finance presentation 2008
TRANSCRIPT
Advanced Diploma in Management Practice
Finance
Steve Pollard
Course Secretary: Lee Hutchinson
Room No: 2 D 15
Telephone: 028 9036 8077
Email: [email protected]
Advanced Diploma in Management Practice
Setting the Scene
oThe Teaching Plan
oHandouts and materials on Web CT
oFinance for the Non-Financial Manager
oNot An Accountancy Course
oFinance as a Management Tool:GovernancePlanningDecision-MakingControl
People
Knowledge
Resources
Results
Finance
Monitor and Evaluate
Business Processes
Leadership
Strategy
Finance
The science that describes the management of money, banking, credit, investments, and assets.
Basically, finance looks at anything that has to do with money and the market
AIMS
The aim of this module is to enable you to critically
evaluate and appraise the performance of the
organisation as a whole, and subsets within that
organisation and to use accounting-based
information for planning, decision-making and
control.
Setting The Scene
STRATEGIC VISION & MISSION
oSenior management’s view of firm’s long-term direction
oHelps managers avoid visionless or rudderless decision-making
oConveys organisational purpose motivating employees to do their very best
oHelps keep direction-related actions of lower-level managers on common path
oA well-chosen mission prepares a business for the future!
Objectives
oRepresent managerial commitment to achieve SPECIFIC & MEASURABLE PERFORMANCE TARGETS by a certain time
oSpell-out HOW MUCH of WHAT KIND of performance BY WHEN Direct attention & energy to WHAT NEEDS TO BE ACCOMPLISHED
oEstablishing objectives converts the business’ mission into concrete performance outcomes!
WHAT KIND OF OBJECTIVES TO SET
FINANCIAL OBJECTIVES
oRelate to firm’s financial performance oAcceptable financial performance is critical to businesss survival
STRATEGIC OBJECTIVES
oRelate to firm’s competitiveness & market position oTend to be competitor focused oAcceptable strategic performance is essential for long-term competitive successoRequired for Every Key Result Area
MANAGERIAL VALUE OF OBJECTIVES
Objectives serve two purposes:
oSubstitute strategic decision-making for aimlessness over what to accomplish
oProvide benchmarks for judging organisational performance
MANAGERIAL VALUE OF OBJECTIVES
Principle:
Companies whose managers set objectives for each KEY RESULT AREA and then pursue actions calculated to achieve their performance targets typically outperform companies whose managers have good intentions, try hard, and hope for success
WHAT KIND OF OBJECTIVES TO SET
SHORT-TERM OBJECTIVES
oFocus on short-term performance
LONG-TERM OBJECTIVES
oFocus on long-term performance
Required for Both Short & Long Term
STRATEGIC MANAGEMENT PRINCIPLE
Every company needs both strategic and financial objectives!
EXAMPLE: CORPORATE OBJECTIVES
To achieve 100 percent total customer satisfaction. . .everyday. . .in every restaurant. . .for every customer.
McDONALD’s
EXAMPLE: CORPORATE OBJECTIVES
To increase annual sales from $1 billion to $2 billion in 5 years. To enter a new market every 18 to 24 months. To have 30% of sales each year come from products not in the company’s product line five years earlier. To be the lowest cost, highest quality producer in the household products industry. To achieve a 15% average annual growth in sales, profit, and earnings per share.
Rubbermaid
Financial objectives
Goals related to returns that a business will strive to accomplish during the period covered by its financial plan.
Financial plan: A blueprint relating to the financial future of a Business
EXAMPLE: FINANCIAL OBJECTIVES
oAchieve sales growth of 10% per year oIncrease earnings by 15% annually oIncrease dividends per share by 5% per year oIncrease net profit margins 2% to 4% oBoost annual returns on invested capital from 15% to 20% oStronger credit ratings oA more diversified revenue base oStable earnings during recessionary periods
“Our primary objective is to grow the value of the business for our shareowners. This objective is quantified in terms of three financial targets:
oTo increase our earnings per share by at least 10% every year
oTo generate £150m of free cash flow every year
oTo double the value of our shareowners’ investment within four years.”
