Finance for Non Finance

Agenda
1.Introduction 2.Accounting Cycle at OG 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Introduction Program Overview
Business Goals Through Budgets Evaluating Capital Expenditures Maximizing Profit Contribution Growing Economic Value Added Managing Working Capital Accounting Cycle

Measuring Financial Results

Introduction Objectives • To better use financial information to grow the business • To make sound financial decisions

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Accounting Cycle at OG

Key Accounting Processes
Purchasing and Payables Production and Inventories Payroll Sales and Settlement Financial Statements

Accounting Transactions

General Ledger

Accounting Cycle at OG

Purchasing and Payables Process
User Department
Check budgeted

Purchase Requisition

Purchasing Department
•Bids •Select Vendor

Purchase Order

Receiving Report

Receiving Department

Shipping List
Delivery

Vendor

Payment General Ledger
Account Distributio n

Account Payables
-Audit -3 way match (invoice, P.O, receiving report) -Valid vendor

Invoice

Accounting Cycle at OG

How is Financial Information Produced?
Trial Balance of Accounts As of xx/xx/xx

Source Documents

Journal Entries
DR CR

General Ledger

Financial Statements

Subsidiary Ledgers

Accounting Cycle at OG

General Ledger
GL Accounts
Journal Entries

Which Account?

Chart of Accounts
•Valid accounts •Description-how to use

Categories of •Assets Accounts -Liabilities -Share-Owners’ Equity -Revenue -Expenses

Accounting Cycle at OG

Examples of Journal Entries
Account Title •Purchase A New Truck Fixed Assets – trucks (B/S) Accounts Payable (B/S) b) Sell products Cash (B/S) Sales – Washing Machine (I/S) - Cookers (I/S) c) Pay Payroll Salaries (I/S) Cash (B/S) d) Purchase Raw Materials Inventory of Raw Materials (B/S) Accounts Payable (B/S) Debit LC 10,000 7,500 Credit LC 10,000 5,000 2,500 2,000

2,000

3,500 3,500

Accounting Cycle at OG

Examples of General Ledger Account
Truck DR CR (a) 10,000 Inventory DR CR (d) 3,500 Cash DR CR (b) 7,500 (c) 2,000 AP DR CR (a) 10,000 (d) 3,500 Sales DR CR (b) 5,000 (b) 2,500 Salaries DR CR (c) 2,000

Trial Balance DR Truck 10,000 Inventory 3,500 Cash AP Sales 2,000 Salaries 21,000

CR 13,500 7,500

21,000

Accounting Cycle at OG

Accounting Cycle - Revenue
Delivery Report
DR CR

Invoices

Route Settlement

Sales Accounting Journal

DR

CR

General Ledger

Cash Detail

DR

CR

Subsidiary Ledgers
•Accounts Receivable •Finished Product Inventory

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Financial Statements How is Financial Information Produced?
Balance Sheet Source Documents Account Data Base (General Ledger) Trial Balance of Accounts As of xx/xx/xx Income Statement Cash Flow Statement

Subsidiary Systems

Management Reports

Financial Statements

Balance Sheet = Financial Photograph

Financial Statements

OG Consolidated Balance Sheet

Financial Statements

Income Statement = Television Program
-It has a Beginning and End -Lasts for a specific period

Financial Statements

OG Consolidated Statement of Income

Financial Statements

Income Statement Issues -Gross Profit -Operating Results -Operating Expenses -Net Income -Accruals -Manipulating of Results

Financial Statements

Statement Differences
Differences In: Income Statement Cash Flow Statement •Shows Cash and Non-cash items, e.g: •Shows only cash items Depreciation, Amortization •Adds back depreciation, amortization •Shows accounting profit or loss for and other non-cash items to profit the period regardless of whether cash •Shows changes in assets and liabilities is received or not , spent or not -Ignores accounts receivable (Investing, and financing activities) -Includes accrued expenses •Shows increase/decrease in cash from beginning to end of period.

