 SaaS E-commerce Media site 2-sided market UserGenerated Content Mobile Applications Retail B2C Service B2B Service FMCG SMCG Commodity There are 6 offline business models and 6 online models. Every business model has its set of KPI
- 88. 88 SaaS E-commerce Media site2-sidedmarket UGC B2B Service B2C ServiceRetail Bear in mind that big companies can operate many business models
- 89. 89 Analysis of BusinessUnits – Groceries Discounter – Case Introduction
- 90. 90 Imagine that youhave to analyze the performance of difference concepts and regions of a Grocery Discounter. You have data on the store level.
- 91. 91 Let’s have alook at the data that we have on the Grocery Discounter He currently has 700 stores He operates 4 concepts: Mini, Express, Regular, Big He operates in 10 regions Have a look at results on the level of concepts & regions Look at revenue and EBITDA per store
- 92.
- 93.
- 94. 94 In this sectionwe will discuss the following things Introduction to Valuation Introduction to DCF methods Difference between FCFF and FCFE Introduction to using multipliers for valuation Case study
- 95. 95 We are goingback to our example of ceramic tiles producer and we will see what kind of methods we can use to estimate its valuation.
- 96. 96 They have 4groups of products We have DCF models Use DCF and multiplier method to estimate their value Just as a reminder a few information about the firm
- 97.
- 98. 98 You can tryto estimate the value of 2 different categories Enterprise Value Equity Value Net Debt Value
- 99. 99 For valuations youcan use 2 groups of valuations methods DCF methods DCF of Free Cash Flows to Firm (FCFF) DCF of Free Cash Flows to Equity (FCFE) Multiplier methods EV/EBIT EV/EBITDA P/E ratio
- 100.
- 101. 101 In DCF modelyou use forecast of cash flows to estimate the value of the company Step 1 – Calculate the cash flows 2018 2019 2020 2021 2022 𝐶𝐹2018 𝐶𝐹2019 𝐶𝐹2020 𝐶𝐹2021 𝐶𝐹2022 t+1 𝐶𝐹𝑡+1 𝐶𝐹2018 (1 + 𝑟) 𝐶𝐹2019 (1 + 𝑟)2 𝐶𝐹2020 (1 + 𝑟)3 𝐶𝐹2021 (1 + 𝑟)4 𝐶𝐹2022 (1 + 𝑟)5 𝐶𝐹𝑡+1 (1 + 𝑟) 𝑡+1 𝒊=𝟏 𝒕 𝑪𝑭𝒊 (𝟏 + 𝒓)𝒊 Step 2 – Calculate the present value of CF Step 3 – Calculate the Valuation 𝑻𝒆𝒓𝒎𝒊𝒏𝒂𝒍 𝑽𝒂𝒍𝒖𝒆 (𝟏 + 𝒓) 𝒕+𝟏 Step 3 – Calculate the Valuation + 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐶𝐹𝑡+1 (𝑟 − 𝑔) Step 3 – Calculate the Valuation Step 3 – Calculate Terminal (Continuing) Value 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐸𝐵𝐼𝑇𝐷𝐴 𝑥 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
- 102. 102 In the nextlecture we will use 2 different methods for DCF valuation Free Cash Flows to Firm (FCFF) Free Cash Flows to Equity (FCFE) Cash flow before financial activities
- 103.
