MBA – MFL 2012

Session Three : Finance

1

Conceptually
General Management
Strategic Thinking

Marketing

Finance

Human Resources

Operations

Marketing MFL Session 6 – Practical Issues in Human Resources MFL Session 7 – Finance workshop – analysing statements MFL Session 8 – Operations case.Finance – theory and workshops MFL Session 4 – Operations and Human Resources Individual and Syndicate Assignment MFL Session 5 – Syndicate presentations . and summary integration .Overview of Marketing Management MFL Session 3 . Human Resources and Operations • • • • • • • • MFL Session 2 . Finance.Overall Approach • MFL Session 1 – Introduction to the principles behind General Management – Intro to Marketing.

Intro to Accounting video http://www.youtube.com/watch?v=vLv6CqCK1Sc 4 .

Principles • Financial accounting vs management accounting – External view. money is the common denominator – Some events defy expression in monetary terms – Figures may be approximations – Figures may reflect opinions . vs being the pilot – Overall view – Historical view • Accounting is a language.

and source and uses – Capital employed: owed and owing by whom .Principles • Time is an artificial compartment • Figures tell a story – what is the figure intended for? – Insurance (replace) – Tax? • So. accounting routines. produce: – Profit and loss and their sources – Cash flow generated.

Question for Discussion • What is the difference between Finance and Accounting? • What is the role of Finance? What do they do in your organisation? • What are the three financial statements and what is the major role for each? • What has always intrigued you about the figures in your organisation? 7 .

Income Statement Basics Sales (when is a sale a sale?) .Cost of Goods Sold (COGS) = Gross Profit .Other expenses = Net profit Records must match the same period of time Any remaining profit belongs to the owner .

snapshot of financial position created at a particular time • Equity plus liabilities = Assets Equity + Liabilities Owners equity Original capital Retained profits Current Liabilities 1500 50 200 Assets Fixed assets Building Equipment Current Assets Stock (inventory) 100 Debtors Cash 150 400 9 Balance Sheet 1000 1000 Long term liabilities 900 2650 2650 .• After completing the Income Statement from General Ledger.

Balance Sheet Principles • Snapshot of financial position at a particular time • Assets must = equity plus liabilities (accounting equation) • Shareholders equity = share capital plus retained earnings • Current and long term assets and liabilities are recorded. monitored and tracked to ensure protection of company assets 10 .

com/watch?v=mxsYHiDVNlk&feature=fvsr 11 .BS Wot’s a Balance Sheet?? http://www.youtube.

Conventions • • • • • Going concern Matching Prudence Historical cost Depreciation – Account for asset over its working life = original cost.estimated scrap value Estimated years useful life • Goodwill .

Balance sheet structures UK Oriented US oriented Owners Equity +Liabilities Assets Fixed Assets Current assets Total assets Non current liabilities Current liabilities .

Depreciation and Amortisation (EBITDA) • Operating profit before Interest and Tax (EBIT) • Profit before Tax (PBT) • Profit after Tax (NPAT) • Profit attributable to Ordinary shareholders.The Profit Family • Gross Profit = Sales minus COGS • Operating profit before Interest. Tax. dividends are paid of of this • Profit retained .

like profit!! • Adjustments to Profit to correct into cash: – Capital Expenditure (Capex) – fully paid at the time – Add back depreciation – Net Movements in stock and Work in Progress (WIP) – Changes in debtors and creditors .Profit versus cash flow • Dual Motives for an organisation: – Need to make a profit in the long run – Need to stay solvent in the short term – Cash flow is a fact. not an opinion.

Ratios 16 .

What to look for in ratio analysis Four categories: • Operating Efficiency – how well run? • Liquidity .can it pay its way? • Financial structure – split between shareholders and debt safe? • Shareholder satisfaction: – Profitability – Dividends – Share price .

What to look for • Operating Efficiency – Profitability • Margins (express as % of sales) • ROCE (RONA) = EBIT X Sales Sales Net Operating Assets (velocity ratio) – Asset productivity • Stock turn (inventory) • Debtors days (customers supplied on credit) • Creditor days (credit granted by suppliers) – Cash flow .

What to look for cont • Liquidity – Current ratio – Quick ratio. if you have stock • Financial structure (Capital gearing) – Debt:equity • Shareholder perspective – ROE – Dividend payout ratio – EPS .

Operating Management perspective • • • • Revenue (sales) Profit Resources employed Cashflow .

• Margins Desirable ratios – Gross margins: 20%+ – EBIT: 10-15% – NPAT: 5-10% • Asset productivity – Stock turn (inventory) 20-60 – Debtors days (payment terms 30?) 30-45 – Creditor days (credit granted by suppliers) 45+ • ROCE (RONA): 15-20% • Liquidity: current ratio at least 1:1. preferably 2:1 • Fin structure – debt:equity < 50/60% .

Shareholder perspective • ROE 20%+ • Dividend payout ratio • EPS .

• Practical Issues • Meeting funds shortfall – Bank loan – New shareholders or more from existing (rights issue) – Less dividends – Suppliers extend payment terms .

Sustainable growth Rate (extra*) • The growth rate at which the organisation can grow without exceeding financial resources is dependent on: – Any external sources of finance – loan or even equity – Dividend payout ratios (Reduce or stop?) – Maximum Debt to equity limits – Assets being squeezed to max Have to improve margins to self fund Growth = dividend ratio* ROE .

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