Understanding Finance to Influence Strategic Decisions

Introduction
• New business leaders and managers have to develop at least basic skills in
financial management. Expecting others in the organization to manage
finances is clearly asking for trouble. Basic skills in financial management
start in the critical areas of cash management and bookkeeping, which
should be done according to certain financial controls to ensure integrity
in the bookkeeping process. New leaders and managers should soon go on
to learn how to generate financial statements (from bookkeeping journals)
and analyze those statements to really understand the financial condition
of the business. Financial analysis shows the "reality" of the situation of a
business -- seen as such, financial management is one of the most
important practices in management. This topic will help you understand
basic practices in financial management, and build the basic systems and
practices needed in a healthy business.
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The Strategic Financial Decision-Making
Framework

• Capital investment is the springboard for
wealth creation. In a world of economic
uncertainty, the investors want to maximize
their wealth by selecting optimum investment
and financial opportunities that will give them
maximum expected returns at minimum risk.

• Since management is ultimately responsible to
the investors, the objective of corporate
financial management should be to
implement investment and financing decisions
which should satisfy the shareholders by
placing them all in an equal, optimum
financial position.

• The satisfaction of the interests of the
shareholders should be perceived as a
means to an end – maximization of
shareholders’ wealth.

• Since capital is the limiting factor, the problem that
the management will face is the strategic allocation
of limited funds between alternative uses in such a
manner, that the companies have the ability to
sustain or increase investor returns through a
continual search for investment opportunities that
generate funds for their business and are more
favorable for the investors.

• Therefore, all businesses need to have the following
three fundamental essential elements:
– A clear and realistic strategy;
– The financial resources, control and systems to
see it through; and
– The right management team and processes to
make it happen.

Strategy
A method or plan chosen to bring about a
desired future, such as achievement of a goal
or solution to a problem.
(businessdictionary.com).

Strategy
"Strategy is the direction and scope of an
organization over the long-term: which
achieves advantage for the organization
through its configuration of resources
within a challenging environment, to
meet the needs of markets and to fulfill
stakeholder expectations".
(Johnson and Scholes)

Strategy
“A general direction set for the
company and its various components
to achieve a desired state in the future.
Strategy results from the detailed
strategic planning process”.
(managementstudyguide.com)

Strategy
A strategy is all about integrating organizational
activities and utilizing and allocating the scarce
resources within the organizational environment so as
to meet the present objectives. While planning a
strategy it is essential to consider that decisions are
not taken in a vacuum and that any act taken by a firm
is likely to be met by a reaction from those affected,
competitors, customers, employees or suppliers.

This is the long term direction and scope of an
organization to achieve competitive advantage through
the configuration of resources within a changing
environment for the fulfillment of stakeholder’s
aspirations and expectations.
In an idealized world, management is ultimately
responsible to the investors. Investors maximize their
wealth by selecting optimum investment and financing
opportunities, using financial models that maximize
expected returns in absolute terms at minimum risk.

• What concerns the investors is not simply
maximum profit but also the likelihood of it
arising: a risk-return trade-off from a portfolio
of investments, with which they feel
comfortable and which may be unique for
each individual.

• Strategic financial management combines backward-
looking, report-focused discipline of accounting with
the more dynamic, forward-looking subject of
financial management.
• It is basically about the identification of the possible
strategies capable of maximizing an organization’s
market value. It involves the allocation of scarce
capital resources among competing opportunities.

• It also encompasses the implementation and
monitoring of the chosen strategy so as to achieve
agreed objectives.
• This is the portfolio constituent of the corporate
strategic plan that embraces the optimum
investment and financing decisions required to attain
the overall specified objectives.

• In this connection, it is necessary to distinguish
between strategic, tactical and operational financial
planning.
• While strategy is a long-term course of action, tactics
are intermediate plans, while operational are short-
term functions.

• Irrespective of the time horizon, the investment
and financial decisions functions involve the
following functions:
– Continual search for best investment
opportunities
– Selection of the best profitable opportunities
– Determination of optimal mix of funds for the
opportunities
– Establishment of systems for internal controls
– Analysis of results for future decision-making.

Key Decisions
• Financial Decisions
– This deals with the mode of financing or mix of
equity capital and debt capital. If is possible to
alter the total value of the company by alteration
in the capital structure of the company, then an
optimal financial mix would exist – where the
market value of the company is maximized.

