FINANCE MANAGEMENT FOR NON-FINANCE MANAGERS. Michael F Hartung

Transcription

1 FINANCE MANAGEMENT FOR NON-FINANCE MANAGERS Michael F Hartung

2 Course Agenda Module 1 Module 2 Module 3 Module 4 Module 5 Module 6 Introduction & Finance Stakeholders Accounting Overview Financial Reporting External Financial Analysis Internal Financial Analysis - MIS Cost Management

3 Course Goals At the end of the course participants should be able to Critically evaluate company performance and evaluate own performance and contribution; Better understand the bias in the numbers (challenge the data provided by finance and accounting department); Use numbers and financial tools to make better and more substantiated decisions. 2 days workshop Working hours 9:00 18:00 Lunch break 12:00 13:30 No mobile phones Be open share and listen

4 Welcome Please introduce yourself Your Name Your Position Your expectation on this course Your engagement with Finance in the past

5 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Analysis - MIS 6. Cost Management Q&A

6 1.1. Finance Functions Definition: Risk Management Investments Valuation & Taxation MIS - Controlling (Internal) Financing Liquidity Financial Reporting (external) Accounting Stake-holder Management Finance Management covers the reporting, planning, procuring and controlling of the firm's financial resources. It includes reporting of Financial information to internal and external Stakeholders.

7 Finance Stakeholders Business Management Regulators External Finance Controlling Accounting Financial Analysis Valuation Sup port Tax Business Analysts Accountants Financial Analysts Tax Spec

8 Finance Management Objectives Have sufficient Liquidity Maintain sufficient Equity Keep Stakeholders informed Failure may lead to bankruptcy

9 1.2 Financial Data Consolidation Du Pont Scheme to measure Shareholder Value via the Financials Return on Net Worth Net Profit Net Worth Financial Leverage Total Assets Net Worth Return on Assets Net Profit Total Assets ROE= Profit / Equity = Profit Margin x Asset Turnover x Equity Multiplier Operational Efficiency X Capital Efficiency Net Profit Margin X Asset Turnover Net Profit / Sales Sales / Total Assets Gross Margin Total Expenses - - Income Taxes Current Assets + Fixed Assets Sales Cost of Sales Var. Expenses Fixed Expenses Inventory Accounts receivable Other Assets

10 1.3. Financial Reporting Financial Reporting External Reporting Public Relation Data Tax Filing MIS Internal Reporting Budgets Investment Planning

11 1.4.Type of Finance Stakeholders Internal Ta Management xemployees Finance Shareholders External Suppliers Lenders / Banks Capital Markets Tax Authorities Regulators Competitors Different Stakeholder with different Expectations and aims to look into the Financials

12 1.5. Aims of Financial Stakeholders Stakeholder Management Employees Shareholders Clients Lenders Suppliers Tax Regulators Competitors Markets Reporting Requirement Accurate Details Transparent Transparency Accurate Standard Details Risk Transparency Standard Accurate Standard Accurate Transparency Transparency Goal Growth Profits Profits Growth Risk Risk Profits Risk Benchmark Risk Stakeholders have different and partly controversy aims and requirements on Financial Reports and Finance Management have to consider and manage these different interests of Stakeholders in the Financial Reports.

13 Group Exercise Identify the intentions and expectations of the following Stakeholders from the Financial Reporting: Shareholders Management Lenders Competitors What information they want to see and how are their views on the profitability of the Company?