- 104. 104 In the nextlecture we will use 2 different methods for DCF valuation Free Cash Flows to Equity (FCFE) DCF Cash Flow before financial activities As a discounting rate we use Weighted Average Cost of Capital (WACC) The Terminal Value is calculated using 3% growth rate assumed after the period of forecast DCF Free Cash Flows to Equity As a discounting rate we use cost of equity The Terminal Value is calculated using 3% growth rate assumed after the period of forecast Free Cash Flows to Firm (FCFF)
- 105. 105 FCFF and FCFEevaluate different things Enterprise Value Net Equity Value Net Debt Value Cash flow before financial activities / Free Cash Flows to Equity (FCFF) estimates the Enterprise Value Afterwards using the Net Debt Value you can estimate Equity Free Cash Flows to Equity (FCFF) estimates Equity Value
- 106. 106 Introduction to using multipliersfor valuation
- 107. 107 For simplicity oftenvaluation is calculated using multipliers. Multipliers also help you check the valuation from DCF which is subject to many assumptions EV/EBIT EV/EBITDA P/E ratio
- 108. 108 Using the Multipliermethod of valuation is relatively easy Find comparable companies Estimate the multipliers for the comparable. Eliminate outliers Estimate the EBIT, EBITDA and net profit for the company and adjust them Apply the multiplier Estimate Equity Value
- 109. 109 The methods wediscussed estimate different values Enterprise Value Equity Value Net Debt Value Using EV/EBITDA multiplier and EV/EBIT you can estimate the Enterprise Value Using P/E ratio you can estimate Equity Value
- 110. 110 Below how wecan use the EV/EBIT multiplier to estimate the Equity Value in 2 steps EV/EBIT multiplier x = EBIT of the company Enterprise Value of the company Enterprise Value of the company - = Debt of the company Equity Value of the company
- 111. 111 Using P/E ratiois even easier P/E ratio x = Net profit of the company Equity Value of the company
- 112. 112 For more detailsand content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
- 113.
- 114. 114 Financial analyses relatedto M&A – Introduction
- 115. 115 Many companies growby acquiring other firms. In this cases consultants do a lot of financial analyses related to M&A. We will discuss examples of such analyses in this section.
- 116. 116 In this sectionwe will discuss the following things What kind of financial analysis consultants do when it comes to M&A Estimating the impact of expanding via M&A – plywood producer case study Vertical Consolidation via M&As – fitness sector case study Sell non-core assets – general framework Sell non-core assets – case study
- 117. 117 Financial analyses thatconsultants do when it comes to M&A
- 118. 118 Let’s have alook at different types of analyses management consultants do Estimation of Potential Synergies Valuation of potential targets Value Creation Plan in Excel Comparison of M&A vs organic growth options Forecasting of the firm after the M&A Valuation of the firm after the M&A Divestment analyses
- 119. 119 Expand via M&A– Plywood – Introduction
- 120. 120 Let’s have alook at plywood producer that has 2 factories and is considering taken over another one 2 plants Considers taking over a plant in Lithuania Try to estimate the possible benefits
- 121. 121 Expand via M&A– Plywood – Solution
- 122. 122 Let’s have alook at plywood producer that has 2 factories and is considering taken over another one 2 plants Considers taking over a plant in Lithuania Try to estimate the possible benefits
- 123. 123 There are plentyof potential benefits that you can expect from this particular M&A Reducing Head Quarters costs Savings on Capex Less competition on price Cross-selling among customer baes Lower Purchasing price on wood Exchange of best practices
- 124. 124 From the analysisof benefits we can see that we can gain up to $17 M from acquiring the Lithuanian factory 2 100 3 500 3 720 2 739 576 4 280 16 915 Reducing Head Quarters costs Savings on Capex Less competition on price Lower Purchasing price on wood Exchange of best practices Cross-selling among customer baes Total benefit from M&A Annual additional benefits from M&A In million of USD
- 125. 125 Vertical Consolidation viaM&As – Case Introduction
- 126. 126 Let’s imagine thatyou have to help a fitness card operator decide what will be the impact of M&A on his strategy to vertically integrate Fitness card operator wants to have 40% of his revenue delivered by his own fitness clubs He is considering 2 options: only organic growth or M&A with organic growth Check what will be the impact of both options on Revenues, EBITDA and Market Cap
- 127. 127 Let’s have alook at value chain in the fitness segment Operator of the fitness card Fitness Clubs HR Managers Developers Landlords Equipment Producers Others Producers of raw materials and components Financing Fitness Clubs Elements of value chain where he is currently present
- 128.
- 129.
- 130. 130 Firms do alot of investment. During consulting project quite often you have to check whether they make sense. We will discuss investment analysis in detail using different case studies.