Cadbury Schweppes Plc
oThe name of your organisation, brief description, key products and/or services
oYour organisation’s •key financial objectives•attitude to surpluses & profitability
oYour organisation’s •annual turnover (revenue/income/funding)•no of employees•net worth (if you know it!)
oYour role
oFinancial reports that you •contribute towards the preparation of•are required to present•interpret to help with decision making.
CONTENT
oResources and Financial ManagementoFinancial ReportingoUnderstanding CostsoBudgetingoFinancial ControlsoInvestment Appraisal TechniquesoInformation ManagementoLegal Frameworks
Resources and Financial Management:
oExplain the term financial managementoEstablish Financial ObjectivesoIdentify key tasks involvedoClassification of resourcesoAppreciate the role of the manager in financial managementoApply this to you and your organisation
What is Financial Management?
Handout: What is Financial Management
“Financial management is all about getting the most appropriate manpower, materials or equipment at the best price (economy), making sure that the resources are used in the most productive way (efficiency) to meet the organisation’s objectives (effectiveness).”
Chartered Institute of
Management Accountants
Collier (2003: 18) believes that: financial management is concerned with,Funds from stakeholders or financiers to provide the capital the business needs to sell and produce goods and services.
Financial Accounting:
The measuring and reporting of accounting information for external users (those users other than Managers of the business)
Atrill McLaney 2005
Management Accounting:
The measuring and reporting of accounting information for the Managers of a Business
Atrill McLaney 2005
Financial Management can be defined as:
The management of the finances of a business / organisation in order to achieve financial objectives
oFinancial Planning
oFinancial Control
oFinancial Decision making
Planning - To ensure that:
Enough funding is available at the right time to meet the needs of the business.
Working Capital
Why does a business need Working Capital?
Working Capital:
oIn the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
oIn the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.
The working capital cycle can be defined as:
The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer
Working Capital
The diagram below illustrates the working capital cycle for a manufacturing firm
Working Capital
Financing Working Capital
Financial control ensures that the business is meeting its objectives by addressing questions such as:
o Are assets being used efficiently?
o Are the businesses assets secure?
o Do management act in the best interest of shareholders and in accordance with business rules?
The key aspects of financial decision-making relate to investment, financing and dividends:
• Investments must be financed in some way – however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers
• A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.
Key Resources
Assets and Resources of the Firm
Financial capital
Physical capital
Social capital
Human capital
Intellectual capital
Customercapital
financial capital – the money available for investment and growth
intellectual capital – specialised or protected knowledge or property
physical capital – physical resources, including IT
human capital – staff resources and capabilities
social capital – ‘good name’, goodwill, similar cultural characteristics
customer capital – the size, value and loyalty of customers
information capital – systems, databases, networks
organisational capital – culture, leadership, alignment
Benchmark against other organisations in our sector. To what extent are our assets better, the same or worse than competition? Are they stable, strengthening, or becoming weaker?
Assets and ResourcesSource: Grant, Kaplan and Norton
oFixed AssetsoCurrent AssetsoLong-Term LiabilitiesoCurrent Liabilities
Balance Sheet
Understanding Costs
Cost
“The amount of resources, usually measured in monetary terms, sacrificed to achieve a particular Objective.”
Atrill & McLaney
Financial Framework
Types of cost incurred by the organisation:
o Variable costs (COGS) or (COS)Variable costs (COGS) or (COS)
o Fixed costs and OverheadsFixed costs and Overheads
o Capital Expenditure (Capex)Capital Expenditure (Capex)
o DepreciationDepreciation
Direct or Variable Costs:
“Costs that can be identified with specific cost units,to the extent that the effect of the cost can be measured to each unit of output”
Atrill & McLaney
Overheads (Indirect Costs or Fixed)
Costs that do not vary with changing sales or production volumes e.g. rent, rates, administration, depreciation, telephones, heat, light & power, insurance, professional fees, stationery etc.
Fixed Costs Costs which in the short term remain unchanged regardless of the level of activity.