14 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Analysis - MIS 6. Cost Management Q&A

15 Financial Elements Asset: Resource controlled as a result of past events and from which future economic benefits are expected to flow Liability: Present obligation arising from past events, the settlement of which is expected to result in outflow of resources embodying economic benefits Equity: Assets minus liabilities Income (Expense): Increases (decreases) in economic benefits during period from inflows or enhancements (outflows or depletions) of assets (liabilities) or decreases (incurrences) of liabilities from in increases (decreases) in equity, other than contributions from (distributions to) equity

16 Balance Sheet Asset Tangible Assets Inventories Intangible Assets Liabilities Liabilities Equity Off Balance Sheet Items Characteristics Overview on all Assets and Liabilities legally owned by the Company Equity defines as variance between all Assets minus Liabilities Data represents status from last Business day, no continues data for the Year Predefined Asset and Liabilities Categories (Chart of Accounts) Include Valuation on Assets and opportunities of Window Dressing

17 Income Statement Sales Change in Inventory Investment Income Cost Material Personnel Expenses Other Costs Investment Expenses Operating Profit / Loss Extraord. Income Tax benefits Extraord. Expenses Tax Expenses Net Income / Loss Characteristics Income statement in Cost Summary or Cost of Sales method Revenues and costs show related to full reporting period (Continuous data) Ordinary and Extraordinary Results shown according to Pre-defined Chart of Accounts Include Valuation methods and opportunities of Window Dressing

18 Cash Flow Statement CF from Operations CF from Investments Taxes Investing Financing Net Cash Flow Characteristics Overview on actual cash in- and outflows for the full period Not required under all GAAPS Categories of Cash Flows Instrument to check Liquidity and Financing needs

19 Other Information Director s Report Auditor s Opinion Other Documents (Depends on local requirements) Information about the company Special information or impacts Accounting information Results and Dividends Shareholder Information Completeness of books Fair Accounting Treatment Rules for Financial Reporting - Consistent Accounting Treatment - Continuous Business - Transparent - Accrual Concept - Existing Fair Value

20 Golden Accounting Rules Debit The Receiver, Credit The Giver This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited. Debit What Comes In, Credit What Goes Out This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization. Debit All Expenses And Losses, Credit All Incomes And Gains This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance. The golden rules of accounting allow anyone to be a bookkeeper. They only need to understand the types of accounts and then diligently apply the rules.

21 Accounting Principles Principle of Business Continuity Transparency Principle Completeness of all transaction and financials Consistency Principle Consistent Accounting Treatment Fair Value Principle (Fair Value) Consistent Valuation & Risk Measurements Accrual Principle Periodical separation of Financial impacts

22 Accounting Basics A Machinery L A Loans L XXX + A Receivables L XXX Balance Sheet - - XXX + A Equity L - XXX + Financial Reports consists from single accounts Accounts defined in Chart of Accounts Double-entry book keeping applied Income Statement Bookings done in Balance Sheet and Income accounts All accounts closed to Financial report A Sales Income L XXX A Interest Exp L XXX

23 Accounting Rules DR Asset (Liabilities) - CR Asset (Liabilities) DR Asset (Liabilities) - CR Liabilities (Asset) DR Asset (Liabilities) - CR P&L account CR P&L account - DR Asset (Liabilities) Reclassification Total BS adj. Profit Loss

24 Accounting Actions & Treatments Definition (Bookings) assets, liabilities, and other financial statement elements are defined. Recognition guidelines as to when to recognize revenues and expenses. Measurement various bases are allowed: historical cost, current cost, realizable value, and present value.

25 Group Exercise Create a Balance Sheet Report and Income Statement based on the information below: The Company has Administrative Costs of USD 69k, additional the company buys office equipment for daily use with total amount of USD 1k Equity is USD 1,000k unchanged The inventories increased from USD 100k to 150k Staff Costs of USD 150k p.a. Machinery of USD 1,500k with expected lifetime of 10 years is already 3 years old (linear depreciation) The company buys a new car for USD 50k expected usage of 5 years Sales Revenues of USD 400k p.a. The Company buys Material of USD 100 k The company has a short term bank loan of USD 200k

26 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Analysis - MIS 6. Cost Management Q&A

27 Information in Financial Reports Balance Sheet Income Statement Cash Flow Statement Fixed Assets Movement Auditors Opinion Comments and Director s Report Tax Filing Different Reports to meet different Stakeholders expectations