Key Decisions
• Investment Decisions
– This involves the profitable utilization of a firm’s
funds especially in long-term projects. Because
the future benefits associated with such projects
are not known with certainty, investment
decisions necessarily involve risk.
– The projects are evaluated in relation to their
expected return and risk.

– These are the factors that ultimately determine the
market value of the company.
– To maximize the market value of the company, the
financial manager will be interested in those
projects with maximum returns and minimum risk.
– An understanding of cost of capital, capital structure
and portfolio theory is a prerequisite here.

Key Decisions
• Dividend Decisions
– Dividend decision determines the division of
earnings between payments to shareholders and
reinvestment in the company.
– Retained earnings are one of the most significant
sources of funds for financing corporate growth,
dividends constitute the cash flows that accrue to
shareholders.

– Although both growth and dividends are
desirable, these goals are in conflict with each
other.
– A higher dividend rate means less retained
earnings and consequently, slower rate of growth
in future earnings and share prices.
– The finance manager must provide reasonable
answer to this conflict.

Key Decisions
• Portfolio Decisions
– Portfolio analysis is a method of evaluating
investments based on their contribution to the
aggregate performance of the entire corporation
rather than on the isolated characteristics of the
investment themselves.

– When performing portfolio analysis, information is
gathered about the individual investments
available, and then chooses the projects that help
to meet all of our goals in all of the years that are
of concern.
– Strategic Portfolio Management takes the insights
gained form portfolio analysis and integrates them
into the decision-making process of a corporation.

Interface of Financial Policy and Strategic
Management
• “The starting point of an organization is money and
the end point of that organization is also money.” –
this fact must be appreciated so that the interface of
strategic management and financial policy will be
clearly understood.

• No organization can run an existing business and
promote a new expansion project without a suitable
internally mobilized financial base or both internally
and externally mobilized financial base.
• Sources of finance and capital structure are the most
important dimensions of a strategic plan. The
generation of funds may arise out of ownership
capital and/or borrowed capital.

The Decision-Making Process

The Decision Making Process
• Definition:
•A set of eight steps that begins with identifying a problem; it moves
through selecting an alternative that can alleviate the problem and
concludes with evaluating the decision’s effectiveness
• This process can be used to describe both individual
and group decisions.

The Decision Making Process
Identification
of a
Problem
Identification
of Decision
Criteria
Allocation
of Weights
to Criteria
Development
of
Alternatives
Analysis
of
Alternatives
Selection
of an
Alternative
Implementation
of the
Alternative
Evaluation
of
Decision
Effectiveness

Step 1: Identification of a Problem
• A Problem: a discrepancy between an existing and a desired
state of affairs.
• In real world, most problems are not clear.. Thus, problem
identification is not simple.
• Also, problem identification is subjective.
• Furthermore, managers who mistakenly solve the wrong
problem are not different from those who don’t solve it!.

How Can Managers Identify
Problems?
• They need to make comparisons between current
state of affairs AND some standard
• The standard can be:
– past performance.
– previously set goals.
– the performance of some other unit within the
organization or some other organization.

Step 2: Identification of Decision Criteria
• Here, we select specific criteria that we will use in
making the decision. The criteria include: price,
weight, size, number of employees, hours needed ...
etc.
• Decision Criteria (single is criterion): factors that are
relevant in a decision.
• Every decision making has a criteria whether
explicitly stated or not.
• If a factor is not included, it’s considered irrelevant.

Step 3: Allocation of Weights to
Criteria
• In this step, we give weights to the criteria
identified in the previous step
• A simple approach: Give 10 to the highest
important factor, and then assign weight the rest
against that standard
• For example: if you give another criterion 5, the
standard is twice as important
• Mainly, you use your personal preferences. In a
more studied decisions, you will use data,
statistics, studies, analysis, and research

Important Criteria and Weights in a Car-
Buying Decision
Criterion Weight
Price 10
Interior Comfort 8
Durability 5
Repair Record 5
Performance 3
Handling 1

Step 4: Development of Alternatives
• Here, we list all the alternatives that could succeed in
solving the problem.
• We only list them, without evaluating them.