Financial Statements

The Business Cash Cycle
Investments Cash Financing

Operations
Cash Receipts & Payments Sales Inventory

Financial Statements

OG Consolidated Statement of Cash Flows

Financial Statements

Cash Flow Statement Issues •Working Capital •Cash From Operations •Debt Levels •Financing activities •Investing activities

Financial Statements

Growth And Profit Cycle
Income Statement -Volume/Price -People/Asset Productivity - Financing Cost Balance Sheet Assets for-Volume Growth -Increased Productivity Capital for-Debt - Equity Cash Flow Statement -Operating Activities -Investing for Growth -Debt (+/-) -Dividends -

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Measuring Financial Results

What Financial Statement can tell us?
•Company’s overall financial health

•Revenue, Expenses, Profits..on targets?

•Problems and Opportunities

•Performance compared to competitors

Measuring Financial Results

Trend and Ration Analysis
1.Spot trends in performance 2.Discover strengths and weaknesses 3.Compare performance to internal and external benchmarks 4.Use a variety of analysis measures 1. 2.

Measuring Financial Results

Analysis Measures
We analyze performance in several ways: -Product/ brand / category Sales -Total Amounts of Money (Dollars, Pounds, Yen…) -Income, Expenses, And Profits per product/ brand / category -Percentage Changes -Ratios

Measuring Financial Results

Trend Analysis
Different Methods •Period-to-Period Changes - Amounts - Percentages •Actual to Forecast/Budget - Amounts - Percentages

Measuring Financial Results

Rules of Thumb
-Volume Growth > Industry Growth -Revenue Growth > Volume Growth + Inflation -Revenue Growth > Cost of Goods Sold Growth -Gross Profit Growth > Expense Growth -Operating Profit Growth > Interest And Tax Growth

Measuring Financial Results

Ratio Analysis
Ratios One Number Another Number

= =

A Ratio

To express a ratio as a percentage, Multiply by 100 One Line Item Another Line Item A Financial Statement Ratio

Measuring Financial Results

Ratio Categories
•Profitability •Activity •Liquidity •Leverage

Measuring Financial Results

Profitability Ratios
•Show Return on Sales, Assets, And Equity • •Important Ratios • •Usually Expressed As Percentages

Measuring Financial Results

Sales Profitability Ratios
Gross Profit Net Operating Revenue Operating Income Net Operating Revenue Net Income Net Operating Revenue

= = =

Gross Profit Margin Operating Profit Margin
Net Profit Margin (Return on sales – ROS)

## ##

X 100 = ##%

## ##

X 100 = ##%

## ##

X 100 = ##%

Measuring Financial Results

Asset and Equity Profitability Ratios

Net Income Total Assets

= =

Return on Assets (ROA)

## ##

X 100 = ##%

Net Income Share-Owners’ Equity

Return on Equity

## ##

X 100 = ##%

Measuring Financial Results

Liquidity Ratios
•Show whether the company can meet its financial obligations • •Help track working capital • •Usually not expressed as percentages

Current Assets Current Liabilities

=

Current Ratio

## ##

= ##%

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Measuring Financial Results

Case Study

Measuring Financial Results

Exercise : Ratio Comparison

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Cash Flow & Working Capital

Working Capital Defined
Current Assets Less: Current Liabilities = Working Capital

Cash xxx Inventories xxx Accounts Receivable xxx Less: Accounts Payable xxx Working Capital xxx

Cash Flow & Working Capital

The Business Cash Cycle
Investments
Buying/Sellin g -PP&E -Investments -Businesses

Financing Cash
-Taking Out/Paying Back Loans -Selling/Buying Back Stock -Paying Dividends