28 Financial Reporting Overview Accounting Standards External Financial Reporting (Financial Accounting) Internal Reporting (Management Accounting)

29 Aims of Financial Reporting Basis for Taxation Show Wealth and Profitability of the Company Information for Stakeholders Check for Creditworthiness

30 Accounting Standards Global Standards (IFRS / USGAAP) Local Standards (Singapore Financial Reporting Standards ) Stock Exchange Reporting (20F Filing) Tax Filing Standards differentiate in Valuation: Conservative Historical Values Realization Market Value

31 Standards Comparison Stands for Introduction Used in GAAP Generally Accepted Accounting Principles Standard guidelines and structure for typical financial accounting. United States Balance sheet, income statement, Required documents statement of comprehensive income, in financial changes in equity, cash flow statement, statements footnotes Separate objectives for business and Objectives of non-business entities. financial statements Qualitative characteristics Definition of an asset Relevance, reliability, comparability and understandability. The US GAAP framework defines an asset as a future economic benefit. IFRS International Financial Reporting Standards Universal financial reporting method that allows international businesses to understand each other and work together. Over 110 countries, including those in the European Union Balance sheet, income statement, changes in equity, cash flow statement, footnotes The same set of objectives for business and non-business entities. Relevance, reliability, comparability and understandability. The IFRS framework defines an asset as a resource from which future economic benefit will flow to the company.

32 Introduction IFRS International Accounting Standard Boards Close to USGAAP but less individuality Fair Presentation / Decision Usefulness / Stakeholder View (information) Capital markets oriented Transparency / Relevance, Comparability / Reliability Continuous update and feedback

33 Introduction IFRS Asset Liabilities IAS 16, 17, 36 IAS 21, 39 IAS,24, 27, 31 Tangible Assets Liabilities IAS 39 IAS 23 IAS 37 IAS 2, 11, 15 Inventories IAS 38 Intangible Assets Equity IAS 8 Income + Revenues IAS 18 Comments & Information (IAS 1, 10,24, 30, 32, 35) Valuations / Impairments (IAS 36, 39) Segmental Reporting (IAS 14) - Expenses +/- Financial Results +/- Results Group Ent. +/- Results Accounting - Taxes + Net Income IAS 19 IAS IAS 31 IAS 20 IAS 12

34 Fixed Assets (IAS 16) Acquisition Costs = Sales price + Delivery Costs Discounts + additional expenses Production Costs = Direct costs, allocated Costs, Accruals, Social Expenses, interests if related to product, no general admin costs Split of assets in single parts to be valued with different lifetimes (incl. spare parts and costs for inspections) Consistent and continuous Valuation Cost Model (previous Year Value impairments / accruals) Fair Value

35 Current Assets (IAS 2) Individual valuation. Valuation of stock according to average method or FIFO (First in First Out). First Time valuation based on acquisition- or production costs. Valuation based on net realizable value, means the lower value of liquidation value or production costs In general request for impairments on stocks to realize a Fair Value. For raw materials no need for impairments if the sales price of finished product is stable.

36 Financial Instruments (IAS 39) Categories of Financial Assets (Fair Value, Available for Sale, Loans and Receivables, Held to maturity) Categories of Financial Liabilities ( Fair Value, Other Liabilities, Equity) Change in categories to be carefully checked to avoid reclassification of whole portfolio Valuation: For Fair Value all changes in P&L For SFA changes in Reserves (impairments in P&L)For Other based on amortized Costs

37 Impairments (IAS 36) Impairment Testing to be done at triggering event or regularly. Impairment Tests: Compare Book Value with current value or use value (cash values plus remaining values). Impairment booked in P&L. Recoveries booked in P&L up to continued book value. Additional recoveries booked in Reserves.

