08.11.

2020

Company’s finance – basic

Mirosław Nalazek PhD documents
For financial management four main documents
are essential:
Economics of Tourism ◼ Income statement
Establishments ◼ Balance sheet

◼ Cash flow statement

Lecture
◼ Retained earnings

Basics of Economics of Finance

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Income statement
Income statement (Profit and ◼ The Income Statement includes sales, cost
Loss Statement) of goods sold, gross profit, labor and
overhead expenses, and net profit.
◼ Income statement tells how much money the
hotel earned (lost) in given period (month,
quater, year).

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Types of expenses in tourism

The Income Statement (Overview) establishments
▪ Revenue ◼ Marketing,
▪ Costs of services (goods) ◼ Administration,
▪ Undistributed operating expenses ◼ Utilities
▪ Management fees ◼ Operations
▪ Fixed charges
▪ Income taxes
▪ Net income

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Income statement – some remarks

Net income is not cash Income statement for the
◼ Sales on account/receivables
travel agency
◼ Sales occur today
◼ Cash comes later
◼ Depreciation
◼ Cash is expended today
◼ Expense is recognized later

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Travel agency costs (cont’d)

Travel agency revenues

Source: Cooper et al
Source: Cooper et al

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Example of travel agencies commissions

in Poland

Type of services Commission level % Remarks

Income structure of tour
Air tickets 0-1% Plus override commissions operators
Hotel reservations 10%
Base commission 8-12%.
Tours 8-15% Override commissions 1-3%
depending on the value of sales

Insurance 20-30%

Other services Ok. 7-10%

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Sales structure of a large mass maket tour

operator
Price structure of a 14-night inclusive tour

Source: Trade information

Source: Trade information

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Number of customers served by

Income statement for a product category (data provide by
touroperator Novaturas, ‘000 passengers):
Lithuania (amounts in
thousand EUR)

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Income from tour packages by

destinations

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Financial statements – balance sheet

◼ A balance sheet reflects how the assets and
Balance Sheet liabilities relate to the owner’s equity at a particular
moment in time.
◼ A balance sheet tells how much the company is
worth at given moment (usually end of the
financial year)

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Balance Sheet (Overview) Current assets

Includes: ◼ Current assets are assets that are expected
▪ Current Assets to be converted to cash, sold, or consumed
▪ Property and Equipment during the next 12 months or within the
business’s operating cycle if longer than a
▪ Current Liabilities year.
▪ Long-term Debt
▪ Owners’ Equity

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Current assets Property and quipment

◼ Current assets typically include:
◼ cash,
◼ short-term investments,
◼ accounts receivable,
◼ prepaid expenses, and
◼ inventory.
◼ Property and equipment may consists of
Office equipment, company cars, etc., which
are carried at cost, less accumulated
depreciation.

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Current liabilities Long-term debt

◼ Current liabilities are a company's debts or
obligations that are due within one year,
appearing on the company's balance sheet
and include short term debt, account payable,
accrued liabilities and other debts.
◼ Long-term debt consists of loans and financial
obligations lasting over one year.
◼ Long-term debt for a company would include
any financing or leasing obligations that are
to come due in a greater than 12-month
period.

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Cash and Income Flows Related

Owner’s equity to Equipment
◼ The owners' interest in the assets of a business. ▪ Example of activities
◼ Owners' equity includes the amount invested by the ▪ Purchase of equipment
owners plus profits (or minus the losses) ▪ Use of equipment
in the enterprse. ▪ Disposal of equipment
◼ Owners' equity and liabilities are used to finance
company’s assets.
◼ Also called net assets, shareholders’ equity.
◼ Owner’s equity has 2 main subparts:
◼ paid-in capital and
◼ retained earnings

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Balance sheet of Novaturas S.A.

Current maturities & liabilities (amounts in thousand EUR)
◼ The term current maturities of long-term debt refers
to the portion of a company's liabilities that are
coming due in the next 12 months.
◼ Examples of this long-term debt include loan
installments and interests on the credit received from
the bank that are maturing.
◼ This portion of long-term debt is classified as a
current liability on a company's balance sheet.
◼ Current Liabilities (CL): what the company "owes"
which must be paid within one year

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Balance sheet of Novaturas S.A.

(amounts in thousand EUR)

Statement of Cash Flow (SCF)

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Statement of Cash Flow Definition Importance of knowing cash flow

◼ SCF is a summary of the actual or anticipated incomings and
outgoings of cash in a firm over an accounting period (month,
quarter, year).
◼ It answers the questions:
- Where the money came (will come) from?
- Where it went (will go)?
◼ Cash flow statements assess the amount, timing, and
predictability of cash-inflows and cash-outflows, and are used as
the basis for budgeting and business-planning.
◼ A company's cash flow shows whether the business is
able to fulfill its financial obligations.
◼ Profits and cash flow are different financial categories
◼ Profits are money that the business ends up earning
after expenses and taxes, while cash flow is money
available to use for operating expenses.
◼ Even if a business shows a profit, it must have the
cash flow to operate without problems.