Financial Framework
Sales Volume (Cumulative)
Costs & Business activity and the P & L Account
Value
€/£
Fixed Costs
Sales
Variable Costs
0 5 10 15 20 25
A
B
C
Contribution and Margins
€000s A B C D
Sales 1,000 1,000 1,000 1,000
Variable costs 300 700 800 100
Contribution 700 300 200 900
Overheads 500 200 100 600
PBT 200 100 100 300
Margin 20% 10% 10% 30%
Publisher Retailer Agency Broker
Pharmaceutical Company
Which company would you invest in? Why?
Direct and Indirect Costs in Practice:
Survey in 1999 of 176 fairly large UK businesses revealed that on average, total costs are in the following proportions:
oDirect costs 70%oIndirect Costs 30%
Applied across all sectors except financial services (52/48)
Drury and Tayles
Financial Reporting- The Traditional Accounting
Control Model
Handout: Introduction to Financial Accounts
oFinancial accounts are concerned with classifying, measuring and recording the transactions of a business.
oHow financial and physical asset resources are reported
oAt the end of a period (typically a year),
Financial Framework
Financial Reporting:
oBalance SheetoProfit & Loss Account (P&L)oCash Flow Statement
Annual Report and Account (All the above)
Profit and Loss Account
Describing the trading performance of the business over the accounting period
Balance SheetStatement of assets and liabilities at the end of the accounting period (a "snapshot") of the business
Cash Flow Statement
Describing the cash inflows and outflows during the accounting period
Notes to the Accounts
Additional details that have to be disclosed to comply with Accounting Standards and the Companies Act
Directors' Report
Description by the Directors of the performance of the business during the accounting period + various additional disclosures, particularly in relation to directors' shareholdings, remuneration etc
Financial Framework
The Balance Sheet
Financial Framework
Capital Structure:
o Owners share capital (equity)o Reserves (P or L) – part of owners equity
o Short-term finance – debto Long-term finance – debt
o Debt : : Equity = Gearing ( high is >1 )
Sometimes expressed as a % of total funding
A statement of the assets and liabilities ofa business at a particular date – It has two parts:
1.A statement of Fixed Assets, Current Assets & Current liabilities – Total Assets
2.A statement of how net assets have been financed
Glossary of Terms
Fixed Assets – Held by the enterprise rather than for sale or conversion to cash e.g. Buildings, machinery, equipment, fixtures & fittings.
Current Assets – Cash and anything that is expected to be converted into cash within one year e.g. stock, debtors, cash, bank balance.
Glossary of Terms
Current Liabilities – Liabilities to be paid within a year e.g overdraft, trade creditors, short-term loans, accrued expenses, tax.
Long-term Liabilities – More than a year
Total (Net) Assets – Fixed + Current less current liabilities and long-term liabilities
Balance Sheet (amounts shown in £' millions) 24 February 200x 26 February 200x
FIXED ASSETS 10,038 8,527 Current Assets 1,694 1,342Short-term creditors (4,389) (3,487) NET CURRENT LIABILITIES (2,695 (2,145) Total Assets less Current Liabilities 7,343 6,382 Long-term creditors (1,927) (1,565)Provisions (24) (19) TOTAL NET ASSETS 5,392 4,798 Equity shareholders' funds 5,356 4,769Minority interests 36 29Total Capital Employed 5,392 4,798
Draw Up A Personal Balance Sheet
P&L
Describing the trading performance of the business over the accounting period
Profit & Loss Account
£'000 £'000Revenue 12,500 10,000Cost of Sales 7,500 6,000Gross Profit 5,000 (40%) 4,000 (40%)Operating Costs Sales and distribution 1,260 1,010Finance and administration 570 555Other overheads 970 895Depreciation 235 210Total Operating Costs 3,035 2,670Operating Profit (gross profit less operating costs)
1,965 1,330
Operating profit margin (operating profit / revenue)
15.7% 13.3%
Interest (450) (475)Profit before Tax 1,515 855Taxation (455) (255)Profit after Tax 1,060 600Dividends 650 400Retained Profits 410 200
The Trading Account.
