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Transcript
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