- 131. 131 In this sectionwe will discuss the following things Time value of money NPV & IRR Investment – General thoughts Replacement Investment – case study Required by customer investment – case study Investment in bottleneck removal – case study Cost reduction Investment – Retail – case study Cost reduction Investment – Ceramic Tiles – case study
- 132. 132 Time value ofmoney
- 133. 133 Let’s first startby calculating what is the future value of 100 USD 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Future Real Value of 100 that we have today 100 105 110 Nominal Value x (𝟏 + 𝒓) 𝟏 Nominal Value x (𝟏 + 𝒓) 𝟐
- 134. 134 Now imagine thatthe you are getting 100 USD every year. You want to calculate the Present value of the money 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓) 𝟏 Nominal Value (𝟏 + 𝒓) 𝟐
- 135.
- 136. 136 Let’s start witha short definition NPV stands for Net Present Value NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time usually related to some investment It’s used to determine whether something (action, investment etc.) makes sense or not NPV =
- 137. 137 Just as areminder Present Value of money is different than the Nominal Value 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓) 𝟏 Nominal Value (𝟏 + 𝒓) 𝟐
- 138. 138 Let’s have alook at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%) 𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%) 𝟐 300 (𝟏 + 𝟓%) 𝟑 300 (𝟏 + 𝟓%) 𝟒
- 139. 139 NPV enables youto make decisions about specific investment NPV 0> The investment can generate more cash than it requires. Can be considered to be done NPV 0< The investment will be eating away cash. Rather consider not doing it NPV 0= Neither creates nor destroys value. Look for other criteria i.e. strategic, tactical factors
- 140. 140 Let’s have alook at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%) 𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%) 𝟐 300 (𝟏 + 𝟓%) 𝟑 300 (𝟏 + 𝟓%) 𝟒
- 141.
- 142. 142 Let’s start witha short definition IRR stands for Internal Rate of Return IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero IRR tells us how much you would have to earn on saving account every year to get to the same results as from the investment you are analyzing IRR =
- 143. 143 If you wantto decide on whether to do certain investment or not compare IRR with the right interest rate IRR Interest rate > The investment can generate higher returns than the alternatives. Can be considered to be done IRR Interest rate < The investment will generate lower returns than the alternatives. Rather consider not doing it IRR Interest rate = The investment is as good as other alternatives. Look for other criteria i.e. strategic, tactical factors
- 144. 144 NPV and IRRgives you the same directional information NPV 1 NPV 2> Investment 1 is better than Investment 2 IRR 1 IRR 2> Investment 1 is better than Investment 2
- 145. 145 NPV – Howto calculate it in Excel
- 146.
- 147. 147 Apart from capacityincrease there are 4 main reasons why you do investment Investments Replacement Required by the customer Reducing costs Removing bottlenecks Total cost of Ownership / Usage – comparison Margin that may be lost if you don’t do the investment Margin that can be gained if you do the investment Change in labor costs Change in materials and related costs Change in energy & other utilities costs Margin gained thanks to the removal of the bottlenecks Reduction of costs related to production Reduction of other costs (not related to production) Change in maintenance costs
- 148. 148 To decide whethersomething makes sense or not we compare Capex and Benefits Capex Benefits? Cash outflow / Negative cash flow Cash inflow / Positive cash flow ?
- 149. 149 We usually usethe NPV or IRR to decide whether the investment makes sense NPV IRR
- 150. 150 In the nextlectures we will go through different case studies Replacement Investment – Furniture Production Required by customer investment – Food Industry Investment in bottlenecks removal – Plywood
- 151. 151 In the nextlectures we will go through different case studies Cost reduction Investment – Retail Cost reduction Investment – Ceramic Tiles
- 152.
- 153. 153 Imagine that youwork for a furniture producer that operates in Europe 10 factories Sells most of his production to France & Germany You have to calculate whether the investment in new forklifts makes sense
- 154.