This records the money in (revenue) and out (costs) of the business as a result of the business’ ‘trading’ (Gross Profit)
The Profit and Loss Account proper
This starts with the Gross Profit and adds to it any further costs and revenues, including overheads.
The Appropriation Account.
Retained for future investment and growth, Returned to owners eg a ‘dividend’ or Paid as tax.
3 Parts to P&L
Cost of Goods Sold – The directly attributable costs of products or services sold e.g. materials, direct labour, production costs.
Gross Profit – Where sales revenue (turnover) exceeds the cost of goods sold
Glossary of Terms
Overheads (Indirect Costs or Fixed)
Costs that do not vary with changing sales or production volumes e.g. rent, rates, administration, depreciation, telephones, heat, light & power, insurance, professional fees, stationery etc.
Net Profit
Where sales revenue plus other income (such as rent received) exceeds the sum of cost of goods sold plus overheads
Interpretation of the Statements
Key Questions:
Financial information is always prepared to satisfy in some way the needs of various interested parties (the "users of accounts").
Stakeholders in the business (whether they are internal or external) seek information to find out three fundamental questions:
•How is the business doing?•How is the business placed at present?•What are the future prospects of the business?
£'000 £'000Revenue 12,500 10,000Cost of Sales 7,500 6,000Gross Profit 5,000 (40%) 4,000 (40%)Operating Costs Sales and distribution 1,260 1,010Finance and administration 570 555Other overheads 970 895Depreciation 235 210Total Operating Costs 3,035 2,670Operating Profit (gross profit less operating costs)
1,965 1,330
Operating profit margin (operating profit / revenue)
15.7% 13.3%
Interest (450) (475)Profit before Tax 1,515 855Taxation (455) (255)Profit after Tax 1,060 600Dividends 650 400Retained Profits 410 200
How Is This Business Doing?
Performance Area
Key Issues
Profitability Is the business making a profit? Is it enough?Efficiency Is the business making best use of its resources? Is it
generating adequate sales from its investment in equipment and people? Is it managing its working capital properly?
Liquidity Is the business able to meet its short-term obligations as they fall due from cash resources immediately available to it?
Stability What about the long-term prospects of the business? Is the business generating sufficient resources to repay long-term liabilities and re-invest in required new technology? What is the overall structure of the businesses' finance - does it place a burden on the business?
Investment Return
What return can investors or lender expect to get out of the business? How does this compare with similar, alternative investments in other businesses?
Interpretation of the Statements
Area for Review CommentsReview of the Business; Chairman's and CEO's Review
The accounts of all quoted companies (and many private companies) include some commentary from senior management on the strategy and performance of the business. This is often the most useful place to start. The statements (usually one each from the Chairman, CEO and Finance Director) will reveal many "qualitative" things about the business. These include a description of the business activities, objectives, developments and competitive environment. Political, environmental and macro-economic issues may also be raised.
Cash flow statement
The cash flow statement will reveal where the company's resources have come from and how they have been applied during the year.
Calculation of significant ratios between figures in the accounts
Ratio analysis is an important tool for understanding and comparing business performance. However, ratios and other financial calculations are rarely useful when looked at in isolation. it is important to carry out calculations of ratios and other significant financial figures with previous years (many companies publish five or ten year summaries as part of their annual reports) in order to identify positive or adverse trends). Comparison with other, relevant competitors and industry "norms" is also important.
The Main Tools of Review
Ratio Calculation CommentsGross Profit Margin
[Gross Profit / Revenue] x 100 (expressed as a percentage
This ratio tells us something about the business's ability consistently to control its production costs or to manage the margins its makes on products its buys and sells. Whilst sales value and volumes may move up and down significantly, the gross profit margin is usually quite stable (in percentage terms). However, a small increase (or decrease) in profit margin, however caused can produce a substanial change in overall profits.
Operating Profit Margin
[Operating Profit / Revenue] x 100 (expressed as a percentage)
Assuming a constant gross profit margin, the operating profit margin tells us something about a company's ability to control its other operating costs or overheads.
Return on capital employed ("ROCE")
Net profit before tax, interest and dividends ("EBIT") / total assets (or total assets less current liabilities
ROCE is sometimes referred to as the "primary ratio"; it tells us what returns management has made on the resources made available to them before making any distribution of those returns.