Operations
Cash Receipts & Payments Sales Inventory

Cash Flow & Working Capital

Operating Cash Flow
Cash Net Flow from Operating Profit for to The Period Profit 1,977,761 (216,206) Retained Earnings Changes in Working Capital 405,105 (675,182) 262,305 15 , 273 , 432 (5,323,162) 17,131,488 (17,719,460) Debit Balances Credit Balances (1,712,824) 1,956,558 1,047,845 10 , 653 , 877 Receivable Payable Expenses & Other Activities Net Activities 13,519,648 Adjustments Capital Depreciation & Amortization Gain / ( Loss ) used to Provisions Provisions Adjustments Operating

Taxes from prior years Profit Before in in in in

( Increase ) / Decrease ( Increase ) / Decrease ( Increase ) / Decrease ( Increase ) / Decrease Increase Increase Net

Inventory Inventory - Real Estate Accounts Accounts Accrued Operating Prepayments & Other

/ ( Decrease ) in / ( Decrease ) in Flow From

Cash

Cash Flow & Working Capital

Statement of Cash Flow

Cash Flow & Working Capital

Forecasting Cash Flow

Cash Flow & Working Capital

Cash Cycle Time
•The Cash Cycle:
Sourcing of Raw Materials and packing industry + Manufacturing and Finished Inventory + Sales and Accounts Receivable TOTAL CYCLE TIME 62 days 15 days 7 days 40 days

Cash Flow & Working Capital

Managing Inventories
Inventories Sales Cash Raw material Inventory

Cash Flow & Working Capital

Managing Inventories
Inventory Turnover
Cost of Goods Sold Ending ( average) Inventory

=

Inventory Turnover

Inventory Days Sales Outstanding (DSO)
Step 1: Cost of Goods Sold = Average Daily CGS 365 Step 2: Ending Inventory = Inventory DSO Average Daily CGS

Cash Flow & Working Capital

Managing Accounts Receivables
Inventory

Sales Sales Slips

Customer Credit Credit Sales A/R Statements Cash

Cash Flow & Working Capital

Accounts Receivables Ratios
AR Days Sales Outstanding (DSO)
Annual Credit Sales 365 Accounts Receivable Average DCS

= =
x

Average DCS
Days Sales Outstanding (or collection period)

Cost of Carrying Receivables
Interest Rate 12 Accounts Receivables

=

Cost

Cash Flow & Working Capital

Credit Management
•Credit Policy Established •Approval of Credit Application •Credit Terms Communicated •Open Item AR System •Review of Aging Report •Follow-Up Procedures •Monthly Statement of Account
AGING REPORT Balance Ahmed Salma Hassan 1,000 3,000 500 1-30 1,000 500 1,000 1,000 500 31-60 61-90 Over

Cash Flow & Working Capital

Cash Management

13 Sales Area

Cash Flow & Working Capital

Currency Fluctuation

US $

EGP

Devaluation Reduce The Purchasing Power of Cash

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Economic Value Added

EVA: Economic Value Added

Economic Value Added

Financial Measurement Tools

Net Income
Key- Generate Returns in Excess of Company’s Cost of Capital in All Business Segments

Earnings

Return on Assets

Financial Indicators

Return on Capital

Economic Value Added

What are Economic Profit and EVA?

NOPAT
(Net Income)

EP This Year minus EP Last Year

minus Capital Change Economic Profit

EVA

Economic Value Added How to calculate Economic Profit and EVA?
Year 1 Step 1 – Calculate your NOPAT = Net Income $ 15.0 Year 2

Step 2 – Calculate your Capital Charge = Your Operating Capital x the company’s Cost of Capital Step 3 – Calculate your Economic Profit = Net Income - Capital Charge Step 4 – Calculate your EVA = This year’s Economic Profit – Last year’s Economic Profit Net Income Minus: Capital Charge Economic Profit Economic Value Added $ 15.0 11.0 4.0

11.0 $ 4.0

$ 17.5 $ 1.4

12.1 5.4

Economic Value Added Step-1 Calculate NOPAT (Net Income)
Accountability
Income Statement Operating Management Corporate Manufacturing Corporate Treasury Corporate Tax