Step 5: Analysis of Alternatives
• Each alternative is evaluated by appraising it against
the criteria.
• The strengths and weaknesses of each alternative
become both evident as we compare them to the
criteria and weights established in step 2 and step 3.
• The assessment is clearly a personal judgments.

Assessment of Possible Car
Alternatives
Alternative Initial
Price
Interior
Comfort Durability
Repair
Record Performance Handling
Total
Mazda
C230
5 6 9 10 7 7 44
Isuzu
Ascender
7 6 8 6 5 6 38
BMW 335 9 7 6 4 4 7 37
Toyota
Camry
6 5 10 10 6 6 43
VW Passat 8 6 6 5 7 8 40

What if?
• If one alternative scored 10 on every criterion, we
wouldn’t need to consider the weights.
• Similarly, if the weights were all equal, you could
evaluate each alternative merely by summing up the
appropriate lines.

Evaluation of Car Alternatives:
Assessment Criteria x Criteria Weight
Alternative Initial Price
[10]
Interior
Comfort
[8]
Durability
[5]
Repair
Record
[5]
Performance
[3]
Handling
[1]
Total
Mazda
C230
5 50 6 48 9 45 10 50 7 21 7 7 221
Isuzu
Ascender
7 70 6 48 8 40 6 30 5 15 6 6 209
BMW 335 9 90 7 56 6 30 4 20 4 12 7 7 215
Toyota
Camry
6 60 5 40 10 50 10 50 6 18 6 6 224
VW Passat 8 80 6 48 6 30 5 25 7 21 8 8 212

Step 6: Selection of an Alternative
• Here, we choose the best alternative among those
assessed
• We merely choose the alternative that scored the
highest score in step 5
• In our example: Toyota Camry

Step 7: Implementation of the
Alternative
• Decision implementation: putting a decision into
action
• This includes conveying the decision to those affected
and getting their commitment to it

Step 8: Evaluation of Decision
Effectiveness
• Managers appraise the result of the decision to see
whether it has corrected the problem; did the
alternative chosen in step 6 and implemented in step
7 accomplish the desired result?.

Learning Outcomes
• Decision making is a process of eight steps.
• Managers use criteria to make decisions, whether
they mention them or not.
• Managers should make alternatives and evaluate
them based on the criteria.
• Managers need to evaluate their decisions to make
sure they are solving the right problem.

Addressing Financial Management
Challenges

Today’s Discussion
• Outline the key public sector financial management issues,
especially during a global economic slow-down.
• Describe the leadership role that the controllership function
and the financial community must play in supporting the
decision-makers through this challenging time.
• Provide some thoughts on how the financial function may need
to transform to support the emerging economic and public
sector environment.

Key Messages
• An effective controllership function is forward looking, acting
as the business’s “head lights”: scanning the environment,
anticipating issues and seeking effective resolutions.
• Controllership must be involved in the front-end of the
decision-making process helping to assess options and
thereby contribute to successful implementation.
• Controllership function must balance a professional
understanding with practical skills in advanced management
accounting, risk management, process and structure cost
control, and revenue management.

What is Controllership and Why is it
Challenging?

What is (Financial) Controllership?
• Controllership is:
– ethical behaviour;
– conscious managing of risks;
– clear lines of accountability;
– stewardship of resources; and,
– reporting and evaluation of results against stated
objectives.

Why Controllership is important?
• Accountability to the public.
• Stability and transparency.
• Ensures compliance against stated standards.
• Enables efficient and effective use of public resources.
• Defines roles and responsibilities.
• Enables performance measurement against agreed
expectations.
• Fulfills legal obligations and mandate.

Why is Controllership Challenging?
• Equal Footing: financial/controllership analysis not always on an equal
footing to policy, operational and communication considerations, in the
decision-making process.
• Management Perceptions: controllership seen by management as “end
state” technical process rather being critical to transparency and
accountability.
• Credible Information: ability to produce timely, reliable, usable and
accurate financial and risk information to decision-makers.
• Communication: providing clear and accessible financial/controllership
information to line-management.
• Capacity: revitalizing financial capacity by attracting, retaining and
developing financial/controllership talent.