:
Key Profitability Ratios
Ratio Calculation Comments
Sales /Capital Employed
Sales / Capital employed
A measure of total asset utilisation. Helps to answer the question - what sales are being generated by each pound's worth of assets invested in the business. Note, link with the primary ratio - ROCE.
Sales or Profit / Fixed Assets
Sales or profit / Fixed Assets
This ratio is about fixed asset capacity. A reducing sales or profit being generated from each pound invested in fixed assets may indicate overcapacity or poorer-performing equipment.
Stock Turnover
Cost of Sales / Average Stock Value
Stock turnover helps answer questions such as "have we got too much money tied up in stock"?. An increasing stock turnover figure or one which is much larger than the "average" for an industry, may indicate poor stock management.
Key Efficiency Ratios
Credit Given / "Debtor Days"
(Trade debtors (average, if possible) / (Sales)) x 365
The "debtor days" ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers.
Credit taken / "Creditor Days"
(Trade creditors + accruals) / (cost of sales + other purchases)) x 365
A similar calculation to that for debtors, giving an insight into whether a business i taking full advantage of trade credit available to it.
Key Efficiency Ratios
Ratio Calculation Comments
Current Ratio Current Assets / Current Liabilities
A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time.
Quick Ratio (or "Acid Test"
Cash and near cash (short-term investments + trade debtors)
Not all assets can be turned into cash quickly or easily. Some - notably raw materials and other stocks - must first be turned into final product, then sold and the cash collected from debtors. The Quick Ratio therefore adjusts the Current Ratio to eliminate all assets that are not already in cash (or "near-cash") form. Once again, a ratio of less than one would start to send out danger signals.
Liquidity Ratios
Ratio Calculation Comments
Gearing Borrowing (all long-term debts + normal overdraft) / Net Assets (or Shareholders' Funds)
Gearing (otherwise known as "leverage") measures the proportion of assets invested in a business that are financed by borrowing. In theory, the higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not "optional" in the same way as dividends. However, gearing can be a financially sound part of a business's capital structure particularly if the business has strong, predictable cash flows.
Interest cover
Operating profit before interest / Interest
This measures the ability of the business to "service" its debt. Are profits sufficient to be able to pay interest and other finance costs?
Stability (Long-Term Health) Ratios
Ratio Calculation Comments
Earnings per share ("EPS")
Earnings (profits) attributable to ordinary shareholders / Weighted average ordinary shares in issue during the year
A requirement of the Stock Exchange - an important ratio. EPS measures the overall profit generated for each share in existence over a particular period.
Price-Earnings Ratio ("P/E Ratio")
Market price of share / Earnings per Share
At any time, the P/E ratio is an indication of how highly the market "rates" or "values" a business. A P/E ratio is best viewed in the context of a sector or market average to get a feel for relative value and stock market pricing.
Dividend Yield
(Latest dividend per ordinary share / current market price of share) x 100
This is known as the "payout ratio". It provides a guide as to the ability of a business to maintain a dividend payment. It also measures the proportion of earnings that are being retained by the business rather than distributed as dividends.
Key Investor Ratios
Over To You
Port of Belfast Annual Accounts 2005
Understanding Costs
•The significance of cost information to managers•Basic elements of cost
fixed/variabledirect/indirectcost allocation methods and implications
•Key costing techniquesstandard costingabsorption costing and activity based costingmarginal cost and the contribution approach to short-term decision making
•Long-term decision-making and capital expenditure evaluation•Business plans
Understanding Costs
Exercise
Costs in Year One for a New Start Community Day Care Centre
15 – 20 minutes
Break-Even
When Sales Revenues = Costs
Point at which enterprise is making neither a profit or loss
Break-Even
•Indicates the point at which all costs are covered by sales revenue
•Prompt you to reassess the price if break-even appears unachievable
•Helps calculate the level of sales required to cover any additional fixed costs such as new premises, equipment or staff
Calculating Break-EvenOne Product or Service
Overheads__________________Price of unit – direct costs of unit = No. Units
Community Day Care Centre Example
£111,767 = 1,242 weeks per year£100 - £10
Open 50 weeks p.a. then 1,242 / 50 =
25 Children
Break Even Analysis
20,00040,000 60,000
20
40
Units
£’000
C
F
E
D
B
A
Costing Techniques
Marginal Costing Absorption Costing Activity Based Costing Standard Costing
Marginal Costing
A useful way of emphasising the marginal costs of production and services. This information is of great assistance when
making pricing decisions.