Product Sales Services Sales

x x

x x x x x x x x x-Co. wide rate NOPAT x x x
x

Net Revenues x Cost of Goods Sold Operating Expenses Internet Income Interest Expense Gain (loss) on exchange Significant gain (loss) on asset sales x Income taxes Net Income x x

x-variances x x x

Economic Value Added Step-2 Calculate Capital Charge
Average Operating Capital (1)

Balance Sheet
Cash (non-interest bearing) Inventories x Receivables x -Payables x = Working Capital + Fixed Assets = Operating Capital x Company’s Cost of Capital (2)

x x x

Capital Charge

(1)Average of last 5 quarters (2)Cost of Equity and Debt (weighted average)

Economic Value Added
Step-3 and 4- Calculate Economic Profit and EVA
Year 1 Income Statement Net revenues Cost of Goods Sold Gross Profit Operating Expenses Profit before taxes Income Taxes Net Income Year 2 Year 3

$ 100.0 40.0 8.0 17.5

60.0 14.5 25.5

$ 120.0 48.0 9.2 20.0 18.8 29.2

72.0 60.0 12.0 26.2

$ 150.0 21.8

90.0 38.2

Balance Sheet Operating assets Less: Operating Liabilities Operating Capital Company’s Cost of Capital

150.0 110.0 11%

40.0

200.0 150.0 11%

50.0

210.0 50.0 160.0 11%

Economic Value Added
Reporting
Operation Operating Capital 110,000 65,000 Net Income 17,500 12,000 Economic Profit 5,400 4,850 EVA 1,400 500

Busine ss Plan
Management Actions

Refreshing Canners Beverage Bottlers

Rolling Estimate Report Operati ng Capital Report

Quarter Ended Refreshing Canners Beverage Bottlers Average

Trade A/R 110,000 65,000 15,000

Inventories 17,500 12,000 14,000

Fixed Assets 5,400 4,850 100,000

Liabilities 1,400 500 (19,000)

Operating Capital 100,000 105,000 110,000

Economic Value Added
Share-Owner Value Model
Rate of Return
-Growth in sales - Industry Per Capita - Share of Sales -Per Product Profitability -Investment Earnings

NOPAT (Net Income) -Capital Charge = Economic Profit

Reinvestment
- Production Lines

Optimize Cost of Capital – Financial Policies
-Foreign Exchange Management -Tax Management -Capital Structure -Dividend Policy -Share Repurchase

Maximize Share-Owner Value

Economic Value Added
How can your Operation Influence EVA? The Three Factors That Drive EVA 1.Investing in Business 2.Increasing / decreasing Net Income 3.Decreasing / increasing Operating Capital
Invest in Business

Increase Net Income

Decrease Operating Capital

Economic Value Added
Factor 1- Investing in Business -Invest in projects that generate returns in excess of cost of capital -Consistent with our operating strategies

Economic Value Added
Factor 2- Increasing Net Income Key Drivers - Examples -Increasing per capita and market share -Increasing sales prices and managing discounts -Improving operating margins through efficiencies -Controlling costs and expenses to grow less than sales revenues -Centralizing purchasing

Economic Value Added
Factor 3 – Reducing Operating Capital Key Drivers - Examples -Using operating capital more efficiently -Eliminating unnecessary assets -Eliminating low-return business segments -Reducing working capital

Economic Value Added
Reduce Working Capital Key Drivers - Examples -Shortening days in working capital cycle -Eliminating excess inventories -Just-in-time inventory management -Good credit management over receivables

Economic Value Added
EVA Conclusion -Apply Concepts: - While preparing your business plan - In evaluating projects - When making day-to-day decisions -Create value for our share owners -Provide career opportunities as company grows

Agenda
1.Introduction 2.Accounting Cycle 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Management’s Responsibility for Controls

-Internal Control System -Chart of Authority -Code of Business Ethics

Management’s Responsibility for Controls

Why are Controls Important? •Support Achievements of Business Objectives •Accuracy of Internal and External Reporting •Safeguard Assets •Protect the Goodwill in our Business •Comply with Laws and Regulations