Key Principles in the Controllership’s Evolution
• Supporting the evolution of the Controllership function are
four key principles:
– Credibility – a trusted business advisor, providing accurate, timely and
reliable financial information and advice;
– Competence – combine business knowledge with financial expertise to
optimize value added;
– Commitment – a shared commitment to the goals of financial
management and effective program service and delivery; and
– Communication – open communication across government, with
external professional organizations and counterparts in other
jurisdictions.

“Think globally, act locally”
Controllership’s Transformation
in Challenging Economic Times

Key Challenges
New Economic Challenges
• Borderless global economic recession, where governments have a role
supporting families, jobs and industry.
• Financial market uncertainty and impact of the economic environment
on government revenues and expenses.
Existing Structural Challenges
• An aging population increasing demands for healthcare and income
security.
• The need to address the infrastructure deficit through sustainable
capital investments.
Current Financial Management Challenge
• Governments must balance the need to respond to these immediate
economic challenges without compromising its responsibilities for
addressing the longer-term objectives.
• Increased complexity of transactions and external reporting
requirements (PSAB, IFRS).

Today’s Operating Environment
• Greater public expectations for seamless, quality and value-for-money
services.
• Focus on results and financial sustainability in health care, education and
social services.
• Government’s evolving “oversight” role, where increasingly Broader Public
Service (BPS) partners deliver front-line services.
• Increased intergovernmental cooperation and collaboration between
federal/ provincial/ municipal governments.
• Advent of new technologies enabling integrated business and financial
solutions.
• Increasing demand to elevate financial management function in
supporting programs, managing risk and leveraging strategic outcomes.

Controllership must exercise Financial
Leadership
• During economic downturns, the role of the public sector financial
community is even more critical.
• Our role is to provide government decision-makers with the best financial
information possible, so that they can make well informed decisions
amongst the competing public policy demands.
• To be successful in this role, in supporting financial decision-making, we
must:
• establish a robust financial management framework;
• emphasize value for money and fiscal accountability;
• balance immediate fiscal impacts with longer-term stewardship;
• ensure appropriate controls are in place and functioning;
• apply financial risk management principles; and
• ensure transparency in financial reporting through public disclosure.

Controllership’s role in financial management
• The controller/controllership function plays a key financial management
role in making the government’s business objectives achievable.
• Controllership adds to the financial management discipline by providing
assurance of compliance with financial reporting and controls.
• However, the controllership function’s “value” is fully realized by supporting
decision-makers with financial analyses that identifies:
– links between costs and performance;
– opportunities to reduce direct and indirect costs; and
– opportunities to increase delivery efficiency in meeting public policy
goals.
• Realizing this contribution can only happen when we fully apply advanced
management accounting, risk management, effective costing and revenue
management.

Financial Management Transformation*
CatalystStrategistStewardOperator
Controllership:
 Focused on the prudent use
of resources by standardizing,
consolidating and automating
processes.
 Procedural policies.
 Establishing financial data
integrity, timeliness and
accuracy
Results Planning:
 Ensuring effective
budgeting, forecasting and
planning systems in place.
 Asset/Capital Management.
 Establish policy framework
 Risk management and
effective controls
Decision Support:
 Focused on performance
management and supporting
effective investment decisions
 Ensure value-for-money
 Policies that strengthen
performance by promoting
positive behaviours.
 Effective BPS management
 Robust Cost/Benefit analysis
Leader:
 Support decision-makers and
identify opportunities for
service delivery transformation
 Creates partnerships to drive
innovation and service delivery
efficiency
 Finance integrated with policy
and operational considerations
 Enterprise risk management
 Effective horizontal
management
Trusted AdvisorAnalysisControls
* Four Faces Framework discussed in Deloitte study “Mastering finance in government:
Transforming the government enterprise through better financial management”

Required Financial Management Elements
• Management Decision Support
– Financial evaluation expertise
– Business risk management expertise
– Capital investment analysis expertise
– Financial performance management
expertise
• Business Planning, Fiscal Planning and
Budgeting
– Strategic business planning expertise
– Risk-based Fiscal planning expertise
– Capital planning expertise
– Integrated capital, operating and cash-flow
budgeting expertise
– In-year fiscal management expertise
• Accounting, Appropriations and Financial
Reporting
– Accounting policy application and control
expertise
– Appropriation compliance and control
expertise
– Costing and pricing expertise
– Financial reporting expertise
– Financial information analysis and integrity
assurance expertise
• Risk Management, Accountability and
Control
– Program risk management and control
expertise
– Project risk management and control
expertise
– Asset and Liability risk management and
control expertise
– Transfer Payment, Agency and Trust risk
management and control expertise.