Marginal Costing
If the selling price < variable cost, the loss will increase as more units are sold
This will be acceptable only in limited circumstances
Example? Supermarket loss leaders.
Marginal Costing
If selling price > variable cost, then the margin will absorb part of the fixed costs
After a certain point, profits will be made MC explains why some goods are sold off very
cheaply Example? Airline tickets.
Absorption Costing
Takes into account all costs Allocates them to individual products or
cost centres Some are directly attributable to a distinct
activity Examples: materials, dedicated employees
wages.
Absorption Costing
Others are not directly attributable Allocation required as costs must be absorbed
by each product No single correct method of overhead
allocation Aim is to achieve fairness in each individual
situation Examples: finance, personnel, IT.
Activity Based Costing
Takes total cost allocation one step further More accurate cost management methodology
than traditional cost accounting Focuses on indirect costs (overheads) Traces rather than allocates each expense
category to the cost driver Effectively makes “indirect” expenses “direct.”
Standard Costing
A system for identifying predetermined or target unit costs that should be achieved under efficient operations.
Uses of Cost Accounting
Cost Control Promoting Responsibility Aid Business Decision Making Aid Pricing Decisions Understanding the nature of your costs, and
what drives them, is vital for effective management decision making.
Making Capital Investment Decisions
Appraisal Techniques
Investment Decision Techniques
Payback Return on Investment (RoI) or Accounting
Rate of Return (ARR) Discounted Cash Flow
Net Present Value (NPV) Internal Rate of Return (IRR).
Payback
Simple measure of the period of time taken for the savings made to equal proposed capital expenditure.
Payback: Example
A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year thereafter
Can you calculate the payback period?
Payback: Solution
A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year thereafter
Payback period is 3 years.
Return on Investment (Accounting Rate of Return)
Takes the average of the money saved over the life of the asset and expresses it as percentage of the original sum invested
€000s A B C D
Sales 1,000 1,000 1,000 1,000
Variable costs 300 700 800 100
Contribution 700 300 200 900
Overheads 500 200 100 600
PBT 200 100 100 300
Margin 20% 10% 10% 30%
Publisher Retailer Agency Broker
Pharmaceutical Company
Which company would you invest in? Why?
Return on Capital Invested
€000s A B C D
Sales 1,000 1,000 1,000 1,000
Variable costs 300 700 800 100
Contribution 700 300 200 900
Overheads 500 200 100 600
PBT 200 100 100 300
Capital invested
1,000 500 200 5,000
ROI
20%
Publisher
20%
Retailer
50%
Agency Broker
6%
Pharmaceutical
Company
Now which would you invest in?
A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year in each of the remaining 7 years
Can you calculate the return on investment or accounting rate of return?
Return on Investment (Accounting Rate of Return)
Return on Investment (ARR): Example
A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year in each of the remaining 7 years
The RoI is 250,000x100 = 31.25% p.a. 100000 x 8
Discounted Cash Flow (Net Present Value) Does take account of the time value of money Therefore considered best method More difficult to understand! Discount factor = 1
(1+r)t r is the discount rate/interest rate t is the time period of the cash flow.
Discounted Cash Flow (Net Present Value) Question
The purchase of 2 competing piece of machinery are under consideration
Machine A costs £100k and will save £60k in year 1 and £55k in year 2
Machine B costs £90k and will save £55k in both years 1 and 2
Savings occur at the end of each year with bank interest at 10%
Can you calculate the NPV of the two projects?
