product manager - finance knowledge
DESCRIPTION
How much a Product Manager should be aware about Finance as a Product ManagerTRANSCRIPT
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Finance for the Product Manager
Book Review
Presented by - Susheel R
(Chp 6)
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Introduction
PM need not have a formal education in FM.
Solid Understanding of Numbers.
It leads to evaluate the performance of the products.
Decisions are made purely on Financial Data.
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Familiarity with words like
• Depreciation• Working Capital• Cash Flow• Gross Profit• NPV• ROI
Leads earning respect from Cross Functional Team Members as well as from Management
Language of Business
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Understanding the Financial Statements leads to
Create Product Budgets (Current)
Analyze Results
Make Decisions when results don’t align with
projections.
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Income Statement (P&L A/c)
Sample P&L A/c
Sales Revenue XXX(-)COGS (Material, Labour, Overhead) XX
(-) Expenses (Mrktg, Sales, R&D) XX
EBIDTA (Less Dep,Int,Tax) X
Net Income X
P&L tracks Product or business performance (montly, quarterly, or yearly)
Product (Profit/Loss)
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Balance Sheet
Snapshot of Assets & Liabilities
It shows the net worth of the company.
Like Human Body Balance sheet should be Balanced
Important Terms – Assets & Liabilities
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Terminologies
Fixed Assets (Land, Building, Mfg Equipment)
Intangible Assets – Intellectual Property
Current Assets (Converted in cash in 1 year)
Quick Assets
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Long Term Liabilities
Equity/Pref Shares Long Term Loans Debentures, Bonds
Current Liabilities (Should be paid within a year)
Payments for Operating ExpensesShort Term LoansCreditors
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Net Working Capital
Money required for Day to Day Operations
Formula (Current Assets – Current Liabilities)
Little WC - Obligations
High WC - Can indicate Problems such as
(Excess or slow selling Inventory Slow payments by customers)
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A PM should be easily able to
Analyse &
Rectify
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Financial LeverageMoney Borrowed
Purchase a Asset ( To Create Value)
Repay the Money (with Overall Net Gain.)
Eg: Pencil (Borrow More and repay)
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Product Managers & FL
Important to know from Competitors point of view.
Whether they are overly leveraged (In Debt) or not?
If yes then they cannot invest in
New ProductsNew Marketing Programs
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It’s a reference tool (purchase of new equipment)
High Inventory (Figures)– Sales are not materialising
Low Inventory – Lag in Production or High Sales.
Why Balance Sheets are Imp?
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Inflow & Outflow of Money on monthly Basis
Inflow – RevenueOutflow – Business Expenses (Ideal Situation Revenues should exceed Investments)
PM should Just have a fair understanding (CFO is mainly responsible)
Cash Flow (Present Value)
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• Product Team Borrows money from CFO
• Money repaid with interest = Discount Rate
Eg: Suppose Product Team need $ 100,000 for a new product. (Discount Rate: 12%)
Money is received in future hence its discounted back to present.
Demystifying Discounted Cash Flow
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Note: In the 2nd year money is discounted twice – (Compunding Discount)
The Mechanics of Cash Flow
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• Create Business cases for Product Investments
• Assemble Forecast
• Test Planning Assumption (Sensitivity Analysis)
• Derive product Cost Models
• Establishing Pricing Models
• Prepare Product Budgets
Financial Planning for PM
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Business case = Primary Document
Investment = Requesting Money from Management
Cases should be realistic & believable.
Creating Business cases for Product Investments
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Assembling Forecast
PM Forecast
Market shareVolume
SalesDemand
Product Forecast
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Testing Planning Assumptions
PM tackles with What if questions?
What if Cost of Material goes up in 6 months?What if we increase the price by 10%?
When you change the variable what is the impact on Profitabilty? (Sensitivity Analysis)
Change only 1 variable. (Price/Qty)
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Deriving Product Cost Model
Standard Costing Std Cost Vs Actual Discrepancy is analysed
Target CostingMarket Price- $100Profit - $75TC should not exceed $25
Activity Based Costing It can be helpful for Cost Reduction & Process Improvement
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Establishing Pricing Models
Pricing is done with well researched customer needs & Competitive Pressure.
New Product at low Price = Market Share
Luxury Consumer Segment = High Price
PM sits with Financial Specialist.
Product Revenue is dependent on Pricing Forecast.
GP is calculated on the units you sell.
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Preparing Product Budgets
PM submits the budget in OctoberExplains Variances between Actual Vs Budget
PM Budgets for next Fiscal Year.
Short Term Planning Co-ordinating Functional Activities. Communicating to Management / Team Members
Tracking Progress
Budgets are done for”
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Managing the Business
PM ensures – Product achieves the Business Goals as Budgeted.
PM should determine the product on PLC.
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Makes sure the Product is Achieving its Financial Goals.
PM evaluates the Product Financial Performance by asking 3 Questions….
What is the Variance?What Happened?What is the Action Plan for remedying the Situation?
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Financial Ratios
PM is concerned only with 4 Ratios.
Gross Profit % Ratio = GP / Total Revenue
Net Profit % Ratio = NP/Total Revenue
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Activity based ratios
(How fast the customer pays)
Inventory Turnover Ratio = COGS/Avg Inv
How many times the Inventory is refreshed? How fast you are moving your product?
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Maturity Assesment - PLC
• PM analyze Product Performance • Visual Clues
The depiction provides
7 Qtr
8 QTR Slow Growth
Decline from Qtr 13 to Qtr 19
Followed by 8 + Qtr’s By Renewed Growth
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Summary
• Product Managers need not be Financial Experts • They should have some Financial Acumen
• They should draw their team into Number Game
• PM should overcome Financial Challenges.