38 Income Recognition (IAS 18) Booking of revenues in economic benefit likely and can be calculated. All income booked with actual value or Fair Value (discounted for future cash Flows) Income recognition for spot deals at transfer date. For Forward deals or deals with longer completion period based on percentage of completion of costs and margins can be recognized. Only recognize of income if good is available for delivery. Also considering of conversion rights (delay in income recognition) if can be determined

39 Group Reporting / Consolidtion Consolidation of Subsidiaries (>50%) Complete consolidated Joint Ventures (=50%) Equity consolidation Associated Entities (20-50%) Equity Consolidation Investments (<20%) Market Value (IAS 39) Business Combination with getting control over subsidiary based on purchase method (valuation based on current value of purchased assets, incl. set up of Goodwill) Joint Ventures / Associated Corporates: reporting of percentage of Assets excluding portion of other shareholders. Continued to be reported as Equity consolidation. Losses in Equity to be reported separately Investments to be reported as SSAFS or Held to maturity according to IAS 39

40 GAAP Differences Fair Value (no concept in USGAAP) US GAAP more argumentation based Production costs of tangible assets Licenses and own produces intangible assets Choice of accounting / Validation methods Consolidation

41 Singapore Financial Reporting Standards In Singapore, accounting standards are known as Singapore Financial Reporting Standards (SFRS) and are based on the IFRS. Financial statements are prepared on the accrual basis of accounting. The overall set of accounting standards in Singapore contain about 39 different standards with each standard named as FRS X e.g. FRS 1. Each standard covers a specific topic such as presentation of financial statements, recognition of revenue, accounting for inventories, and so on.

42 Group Exercise Explain 4 major differences between IFRS and US GAAP (or local GAAP) What are reliable Documents for Review of Financial Performance?

43 Current Assets & Inventory Inventory types (raw material vs. finished goods) Valuation Methods of Inventory FIFO First in First out (historical value) LIFO Last in First Out (current value) Fair Value on Inventory Determine cost of Production for stock of finished goods Trends in finished products (identify slow seller) Trends in prices for raw materials

44 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Analysis - MIS 6. Cost Management Q&A

45 Balance Sheet Analysis Assets Liabilities Intangible Assets - Development Costs. Concessions, licenses - Goodwill - Payments on Accounts Tangible Assets - Land & Buildings - Plant & machinery - Fixtures, fittings, tools - Payments on account Investment - Shares in group undertakings - Loans to group undertakings - Participating interests - Other investments - Other loans Stocks - Raw Materials - Work in progress - Finished goods - Payments on account Debtors - Trade debtors - Amounts owned by group undertakings - Other debtors Investments - Share in Group undertakings - Own shares - Other investments Cash at bank and in hand Prepayments and accrued Income Amounts due within 1 year - Debenture loans - Bank loans and overdrafts - Payment received ion account - Trade Creditors - Bills of exchange payable - amounts owed to group undertaking - Other creditors (incl. taxation) - Accruals and deferred income Amounts due more than 1 year - Debenture loans - Bank loans and overdrafts - Payment received on account - Trade Creditors - Bills of exchange payable - Amounts owed to group undertakings - Other creditors (incl taxation) - Accruals and deferred income Provisions (pension, tax, other) for liabilities Accruals and deferred income Capital and Reserves - Called up share capital - Share premium account - revaluation reserve - Other reserve - Profit and loss account - Minority interests accounts

46 Balance Sheet Analysis Check on relationships in the Balance sheet Liquidity: Short Term Asset funded by Short Term Asset Capitalization: Equity covers Intangible Assets and Tangible Assets Assets sufficient for operations / productions How far goes inventory and stock (compared to turnover) Financing: How Investments and current Assets funded

47 Balance Sheet Analysis Review Following Balance Sheet

48 Current Assets - Inventory LIFO Hidden Reserves with increasing prices Hidden losses with falling prices Valuation gains with increasing prices FIFO Valuation losses with falling prices FIFO

49 Fixed & Tangible Assets Loss of value booked as accrual Define accrual method (years / percent) Determine lifetime of the good Costs for inferior assets directly booked in Income Statement Determine age of fixed assets Determine how assets are critical for operations Check Quality on investments (securities)