Discounted Cash Flow (NPV): SolutionMachine A Machine
B Expenditure Now £ 100,000 £90,000Less Year 1 Savings (discounted) £ 54,540 £49,995
£ 45,460 £40,005Less Year 2 Savings (discounted) £ 45,430 £45,430Savings at Net Present Value (£ 30) £ 5,425
Conclusion: Machinery B the better option
Financial Planning and Monitoring
Market Research
Objectives
Description
Costings
Targets
Planning and Monitoring
Commercial Community Benefit
What product or service?What market gap?
Confirm businessObjective(s)
What will the business do?By whom? With what?
Materials, labour, overheads;Turnover, margins, price
Agree targets:sales, turnover, profit
What community needs?
Define social and environmental objective(s)
What will be done? By whom? How? When?
Time, use of facilities, materials
Confirm realistic social performance targets
Management & Financial Information
Monitor
Adjustments
Annual Audit
Planning and Monitoring
Commercial Community Benefit
Set up systems: cash flow,P&L, balance sheet, time management, job sheets etc.
Monthly managementaccounts
Adjust in light of reality
Assets/liabilities, liquidity, performance, net worth
Set up social book keeping and accounting systems
Monthly/quarterly report on social performance and cost
Adjust in light of reality
Performance verified showing cost to company and contribution to society
PROFIT/LOSSPearce, J. “Social Enterprise in Anytown” 2005 Calouste Gulbenkian Foundation
Monitoring Performance
Required by law to exercise control
Need effective systems for monitoring financial performance in place
Need to gather and understand financial information needed to make decisions
How?
How
Book-Keeping records
Budgets
Cashflow
P&L Statements
Balance Sheet
Budgets
•Estimate of Income / Expenditure for a set period
•Most likely to be used for:
Preparation of Cashflow ForecastsPreparation of P&L Forecasts
“A budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. A budget provides a focus for the organisation and aids the co-ordination of activities and facilitates control”. (CIMA)
Budgets
Many types but 4 Main Ones are:
•Sales Budget•Materials / Direct Costs Budget•Overheads Budget•Capital Expenditure Budget
Budgets are prepared in advance of a definedperiod of time. They are based on the objectives of the business and are intended to show how policies are to be pursued in order to achieve objectives.
What is a budget?
A budget
– is a financial plan.– sets out a businesses financial targets.– is a plan expressed in money. – an agreed plan of action over a given period.– an agreed plan establishing, in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy.
Six Key Purposes of Budgets
A method of planning the use of resources A vehicle for forecasting A means of controlling the activities of various groups
within the firm A means of motivating individuals to achieve
performance levels agreed and set. A means of communicating the wishes and aspirations of
senior management A means of resolving conflicts of interest between groups
with the organisation
Can Get too Much?
Review Drucker Checklist
Consider and Discuss Budgeting and BudgetaryControl in your own organisation
Beyond Budgeting
Origin of the Beyond Budgeting method. History
The BBRT (Beyond Budgeting Round Table) was established
in 1998 in response to growing dissatisfaction, indeed frustration, with traditional budgeting. The BBRT community successfully addressed three major questions:
Is there an alternative to budgeting? - Yes. Is there a better management model? - Yes. How should it be implemented? - This is the main focus now.
BBRT
Organisations of any size and industry can use BB. Someexamples include:
Toyota, the Japanese automotive manufacturer, Svenska Handelsbanken, the Swedish bank, Aldi, the German retailer, and Southwest Airlines, the American airline.
Other less well known exemplars are Ahlsell, the Swedish building materials wholesaler, and ISS, the international Danish facilities service group.
World Bank Small Non-profit: Sightsavers International, a UK charity.
BB is not a process. It is a management model based on two sets of principles.
The six principles of managing with adaptive management processes are:
Goals are based on maximizing performance potential. Base evaluation and rewards on relative improvement
contracts with hindsight. Make action planning a continuous and inclusive process. Make resources available as required. Coordinate cross-company actions according to prevailing
customer demand. Base controls on effective governance and on a range of
relative performance indicators.
Principles
Beyond Budgeting
The six devolution-based principles: Provide a governance framework based on clear principles
and boundaries. Create a high-performance climate based on relative
success. Give people freedom to make local decisions that are
consistent with governance principles and the organisation's goals.