Financial Competencies needed
Business Knowledge
Effective Costing, Planning & Evaluation
Risk Management
Standards Compliance
Effective Communication
Performance Management
Forecasting, Planning and Budgeting
Accounting/ Financial Knowledge
Valued-added
Advice
Value-
for-
Money
Strategic
Focus
Competencies

How is the OPS Responding to this challenge
• Integrated Planning: a reconstituted Treasury Board Office integrates fiscal planning,
controllership and audit leadership enabling government to be better equipped to deal
with the competing demands.
• Financial Management: review of the appropriate financial management functions to
assist ministries in providing decision support to line-ministry decision-makers.
• Policy Framework: revitalize and streamline financial policy framework to clarify and
strengthen roles, responsibilities and accountabilities.
• Transfer Payment Accountability: continue efforts to reduce administrative duplication
for TP recipient partners while ensure improved accountability.
• Asset Management: capitalization of minor Tangible Capital Assets so that ministries can
more effectively plan, account and budget for their portfolio of investments.
• Capacity: revitalize OPS financial capacity through attraction (financial internships and
foreign-trained professional programs), training on core competencies and retention, so
that Ontario can build the financial leadership of the future.

Section 2: Questions
• What do you think needs to happen for the
controller/controllership function to assume a more advisory
“decision support” role?.
• In your role as controller, what strategies can you employ to
strengthen the controllership function's links with line-
management decisions?.
• What incentives can we develop to support the
transformation of the controllership function?.

Case Studies

Case Study 1: Government support for the Auto Sector
• Challenge: Balancing socio-economic imperative to save manufacturing jobs
against the public policy and accountability requirements.
• Objective: Provide ailing automobile companies a credit bridge through difficult
times.
• Key Issues:
– Supporting the auto sector is multi-jurisdictional issue. Loan agreements
cannot be made in vacuum and must take into account all aspects of the
various governments’ initiatives.
– Managing the risk of longer-term investments in an industry with weak
consumer demand and volatile stock markets.
– Ensuring public money is spent appropriately and contributes to wider public
policy goals, such as more environmentally friendly cars.
– Making sure public loans are repaid and that government exposure is based
on the associated risks.

Case Study 2: Vancouver Olympics Capital Projects
• Challenge: City of Vancouver has taken full financial control of the 2010 Olympics
athletes village $1 billion project.
• Objective: Balancing increasing costs against a drop-dead deadline, without
encumbering the city with substantial debt.
• Key Issues:
– Short-term “showcase” event against a substantial public debt at a time of falling
revenues.
– Original Alternative Financing and Procurement (AFP) agreement was supposed to
transfer the “risks” of construction and financing to the developer. With evaporation of
“market” credit the construction company has been unable to make payments. Since
September, 2008 the city has covered construction costs through a $100 million loan to
the developer.
– The city’s takeover could help cut the interest rate from as much as 11.5 per cent to as
little as five per cent.
– Risk that assuming the liability could downgrade of the city’s triple “A” credit rating
which could make it harder to borrow other funds until the athletes’ village loan is paid
off.
– The take-over of financial responsibility for the project means that the city now has the
entire “village” as an asset (and project liabilities), not just the land it sits on.

Case Study 3: Alternative Financing Arrangements
• Challenge: Ontario has an infrastructure deficit estimated at more than
$100 billion.
• Objective: Alternative Financing and Procurement (AFP) represents an
opportunity to leverage private-sector project management expertise and
financing to help bridge the infrastructural deficit.
• Key Issues:
– Public policy considerations in the government’s construction, management
and ownership of assets.
– The higher private-sector financing rates must be balanced against
construction risks (i.e. cost overruns) transferred to the private partners.
– Long-term AFPs that include design, build and asset management
components, require performance criteria to ensure value-for-money
throughout the asset’s life-cycle.
– The openness and transparency of the alternative financing process are critical
to ensure the highest return on investments and public accountability.
– Differing financing rates methodologies impact the recognised value of the
assets. Using a project costing model will increase financing costs, while a
internal discounted rate will decrease financing costs and change the asset’s
value.

