How much a Product Manager should be aware about Finance as a Product Manager

1. Finance for the Product Manager
Book Review
Presented by - Susheel R
(Chp 6)

2. 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.

3. 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

4. Understanding the Financial
Statements leads to
Create Product Budgets
(Current)
Analyze
Results
Make Decisions when
results don’t align with
projections.

5. 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)

6. 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

7. Terminologies
Fixed Assets (Land, Building, Mfg Equipment)
Intangible Assets – Intellectual Property
Current Assets (Converted in cash in 1 year)
Quick Assets

8. Long Term Liabilities
Equity/Pref Shares
Long Term Loans
Debentures, Bonds
Current Liabilities (Should be paid within a year)
Payments for Operating Expenses
Short Term Loans
Creditors

9. 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)

10. A PM should be easily able to
Analyse
&
Rectify

11. Financial Leverage
Money Borrowed
Purchase a Asset
( To Create Value)
Repay the Money
(with Overall Net Gain.)
Eg: Pencil (Borrow More and repay)

12. 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 Products
New Marketing Programs

13. 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?

14. Inflow & Outflow of Money on monthly Basis
Inflow – Revenue
Outflow – Business Expenses
(Ideal Situation Revenues should exceed Investments)
PM should Just have a fair understanding
(CFO is mainly responsible)
Cash Flow (Present Value)

15. • 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.

16. Note: In the 2nd year money is discounted twice – (Compunding Discount)
The Mechanics of Cash Flow

17. • Create Business cases for Product Investments
• Assemble Forecast
• Test Planning Assumption (Sensitivity Analysis)
• Derive product Cost Models
• Establishing Pricing Models
• Prepare Product Budgets

18. Business case = Primary Document
Investment = Requesting Money from
Management
Cases should be realistic & believable.

19. Assembling Forecast
PM Forecast
Market share
Volume
Sales
Demand
Product Forecast

20. Testing Planning Assumptions

21. Deriving Product Cost Model
Standard Costing
Std Cost Vs Actual Discrepancy is analysed
Target Costing
Market Price- $100
Profit - $75
TC should not exceed $25
Activity Based Costing
It can be helpful for Cost Reduction & Process Improvement

22. 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.

23. Preparing Product Budgets
PM submits the budget in October
Explains 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”

24. Managing the Business
PM ensures – Product achieves the Business Goals
as Budgeted.
PM should determine the product on PLC.

25. 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?

26. Financial Ratios
PM is concerned only with 4 Ratios.
Gross Profit % Ratio = GP / Total Revenue
Net Profit % Ratio = NP/Total Revenue

27. 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?

28. Maturity Assesment - PLC
• PM analyze Product Performance
• Visual Clues
The depiction provides
7 Qtr
6 QTR Slow Growth
Decline from
Qtr 13 to Qtr 19
Followed by 8 + Qtr’s
By Renewed Growth

29. 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.