50 Fixed Assets Accrual Methods Accrual Method and lifetime impact the annual expenses for Accruals in near or in long term future Linear Accruals (be lifetime) Digressive Accruals (by percentage)

51 Valuation of Intangible Assets Valuation depends on GAAP Determined by Sales Price and usage Determine cost of Production Determine value of goods for the company Check Goodwill on the company taken over

52 Valuation of Passives Valuation on Liabilities Value based on Repayment Value Under IFRS Fair Value Option Valuation of Equity Positions Tier I Capital - Shareholders Equity (Shares) Tier II Capital - Long Term sub-ordinated Debt - Warrants - Other equity close positions

53 Income Statement Turnover (+) Cost of Sales (-) Gross Profit or Loss Distribution Costs (-) Administrative Expenses (-) Other Operating Income (+/-) Income from participating interests (+/-) Income from other fixed Assets (+/-) Other interest receivable (+/-) Amounts Written off investments (-) Financial profit or loss Interest payable (-) Tax on profit and loss (+/-) Profit and loss on ordinary activities Extraordinary Income & Charges (+/-) Extraordinary profit & loss Other Taxes (+/-) Profit or loss for financial Year Operational Results Financial Results Other/Extraordinary Results

54 Income Statement Analysis Analyze impacts from Operational results Compare turnover with price developments Identify components of Cost of sales (compared to prices for raw material) Identify labor intense operations Analyze impacts from Financial results Contribution of Financials and aligned to Business Analyze Extraordinary result Check if actual tax costs in line with results (variances in tax filing)

55 Income Statement Analysis Review Following P&L

56 Cash Flow Statement Cash flows from (used in) operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations (sum) Interest paid Income taxes paid Net cash flows from operating activities Cash flows from (used in) investing activities Proceeds from the sale of equipment Dividends received Net cash flows from investing activities Cash flows from (used in) financing activities Dividends paid Net cash flows used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

57 Cash Flow Analysis Changes in Stock / Current Asset Check on liquidation opportunities on Assets Analyze Accrued Income / Deferred Income Quality of Debtors including changes and compared to turnover Illiquidity is mandatory reason for filing bankruptcy

58 Cash-Flow Analysis From P&L to Cash FlowP&L

59 Off-Balance Sheet Positions Include obligations from contracts not included in Balance Sheet or Income Statement Guarantees (Obligations) Derivative Contracts (Swaps / FX / Forward)

60 Financial Relations Balance Sheet Equity = Asset Liabilities P&L to Balance Sheet Equity = Capital + retained earnings Changes in stock / inventory Accruals => Changes in Fixed Assets Cash Flow to P&L Cash Flow ~ Profit + non payable expenses non payable revenues

61 Financial Key Data Key data pack Balance Sheet and P&L Positions and their relations Method often used for developments in companies and industries Individual key data checked by stakeholder for each industry

62 Financial Ratios

63 Financial Ratios - Liquidity Current Ratio: Current Assets / Current Liabilities Quick Ratio: Quick Assets / Current Liabilities Net Working Capital: Current Asset Current Liabilities Net Working Capital Ratio: Net Working Capital / Total Assets

64 Financial Ratios - Operations Asset Turnover: Sales / Total Assets Account Receivable Turnover: Sales / Account Receivable Inventory Turnover: Cost of Goods sold / Inventories Asset Intensity: Fixed Assets / Total Assets

65 Financial Ratios - Profitability Return on Assets (ROA): Net Income / Total Assets Return on Equity (ROE): Net Income / Stockholders Equity Profit Margin: Net Income / Sales Earnings per Share: Net Income / Number of shares

66 Financial Ratios - Leverage Debt to Equity: Liabilities / Shareholders Equity Interest Coverage: Income (bef.interest&tax) / Interest Expense