From a Controllership Perspective
• We need to ensure:
– solid financial management information is provided to support an
effective balance between the need to stimulate the economy against
the stewardship role of asset management for the longer-term;
– a strong and transparent decision-making framework is in place that
provides value-for-money to taxpayers;
– public resources are effectively controlled in accordance with legislative
and public sector accountability standards;
– a strong understanding and independent assessment of AFP rival bids
based on robust and reasonable costing/financing assumptions; and,
– transactions are accurately accounted for and represented in the
province’s Public Accounts.
• Overall, we need to put this in a language that helps the
decision makers make informed investment choices.

Key Requirements for Success
• Informed Decisions: Further integration of risk and performance management into
the fabric of financial decision-making.
• Effective Governance: establishing clear roles and accountabilities, linked to
decision-making structure and supported by a robust policy framework.
• Financial Leadership: to set priorities, support capacity improvements and provide
a strategic financial “voice” at the decision-making table.
• Financial transformation: continue to migrate the financial function away from a
transaction-rules focus to an “advisory” decision support and oversight role.
• Business “ownership” of Finance: progressively, delegate financial management to
program managers and other government organizations, while maintaining
accountability and oversight.
• Measuring Progress: establish clear performance measures, evaluate progress
toward achieving the desired goals and taking remedial action when necessary.
• Communications: open and transparent communications to allow knowledge of
risks, challenges and solutions to flow throughout the organization(s).
• Financial Capacity: attract, retain and develop financial capacity that is aligned to
future needs.

Looking Ahead
• Controllership closes the financial management “accountability
loop”.
• Effective controllership provides the front-end financial information
to make informed business decisions but also ensures controls are
met in the achievement of results.
• As the demands of controllership function increase, it is critical to
integrate risk management, process and structure cost control, and
revenue management into the fabric of decisions.
• Ultimately, our success depends upon the professional knowledge
we bring to the decision-making table. Only up-to-date, strategic
competencies and a robust financial community can ensure we
provide value-added expertise needed to achieve public policy goals.

A more complex world…

Understanding The Financial Planning
Process

The Rewards of
Sound Financial Planning
• Maintain and improve standard of living.
• Control spending in order to live well today and
tomorrow!
• Accumulate wealth.

Average Propensity to Consume:
The percentage of each dollar of income that is
spent, on average, for current needs rather than
saved.
 What is your average propensity to
consume?
Income spent on current needs
Total income

The Personal Financial Planning Process
• Taking conscientious and systematic steps
toward fulfilling your financial goals.

Steps in the Financial Planning Process:
1. Define financial goals.
2. Develop financial plans and strategies to achieve
goals.
3. Implement financial plans and strategies.
4. Develop budgets to monitor and control progress
toward goals.
5. Evaluate results by using financial statements.
6. Revise goals as situations change.

1. Define financial goals
2. Develop plans

3. Implement plans
4. Develop budgets
2. Develop plans
FINANCIAL ACTIONS
•Basic asset decisions
•Credit decisions
•Insurance decisions
•Investment decisions
•Retirement and
estate decisions

3. Implement plans
4. Develop budgets
2. Develop plans
5. Evaluate results
6. Revise plans
FINANCIAL ACTIONS
•Basic asset decisions
•Credit decisions
•Insurance decisions
•Investment decisions
•Retirement and
estate decisionsPrepare financial statements

Money:
• Used as a medium of exchange.
• Financial goals are stated in dollar
amounts.
• Need to consider utility, or amount of
satisfaction derived from purchases, as
well as cost.
• May be closely linked to personal
psychological concepts.
• May play key role in personal
relationships.

To attain your financial goals:
• Be specific in defining goals and focus on
results.
• Make goals realistically attainable.
• Involve family members and enlist their
cooperation.
• Prioritize goals and set a definite time frame.

Putting target dates
on financial goals:
• Short-term goals—to be accomplished within
the next year.
• Intermediate-term goals—to be accomplished in
the next 2-5 years.
• Long-term goals—to be accomplished in time
periods greater than 5 years.

From Goals to Plans: A Lifetime of
Planning
• Early childhood.
• High school and college.
• Family formation.
• Career development.
• Pre-retirement.
• Retirement.

