The Financial Perspective

1. The Financial Perspective is …2. Profitability3. Stability

1. Capital2. Gearing3. Liquidity4. Matching Terms

4. Asset Utilisation5. Practice

Overview

Is a systematic way of using the information in the financial statements to focus on key

performance goals.

The Financial Perspective

❶Profitability

❷Stability (Cash and Capital)

❸Asset utilisation

Profitability

Our first accounting equation

Sales – Expenses = Profit

Expenses

Sales PriceVolume Marketing

Design +++ (unlimited tactics)

Cost PriceUtilisation

Management Negotiation+++ (unlimited tactics)

Brings us neatly to the first principle of financial strategy

p81 in workbook

StabilityMaintaining Stability is about making sure that the business has enough money to pay debts when due and take advantages of opportunities for growth

Right first time! Enough money to get the business up and running

Maintaining liquidityStaying on track

Raising CapitalGearing“Long to long”

Generating profitsControlling spendingCredit controlPlanning cash flow

Stability 2 – GearingGearing refers to the mix of Owners’ Funds and debt used to fund the business.

A highly geared company would be exposed to more risk and would find further borrowing difficult: but in high profit low interest rates situations might be seen to be making better use of capital and more return to shareholders

Covered in detail in “Ratios”

Debt < Owner’ Funds is Low Gearing Debt ≥ Owners Funds’ is High Gearing

Current Liabilities

Long Term Liabilities

Owners’ Funds

Owners’ Funds

Long Term Liabilities

Current Liabilities

Owners FundsShare CapitalRetained Profits

Long Term Loans

Current LiabilitiesCreditorsOverdraft

Fixed AssetsBuildingsMachineryVehicles

Current AssetsStocksDebtors

There are a few prudent guidelines in funding a business

Stability 3 - Matching terms

Asset Utilisation

Assets cost money and demand capital

The principle is to keep the level of assets as low as possible without damaging target customer service levels

Fixed assets

Current assets Stock controlCredit control

Consider hiring rather than buyingBe realistic about capacity against likely sales

Covered in detail in “Ratios”

p81 in workbook

Exercise 3 Exercise 3 – The Business ModelBuild the simple but realistic business model described in

on FaBLinker and study the answers and practical explanations of the relevant

business and financial concepts.

It sets a series of challenges to introduce and explore all the financial issues

managers are likely to face in the three generic key results areas:

• Profit

• Stability

• Asset Utilisation

The exercise prepares managers for the directed and self-selected smart-practice

routines that will embed the financial perspective as part of their core skillset.

 

 

 

 

 

 

 

 

 

 

 

 

 

Practice 8 Practice 8 – Exploring sensitivity analysis Selling price = €10

Purchase price = €5

Buy on credit = 20 units

Buy for cash = 130 units

Sell on credit = 20

Sell for cash = 80 units

Fixed overheads = €100

Overheads paid = 100%

Introduce new share capital = €500

Draw down a new loan = €300

Acquire new assets = €200

 

Practice 3 and complete the Sensitivity Analysis table below

Old Profit = €400

Item New Profit Change % Multiplier

Sales Volume

Selling Prices

Cost of Sales

Overheads

What happens to Net profit if you improve One of the items by 10% leaving the others unchanged?

Answers on p88 of

the workbook

Practice 9 Practice 9 – Testing a business model

Build a business model in FaBLinker.

Test and reinforce your skills by exploring the effect which changing each of the following has on the three Key Results Areas.

See if you can predict the impacts before you make each change.

Selling Price

Cost price

Sales Volume

Stock policy (buying volumes compared to sales volumes)

Overhead expenses

Collection times for credit sales

Payment times for credit purchases

Percentage of overheads paid

New share capital

New Loans

Changes in loan interest

Buy a new fixed asset

Sell a fixed asset

Write off a fixed asset quicker or slower (Vary depreciation charges)