Place the responsibility for value creation decisions at front line teams.
Make people accountable for customer outcomes. Support open and ethical information systems that provide
"one truth" throughout the organisation.
Beyond Budgeting?
Exercise: Review Handouts
What is Budgeting? How Should Budgeting Happen in Practice What is Beyond Budgeting? Who Is Right? Which Is Right For Me?
Exercising Control
Organisational Controls Exercise
Please list as many organisational controls that you can think of which are
used within your organisation.
Basic Internal ControlsFinancial reportingBudgetary planningOther planningFinancial policy and procedures in PlaceEmployee behaviourSegregation of dutiesQualification of staff and advisers
Controls over Incoming FundsBanking proceduresNo cash
Key Organisational Controls
Controls over ExpenditureAuthorisation limitsDouble signatures Tendering processBudgetsCost centresAuditSecurityAsset managementPayroll checkDouble entry.
Where Are We At?
Information Management Exercise
Corporate Governance
Legal Frameworks Ethical Frameworks Corporate Responsibility & Corporate Governance
Stakeholder Theory Triple Bottom Line Accounting
Component 1: Ownership structure and influenceTransparency of ownership. Concentration and influence of ownership. Component 2: Financial stakeholder rightsVoting and shareholder meeting procedures. Ownership and financial rights. Takeover defences. Component 3: Financial transparency and information disclosureQuality and content of public disclosure. Timing of and access to public disclosure. Independence and integrity of audit process. Component 4: Board structure and processBoard structure and composition. Role and effectiveness of board. Role and independence of outside directors. Director and executive compensation, evaluation and succession policies. Source: Standard & Poor's Governance Services (2002)
Components of S&P corporate governance score
It is thought that such indices could help determine if well-governed companies outperform their rivals. Though it is worth noting that studies relating corporate governance to company performance have not shown a consistent relationship.
Recently, researchers at the Wharton School examined data from four agencies
specialising in rating corporate governance, including Governance Metrics International, Investor Responsibility Research Center, Institutional Shareholder Services and The Corporate Library.
They analysed the association between the ratings and subsequent company
operating performance and stock returns. They found no conclusive evidence that the summary ratings were related to stock returns, but they did find evidence that corporate governance ratings are associated with the level of future operating performance (Larcker et al., 2005).
“According to Business in the Community, the performances of companies have
moved upwards, creating a bunching at the top and diminishing the differences between the companies. Peer pressure creates this race to the top and impacts positively on corporate governance performance.” (Baker, 2006).
In the theory of accounting and finance, it is assumed that the objective of the business is to maximise the value of a company. Put simply, this means that the managers of a business should create as much wealth as possible for the shareholders.
Given this objective, any financing or investment decision that is expected to improve the value of the shareholder's stake in the business is acceptable. In short, the objective for managers running a business should be profit maximisation. both in the short and long-term.
Shareholder Concept Maximising Shareholder Wealth
Shareholder Concept
The shareholder conception of the firm, views the corporation as its shareholders, and management as their agent. This notion is well entrenched in law, and in the theory of the firm such as that espoused by Ronald Coase in the 1930s and by Jensen and Meckling (1976).
It is also implicit in Milton Friedman’s view of the
social responsibility of business (1979).
Stakeholder Concept - A Wider Range of Objectives
In recent years, a wider variety of goals have been suggested for a business. These include the traditional objective of profit maximisation (in other words - the shareholder concept has not been abandoned). However, they also include goals relating to earnings per share, total sales, numbers employed, measures of employee welfare, manager satisfaction, environmental protection and many others.
New streams of thought have emphasised the need for a more holistic
approach to the study of companies, and their role in society. This is the essence of the stakeholder approach.
“Freeman defines stakeholders in numerous ways, but the most commonly
quoted definition is: any group or individual who can affect or is affected by the achievement of the organizations objectives” (Cooper 2004).
Have we met our objectives?
oResources and Financial Managemento Financial ReportingoUnderstanding CostsoBudgetingo Financial Controlso Investment Appraisal Techniqueso Information Managemento Legal Frameworks