Age
Income
10 20 30 40 50 60 70 80
Income Stream
Personal Financial Planning Lifecycle
Retirement/
Estate
Tax
Savings/
Investment
Asset Acquisition
Liability/Insurance
Benefits

Benefit of planning:
• Your money works more efficiently for you
by...
• Utilizing the financial wonder—
The power of compounding
through time!

Growth of $1,000 at 8 % interest:
21,725
10,063
4,661
2,159
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 10 20 30 40
Years

Growth of $1000 at 10% interest:
17,449
6,727
2,594
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 10 20 30 40
Years
21,725
45,259

Use the personal computer to:
• Prepare financial
statements
• Plan retirement
• Prepare and file tax
returns
• Track investments
• Analyze needs

The Planning Environment
Financial planning is carried out in an economic
environment created by the interactions of
Government
Business
Consumers

BUSINESS GOVERNMENT CONSUMERS
Money payments of wages, rents
interest, and profit
Money payments for goods
and services

and services
Land, labor, and financial capital
Goods and services

and services
Land, labor, and financial capital
Goods and services
Public goods &
services, regulations,
and revenues
Taxes

Government policy decisions are used to
regulate the economy in an effort to:
• Provide economic stability.
• Maintain acceptable employment levels.

• Controls money supply
• Used to stimulate or contract economic
growth
Fiscal Policy
• Controls levels of taxation
• Sets levels of government spending on various
programs
Monetary Policy

Policies seek to control:
• Economic Cycles
– Stages related to employment and production
levels
– Growth measured by changes in GDP
• Inflation
– Measured by changes in CPI
– Affects purchasing power and interest rates
– Affects financial plans and goals

Economic Cycles
Expansion Recession Depression Recovery
HIGH
LOW
Levels of Employment and Production

What Determines Your Personal
Income?
• Age, marital status
• Education
• Where you live
• Career choice

The Fundamentals of Financial Statements

Purpose of Financial Statements
• Financial statements are:
“Structured representation of the financial position and financial
performance of an entity.”
• Objective:
To provide information about:
– the financial position,
– financial performance, and
– cash flows
of an entity that is useful to a wide range of users in making economic
decisions.

The Framework
• The International Financial Reporting Standards
(IFRS), in particular guidance on presentation and
disclosure
• Local statutory requirements
– The Companies’ Ordinance, 1984, in particular the Fourth/ Fifth
Schedule for presentation purposes
– Directives of the regulatory bodies
– Industry specific legislation
– Generally accepted accounting principles

Amendments of the Finance Bill
2007-2008
• The AGM must now be held after three months of the end of the
accounting year. (previously 4 months)
• Power of FG to require additional matters in the auditors’ report now vested
in Commission
• NBFCs to comply with minimum equity requirements rather than minimum
capital requirement for incorporation
• Penalty for failure to comply with NBFC laws enhanced from Rs 5 m to Rs
50 m
• Mandatory for listed Co to have independent share registrar.
• Substantial share holder (12.5%) can apply for re election of directors in
the case of a listed company.

Amendments of the Finance Bill 2007-2008
(Contd.)
• Power of FG to specify business of banking companies now vests in the
SBP.
• Perpetual non cumulative preference shares included in definition of share
capital of Banking Company.
• Additional conditions for eligibility to pay dividends by banking company
• Additional provisions for auditors: all significant matters to be reported to
SBP, SBP may revoke the appointment of auditors.
• New Act ‘Payment System for Electronic Fund Transfer 2007’ introduced.
• Contract worker now entitled to benefits under the Companies Profits
(worker Participation) Act 1968, and amount of profit no longer subject to
audit adjustments.

Responsibility for Financial Statements
• Final responsibility for fair presentation of financial
statements rests with the BoD.
• Companies’ Ordinance 1984: directors to present in the
AGM annual accounts that give a true and fair view of
state of affairs and Profit and loss of the Company (u/s 233
& 234).

The Auditor’s Responsibility
“To express an opinion on financial statements based on
their audit”
• Audit is a statutory requirement for all companies.
• Auditor to be Chartered Accountant for the following:
– Public Cos.,
– Private Co that is a subsidiary of a public company, and
– Private Co having paid up share capital of Rs 3m or more
• Auditors also issue reports on:
– Review of interim f/s (listed Cos.).
– Report on consolidated financial statements.
– Report on changes in accounting policies (listed Cos.)

