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FINANCIAL PERSPECTIVE

FINANCE AND ENTREPRENEURS
 Allocation of scarce resources within the firm
 How decisions should be made? – Finance is for general managers too!
 Finance cannot stand alone – to ignore human or production perspective
will be as fatal as ignoring financial perspective
 Effects of decisions – on shareholders and other constituencies
(management, labor, suppliers, customer, government, society)
 Useful to general managers and critical to entrepreneurs –
 Cash
 Risk
 Value

CASH  Key goal is to keep playing the game!  Cash can be consumed. traded for other assets. distinguish between expenditures and expenses – Managers focus on cash inflow and cash outflow .  Accountants match revenues with expenses.

 Performance Evaluation and Incentive Compensation  Firm’s objective : Maximize value depending upon cash and risk  Individuals act to maximize their own wealth  Hence company’s incentive compensation policy is important  Taxes and Cash  4 kinds of decisions affect taxes: Legal. Investment. within the constraints of the law  Cash and Growth  Sales growth -> Growth in assets -> Increase of shareholder’s equity  Differentiation between real growth and inflation . Accounting  Try to minimize the resources siphoned off to Govt. Financing.

technological. Pattern recognition  Patterns affecting cash: cyclical. regulatory and tax  Identifying opportunities: Using past and current data -> Predict future  Decision making: Offensive or defensive move  Not possible every time therefore responses may be delayed  Scenario Planning  It is not the same as worst or best case scenario considerations  Nor it is linear extrapolation  . seasonal. competitive.

3 billion  Google .$137.$48. 1000 Cr  March 2008 $2.1 billion .3 Billion deal finalized  Cash Rich – top 3 companies  Apple .$68.SITTING ON A CASH PILE  TATA motors acquires JLR  cash pile of Rs. 6000 Cr and FY 07 generated free cash of Rs.1 billion  Microsoft .

DON’T RUN OUT OF CASH!  Forecast and plan future cash flow patterns to avoid jeopardizing the firms’ survival  Lack of cash: potential opportunities can’t be seized  Competitive or offensive moves from business rivals .

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TYPES OF RISK  Systematic Risk: Risk inherent to the entire market or an entire market segment. affects the overall market. This type of risk is both unpredictable and impossible to completely avoid . not just a particular stock or industry.

An example is news that affects a specific stock such as a sudden strike by employees. This kind of risk affects a very small number of assets. Diversification is the only way to protect yourself from unsystematic risk . Unsystematic risk: Sometimes referred to as "specific risk".

It particularly affects debt securities as they carry the fixed rate of interest  Market risk: Arises due to rise or fall in the trading price of listed shares or securities in the stock market  Purchasing power risk: Also known as inflation risk. It affects purchasing power adversely .TYPES OF SYSTEMATIC RISK  Interest rate risk: Arises due to variability in the interest rates from time to time.

This risk will change from industry to industry. technological changes  Financial or credit risk: Financial risk is also known as credit risk. It arises due to change in the capital structure of the organization  Operational risk: Risks arising due to human errors. policies and systems . people.TYPES OF UNSYSTEMATIC RISK  Business or liquidity risk: It originates from the sale and purchase of securities affected by business cycles. It occurs due to breakdowns in the internal procedures.

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RISK & PERFORMANCE EVALUATION How to evaluate and reward managers operating in uncertain environment? • Measure Performance in relative sense • Assess Performance on long term value added .

labour cost advantage and the production flexibility by leveraging China .HOW THE RETURNS WILL BE ACHIEVED Ability to identify positive NPV decisions • Delivering the right value at the right price • Managed two crucial product inputs .

SENSITIVITY ANALYSIS .

VALUE CREATION POTENTIAL FROM FINANCING DECISIONS .

VALUE CREATION POTENTIAL FROM FINANCING DECISIONS Debt over equity Value transfer among various owner Its effect on incentive of various players. especially management .

CONCERNS OVER DEBT?  It increase the risk to shareholders but increases expected return also  US tax laws are biased towards Debt financing  Interest is a tax deductible expense  Increasing debt means financial difficulty  Introduction of debt in capital structure means cash flow increases for owners APPLE’S FIRST BOND 2013 Borrowed as part of a plan to return $1 to shareholders by the end of 2015 .

.CONCERNS OVER DEBT? FINANCIAL DISTRESS Companies become vulnerable to competition CHRYSLER IN 1980 Potential car buyers avoided Chrysler acquainted with the fact about the large debt pool.

CONCERNS OVER DEBT? BANKRUPTCY LEHMAN BROTHERS 2008 $619 BILLION IN DEBT Market reluctance to buy its bonds during 2008 .

VALUE TRANSFER  Size of Pie doesn’t change. but size of slices changes  Value transfer among various shareholder may vary  Variation in company strategy also changes the value transfer .

Results in a value transfer from new shareholders to old shareholders and management They will benefit the extent of overvaluation .EXAMPLE 1 SITUATION: Stock is overvalued Issue of stock when stock is overvalued.

EXAMPLE 2 SITUATION: Management decision changes the character of cash flow stream in a way unanticipated by capital suppliers Conservative to Risk company strategy Supplier of debt will suffer a capital loss .

The £2billion backlash: Zuckerberg sued by Facebook shareholders for 'hiding forecasts of future problems' .

INCENTIVES SITUATION 1: FIRM IS NEAR BANKRUPTCY Incentive for management is to invest in Risky projects Shareholders have a worthless claim unless the firm strikes it rich SITUATION 2: DEBT-RIDDEN Managers have strong incentive to perform well after leveraged buyouts SITUATION 3: NATURE OF CONTRACT BETWEEN MANAGERS AND SUPPLIERS Entrepreneur expresses 51% ownership Gives 100% equity to the capital supplier Will keep the 51% on the basis of actual performance Have strong faith in own abilities .

SUMMARY  Finance is a way of thinking about cash. but identifies the right questions  Financial perspective tells whether a decision is feasible or not  Only recurrent danger is it can easily become the excuse for inaction . risk and value  It doesn’t answer the questions.