Management’s Responsibility for Controls

Definition of Internal Controls A system created by a company’s board of directors, management, and other personnel, designed to ensure: •Effectiveness and efficiency of operations •Reliability of financial reporting •Compliance with applicable laws and regulations

Management’s Responsibility for Controls

Why are Controls Important?
Company Control Environment 1

Monitoring Control Systems 4

Key Components of Internal Control
Company Control Activities 3

Business Risk Assessment 2

Management’s Responsibility for Controls

Company Control Environment

“The Tone at the Top” •Senior Management Commitment •People •Code of Business Conduct

Management’s Responsibility for Controls

Business Risk Assessment

-Public Image -Materiality and Complexity -Changing Conditions -Management of Risks

Management’s Responsibility for Controls

Control Activities

•Reporting and Budgeting Cycle •Company Delegation of Authority •Company Finance Manuals

Management’s Responsibility for Controls

Control Activities - Types

•Preventive and Detective Controls •Segregation of Duties

Management’s Responsibility for Controls

Controls in Purchasing and Payables
User Department
Check budgeted

Purchase Requisition

Purchasing Department
•Bids •Select Vendor

Purchase Order

Receiving Report

Receiving Department

Shipping List
Delivery

Vendor

Payment General Ledger
Account Distributio n

Account Payables
-Audit -3 way match (invoice, P.O, receiving report) -Valid vendor

Invoice
-User approves -Account distribution

Management’s Responsibility for Controls

Controls in Sales and Settlement
Outlet Master Forms
•Calling day •Call restriction •Who to contact

Planning

Cards
•Route cards

Delivery Report

Cash to Cashier

Unload Report Cash Detail

Return to plant

Invoices •Collect cash •Credit customer

Sales

•Product Delivery •Merchandizing

Audit

Accounting Summary
Sales Accounting

Route Settlement

Route Accounting

General Ledger

Route Sales
Finished Goods Inventory

Management’s Responsibility for Controls

Cost versus Benefit
Cost of Controls Benefits of Controls

Probability and Materiality of Losses

= Risk Assessment Cost of Controls

Management’s Responsibility for Controls

Monitoring Control Systems •Responsibility of Management •Audit Committee •Internal Audit •External Audit

Management’s Responsibility for Controls

Code of Business Conduct
Accuracy and Completeness of Accounting Record and Reports

Conflicts of Interest Code of Business Conduct

Dealing with Government Officials, Government Employees, Company Customers and Suppliers

Political Contribution

Administration Of Code

Management’s Responsibility for Controls

Administration of Code

•Applies to Company Operations, Employees, and Consultants •Code Violation •Questions on Code

Management’s Responsibility for Controls

Without Authorization Levels

Management’s Responsibility for Controls

Local Chart of Authority
Local Chart of Authority
Request for Authorization Form Company Delegation of Authority

Approved Budgets 1

Day-to-Day Business Transaction 2

Local Approvals 3

Significant Business Transactions 4

Division, Group and HQ Approvals 5

Management’s Responsibility for Controls

Chart of Authority
Transaction
1.Asset Purchase, Disposal, Revaluation or Write-Off 2. 3.Operating Revenues 4. 5.Operating Expenses 6. 7.Leases 8. 9.Banking 10. 11.Personnel 12. 13.Other Transactions

Approval

Information

Management’s Responsibility for Controls

Security

•Physical Security •Information Security

Management’s Responsibility for Controls

Computer Systems – Controls A.Systems Development and Program changes are approved B.Access to computer resources and data are restricted C.MIS organization has segregation of duties D.Precautions minimize the effect of computer disaster

Summary
1.Introduction 2.Accounting Cycle at OG 3.Financial Statements 4.Measuring Financial Results 5.Case Study on Financial Statements 6.Cash Flow and Working Capital Management 7.Economic Value Added 8.Management’s Responsibility for Controls

Thank You