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Statement of Cash Flows (SCF) Some definitions

▪ Cash from operating activities ◼ Solvency is the degree to which the current
assets of an individual or entity exceed the
▪ Cash from investing activities current liabilities of that individual or entity.
◼ Liquidity refers to a company's ability to pay
its bills from cash or from assets that can be
▪ Cash from financing activities turned into cash very quickly.

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Example of Statement of Cash Flow

Example of statement of Cash Flow (1) (2)

Net Cash Flow from Operating Activities: PLN Net Cash Flow from Investing Activities:
Net income 100,000 Purchase of equipment <200,000>
Sale of investments 100,000
Noncash expenses included in net income:
Net cash flow from investing activities <100,000>
Depreciation 200,000 Net cash flow from financing activities:
Changes in non cash current accounts: New loan received from bank 200,000
Accounts receivable 10,000 Payment of old loan <150,000>
Inventories 5,000 Net cash flow from financing activities 50,000
Accounts payable <10,000> Increase is cash 250,000
Cash beginning of 2018 100,000
Wages payable <5,000> Cash end of 2018 $350,000
Net cash flow from operating activities 300,000

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Statement of Retained Earnings

▪ Retained earnings is the percentage of
Retained earnings net earnings not paid out as dividends, but
retained by the company to be reinvested in
its core business, or to pay debt.
▪ Reflects changes in retained earnings
account during period
▪ Major items:
▪ Results of operation’s (net profit or loss)
▪ Dividends declared

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Statement of Retained Earnings

ABC Travel Agency, Warsaw
Components of Retained Earnings For the year ended December 31, 2018

Retained earnings – January 1, 2018 $100,000

Net profit for 2018 200,000
Dividends declared during 2018 <50,000>
Retained earnings, December 31, 2018 $250,000

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Summary of Financial Statements

▪ Balance Sheet: A = L + E (Assets=Liabilities + Financial performance

Equity) indicators
▪ Income Statement: R – E = NI (Revenues –
Expenses = Net Income)
▪ Statement of Cash Flows: Cash in – cash out =
Negative or Positive cash flow
▪ Statement of Retained Earnings: REB + NI –
DD = REE (Retained Earnings in the Beginning
+ Net Income – Dividend Declared)

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Performance ratios – ABC Travel

Profitability Ratios Agency
▪ These ratios measure the overall ◼ NI = 150 000 PLN
effectiveness of operations ◼ R = 1200000 PLN
▪ Major ratios include: ◼ Cost of sales: 1000000 PLN
▪ Profit Margin
◼ Assets = 1000000 PLN
▪ Gross Operating Profit
▪ Return on Assets (ROA) ◼ Equity = 750000 PLN
▪ Return on Equity (ROE) ◼ Number of shares = 5000
▪ Earnings Per Share (EPS)
▪ Dividend Per Share (DPS)
▪ EBIDTA

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Profit Margin Gross operating profit

▪ Measures the profits from sales ▪ Measures management’s performance based on
▪ Profit Margin = Net income/Total revenue x 100 expenses they control
▪ Illustration: ABC Travel Agency
▪ NI = 150 000 PLN
▪ R= 1 200 000 PLN ▪ Gross operating profit = Gross operating revenue –
Profit Margin = ? Gross operating expenses
150 000/1 200 000 x 100
= 12,5% ▪ Illustration: (ABC Travel Agency)
For every 100 PLN of revenue, 12,5 PLN has been Sales : 1200000,- PLN
earned! Cost of sales : 1000000,- PLN
Gross operating profit = 1200000,- PLN-
1000000,=200000,-

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Return on Assets (ROA) Return on Equity (ROE)

▪ Indicator of profitability compared to the firm’s assets ▪ Measures profitability of firm compared to owners’
investment
Net Income
▪ ROA = Average Total Assets
X 100

▪ ROE = Net income/Equity x 100

▪ Illustration: (ABC Travel Agency)
Average Total Assets = 1 000 000 PLN
▪ Illustration: (ABC Travel Agency)
▪ Net Income=150 000
ROA= 150 000/1 000 000 x 100 ▪ Equity= 750 000
= 15%
ROE = 150 000/750 000 x 100
= 20%

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Earnings per Share (EPS) Dividend Per Share (DPS)

▪ Shows the amount earned per each share of owners’ ▪ Shows the amount of dividend paid to owners per
common stock each share of owners’ common stock

▪ EPS = Net income / number of shares ▪ DPS = Total Dividend / number of shares

▪ Illustration: (ABC Travel Agency) ▪ Illustration: (ABC Travel Agency)

Net income = 150000 Dividend: 50% of Net income = 75 000 PLN
Number of shares = 5000 Number of shares = 5000

EPS = 150 000/5 000 = 30 PLN DPS = 75 000/5 000 = 15 PLN

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EBITDA - Earnings Before Interest,

Taxes, Depreciation and Amortization' Performance indicators for Novaturas
◼ EBITDA stands for earnings before
interest, taxes, depreciation and
amortization.
◼ EBITDA is one of indicators of a
company's financial performance.
◼ EBITDA can be used to analyze and compare
profitability among companies and industries
as it eliminates the effects of financing and
accounting decisions.

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End of Lecture

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