- 155. 155 Just as areminder you work for a furniture producer that operates in Europe 10 factories Sells most of his production to France & Germany You have to calculate whether the investment in new forklifts makes sense
- 156. 156 Let’s have alook how to show the results of investment in replacing forklifts in the Power Point 3 691 7 185 10 875 8 182 2 694 NPV of Difference in Maintenance Costs NPV of Difference in Fuel / Electricity Costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments In thousands of USD
- 157. 157 Required by customerinvestment – Introduction
- 158. 158 We will nowhave a look at a company selling branded juice in Romania. They were asked to start using plastic bottles Currently they sell juice in glass, tetra pak and aluminum cans One of the customers (a discounter) wants to get juice in plastic (PET) bottles This will require significant investment
- 159. 159 Required by customerinvestment – Solution
- 160. 160 Just as areminder we have to estimate wheter it makes sense to get into PET bottles as we were asked by the customer Currently they sell juice in glass, tetra pak and aluminum cans One of the customers (a discounter) wants to get juice in plastic (PET) bottles This will require significant investment
- 161. 161 Let’s have alook how to show in Power Point the results of PET investment 34 804 12 489 22 315 13 182 9 133 NPV of Additional margin from PET NPV of fixed costs related to PET NPV of Net Benefit NPV of Capex NPV of the whole Investment NPV of benefits and investments – 10 year perspective In thousands of USD
- 162. 162 Investment in bottlenecksremoval – Introduction
- 163. 163 Let’s have alook at a plywood producer that considers removing a bottleneck for one of the factories he has 3 plants They have a bottleneck in 1 of the factory They have a demand for products from this factory
- 164. 164 Below you cansee the capacity for the factory in question by stages. As you can see sanding is the bottleneck 200 100 90 80 120 100 50 90 120 Preparation of the wood Peeling Drying Repairing Cold Press Hot Press Sanding Foil Triming & Packing Production Capacity by stages In thousands of cubic meters (m3)
- 165.
- 166. 166 Investment in bottleneckremoval – Solution
- 167. 167 Just as areminder we are working for a plywood producer that considers removing a bottleneck for one of the factories he has 3 plants They have a bottleneck in 1 of the factory They have a demand for products from this factory
- 168. 168 Let’s have alook how to show in Power Point the results from the improvement of sanding line 6 565 1 004 5 561 209 5 352 NPV of Additional margin from higher sales NPV of Additional fixed costs NPV of Net Benefit NPV of Capex NPV of the whole Investment NPV of benefits and investments – 10 year perspective In thousands of USD
- 169. 169 Cost reduction investment– Retailer – Introduction
- 170. 170 Imagine that youare working for a fashion discounter that operates a retail chain in Easter Europe The retailer has 2 000 stores in Europe The retailer uses traditional lighting He wants to switch to LED lighting
- 171. 171 Cost reduction investment– Retailer – Solution
- 172. 172 Just as areminder you are working for a fashion discounter that operates a retail chain in Eastern Europe The retailer has 2 000 stores in Europe The retailer uses traditional lighting He wants to switch to LED lighting
- 173. 173 Let’s have alook how to show the results from the change to LED bulbs in the Power Point 15 624 1 250 620 17 494 3 636 13 858 NPV of Difference in electricity costs NPV of Difference in bulb costs NPV of Difference in labor costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments – 10 year perspective In thousands of USD
- 174. 174 Cost reduction investment– ceramic tile producer – Introduction
- 175. 175 Imagine that youare working for a ceramic tiles producer that has 10 factories in Eastern Europe He has 10 factories Every factory on average has 15 production lines Currently loading the tiles is done mannually (2 people per line)
- 176. 176 Cost reduction investment– ceramic tile producer – Solution
- 177. 177 Just as areminder you are working for a ceramic tiles producer that has 10 factories in Eastern Europe He has 10 factories Every factory on average has 15 production lines Currently loading the tiles is done mannually (2 people per line)
- 178. 178 Let’s have alook how to show in Power Point the results from the introduction of robots to ceramic tiles factory 156 890 37 566 16 657 102 668 27 273 75 396 NPV of Difference in labor costs NPV of Difference in electricity costs NPV of Difference in maitenance costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments – 10 year perspective In thousands of USD
- 179. 179 For more detailsand content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
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