The Auditor’s Responsibility (contd.)
– Review of compliance with Best Practices of Code of
Corporate Governance (Listed Cos.).
– Assets, liabilities, profits and losses, share capital and its
breakup value for prospectus (Schedule II).
– Certification of financial information in statutory report
(for Co limited by shares etc).
– Significant issues identified during audits (listed Cos).
– Industry specific reports (basel II, profit rate verification,
credit review reports etc).

Components of Financial Statements
• General purpose financial statements comprise of:
– Balance Sheet.
– Profit and loss account.
– Statement of changes in equity.
– Cash flow statement.
– Notes to the financial statements.

Components of Financial Statements (contd.)
Listed Cos .
– Balance sheet
– Profit and loss
– Statement of changes in
equity
– Cash flow
– Notes
• 4th schedule applies
• This includes private
companies and public
non-listed companies that
are subsidiaries of listed
companies
Non Listed Cos.
– Balance sheet
– Profit and loss
– Notes
• 5th schedule applies

The Annual Report – other information
TYPE OF REPORT REQUIREMENT OF:
Director’s report Companies’ Ordinance 1984
Statement of Compliance with
Code of corporate governance
Listing regulations
Company information including
financial progress reports,
management structure etc
Other information includes the following:
The auditor may review the information in relation to the
accounts under audit

Review of the Financial Statements
• Variation in presentation may arise from difference in:
– Nature of business of the entity
– Type of Company (listed, non-listed public, private)
– Consolidated or unconsolidated accounts
– Management judgement on matters not specified by statute / standards

Review of the Financial Statements
(Contd.)
• Identification of each f/s component.
• Name of reporting entity.
• Specified if accounts related to group entity.
• Balance sheet date/period of account.
• Presentation currency.
• Level of rounding used in presenting amounts
• Comparatives.
• F/s amounts supported by adequate notes.
• Each F/s component signed by director and chief executive.

Review of Balance Sheet Presentation
• Please review the sample balance sheet:
• Our discussion will follow the line items:
ASSETS
• Fixed Assets
• Long term investments
• Long term loans and advances
• Long term deposits and prepayments
• Current assets
– Stores and spares
– Stock in trade
– Trade debts
– Loans and advances
– Trade deposits, prepayments
– Interest accrued
– Other receivables
– Financial assets
– Tax refunds
– Cash and bank balances

Balance Sheet (Contd.)
SHARE CAPITAL & RESERVES
● Share capital
● Capital reserves
● Revenue reserves
● Surplus on revaluation of fixed assets
NON CURRENT LIABILITIES
● Long term financing
● Debentures
● Liabilities against assets subject to finance lease
● Long term Murabaha
● Long term Deposits
● Deferred Liabilities

Balance Sheet (Contd.)
CURRENT LIABILITIES
• Trade and other payables
• Interest, profit, markup accrued
• Short term borrowings
• Current portion of long term borrowings
• Current portion of long term murabaha
• Provisions for taxation
CONTINGENCIES AND COMMITMENTS

Review of Income Statement
Presentation• Please review the sample profit and loss account
• Line wise discussion follows:
TURNOVER
EXPENSES
• Cost of sales
• Distribution cost
• Administrative expenses
• Other operating expenses
• Finance cost
OTHER OPERATING INCOME
• Income from financial assets
• Income from investments/debts of related parties
• Income from assets other than financial assets

Review of Cash Flow
Presentation
• Please review sample cash flow statements
• Cash flows may be prepared under the indirect or direct method.
• These methods affect the method of arriving at operating cash flows only
• Discussion will follow the line items of the sample cash flow:
– from operating activities.
– from investing activities.
– from financing activities.
– cash& equivalents.
• Cash flows are prepared in accordance with the requirements of IAS 7.

Review of Statement of Changes in
Equity
• Please review sample statements of changes in equity
• Statement may either show:
– All changes in equity
– Changes other than transactions with equity holders

Variations for Industries
• Variations can be seen in presentation & disclosures
of f/s for different industries, eg:
– Banking Companies.
– Manufacturing companies.
– Telecom industry.
– Petroleum exploration and production
– Funds.
– Insurance companies.
– Leasing Companies and other NBFCs.

The End

Understanding Finance to Influence Strategic Decisions

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