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Principles of Management
Week 6 / 7
Unit 8
The Finance Department
The finance department
Finance Director
Accounting
Financial
Administration
Financial
reporting
Auditing
Controller
Tax and
investment
Payroll
Billings and
collections
Purchasing
Financial Analysis
and Planning
Planning and
forecasts
Corp.
finance
Financial
analysis
Review – how profit is calculated
Accounting
Measure of net income (net profit)
Sales revenues
1,000,000
- Cost of goods sold
(500,000)
= Gross profit
- Operating expenses
= Operating income (operating profit)
500,000
(420,000)
80,000
- Other income and expenses (interest)
( 30,000)
- Taxes payable
( 20,000)
= Net income (net profit, earnings, bottom line, etc.)
30,000
Forecasting and planning
Financial Analysis
and Planning
Operating budget
• Year plan,
quarterly
estimates
• All projected
revenues and
current expenses
• Includes cash
Capital expenditure
budget
• Year plan,
quarterly
estimates
• All long-term
capital asset
investments
• Accounted for
differently
Cash budget
• Daily, weekly,
quarterly, yearly
• Cash on hand or
needed
• How much credit
available to
extend
• Cash allocation
Cash flow issues from speculative production
The importance of liquidity
Financial
Administration
Capital budgeting
Financial Analysis
and Planning
Strategies
Capital
expenditure
budget, corp.
finance and
strategy
Capital
budgeting
Alternatives
comparative
analysis
New
investment
project
Viability and
feasibility
analysis
(Investment
appraisal)
Questions
1. If Popco sales projections look slow for April-June
(2nd quarter), what sources of funds should we
consider to manage our cash flow in 2013? Why?
2. For our expansion plans into Brazil (“Popco II”), we
want to raise $2,000,000. What sources of funds
should we consider? Why?
Raising finance – in simple terms
1)
2)
3)
4)
How much money do we need?
When do we need the money
Where do we get money? (sources of funds)
What is the least expensive money
we can get?
Raising finance
Sources of funds
Sales
revenues
Debt
capital
Equity
capital
Sale of
assets
Raising finance
Main way to raise finance: revenues!
Security
• A secured loan means that there is some asset
of value the loan is based on
• If the debtor cannot pay, the creditor takes
ownership of the asset
• The asset used for security is often called
collateral
Short term and long-term debt financing
Short term debt financing
Trade credit*
Promissory notes*
Line of credit*
Unsecured bank loan*
Loan secured by inventory†
Loan secured by receivables†
Factoring†
* Unsecured
† Secured
Long-term debt financing
Long-term loans
Corporate bonds
Types of equity financing
Selling stock
– IPO and high cost of floatation
– Low ongoing cost (no dividend obligation, free to trade,
deferred liability = no need for cash)
Retained earnings (undistributed profits)
– Cost free
– Increases value of stock
Selling assets
• Assets make inventory and revenues
• End of life assets
• Underperforming assets
Back to our questions…
1. If Popco sales projections look slow for April-June
(2nd quarter), what sources of funds should we
consider to manage our cash flow in 2013? Why?
2. For our expansion plans into Brazil (“Popco II”), we
want to raise $2,000,000. What sources of funds
should we consider? Why?
Question 1: Know your inventory requirements!
What inventory do you need to keep in stock?
– Too much inventory = higher costs and expenses
– Too little inventory = lost sales opportunities
When and where do you need more inventory,
when less?
– When is your peak season? Low season?
– Where are your inventories required?
Question 1: Know the industry benchmarks!
What are the typical revenues?
Gross margins? Operating margins?
What are operating costs as a % of
revenues in your industry?
Tax
Operating expenses
5%
What are fixed costs as a % of total Utilities
10%
costs?
Salaries
Deliverie
40%
s
What are the typical % of operating 15%
expenses (Opex)
Rent
30%
Question 2: Comparative finance exercise
What’s the best way to raise $2,000,000?
In other words, what is the return on shareholders
equity of $2,000,000?
Popco
Popco II
Summary
The Finance department manages all the financial
needs of the company (its managers and employees),
and of its customers and suppliers, as well as all the
reporting needs of its stakeholders:
• Current (short-term)
• Day-to-day
• Future (long-term)
• Past
Financial reporting: the accounting team and
financial statements