67 Financial Ratios - Solvency Equity Ratio: Equity / Total Assets Price Earning Market Price (shares) / Earnings per share Market to Book Ratio: Market Price (shares) / Book Value per share Dividend Yield Annual Dividend / Market Price per share

68 Financial Analysis Samples

69 Group Exercise Discuss where following information can be found: Outlook for the Company Net Cash Flow Intensive of usage Machinery in the production Process Profitability of the company Shareholder background Correctness of accounts Lifetime of machinery Inventory Labor intensive production Private fortune of major stakeholder Hedging of FX risks Subsidiaries Employees

70 Sources of Financial Analysis Published Financial Reports Newspaper Information Market Research Credit / Rating Agencies Tax Filing Management Interviews MIS Reporting Internal collected Data

71 Methods of Financial Analysis Peer Groups Industry Comparison Timelines Ratios Ratings Market Researches Key Data Analysis Corporate Valuation

72 Peer Group Comparison Identify Best Practices Choose Peers wisely Impact Location Sub - Industry Organization Market / Brand Financial Year Closing GAAP / Accounting Treatments Business Strategies Understand the position of analyzed company compared to the Peer Group / Industry

73 Timeline & Periodic Reviews Identify the macroeconomic cycle Impact Macroeconomic impacts Trends Product scope Investing / Financing Financial Year Closing GAAP / Accounting Treatments Business Strategies Understand the development of the analyzed company

74 Key Data Reviews Assets Net Profit Equity Current Assets Current Liabilities Compared to: Peers Industry History/ Timeline Accounting Financing methods Dividend Politics Expansion / Consolidation Reporting / Communication Impact for Management

75 Financial Analysis Relationship s/t Assets to s/t Liabilities Quality of Assets (Inventory changes/ Non Tangible Assets, Depreiation) Quality of Equity Funding of Business Growth (timeline) Revenue generation (timeline) Expense Development and Operational Result Financial / Other Results Tax payments Revenue and Expense movements according to Business Strategy Comparison to market drivers

76 Financial Analysis Samples Comparison of Key Rations between different companies in the same industry

77 Financial Analysis Samples Comparison of key financial data over time for the same company

78 Financial Analysis Samples Standard Financial Analysis of a company over time

79 Financial Analysis Samples Forecast

80 Group Exercise Discuss where the following information can be found Outlook for the Company Net Cash Flow Intensive of usage Machinery in the production Process Profitability of the company Shareholder background Correctness of accounts Lifetime of machinery Inventory Labor intensive production Private fortune of major stakeholder Hedging of FX risks Subsidiaries Employees

81 Key Data Review Analyze impacts from Operational results Compare turnover with price developments Identify components of Cost of sales (compared to prices for raw material) Identify labor intense operations Analyze impacts from Financial results Contribution of Financials and aligned to Business Analyze Extraordinary result Check if actual tax costs in line with results (variances in tax filing)

82 Section Header Title 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Analysis - MIS 6. Cost Management Q&A

83 MIS Overview Management Information System Cost & Revenue Allocation Budgeting

84 Management Information System Operational Revenues Extraordinary Revenues Direct Costs & Allocations Return / Income Tax - Impacts Balance Sheet Usage Capital Usage Liquidity Usage Future Potential

85 MIS Function Analyze impacts from Operational results Compare turnover with price developments Identify components of Cost of sales (compared to prices for raw material) Identify labor intense operations Analyze impacts from Financial results Contribution of Financials and aligned to Business Analyze Extraordinary result Check if actual tax costs in line with results (variances in tax filing)

86 MIS Architecture Use Revenues and Costs from Financials Set up Business Units as basis for measurement of operating success Identify Cost Centers and Cost Drivers. Consider responsibilities (influence to manage revenues / costs) Allocate all related income and costs to the Business Units and Cost Centers Assure reconciliation external to internal accounting

87 MIS Archiecture Link from External Accounting to break down according to Business Structure Categories Financials Product 1 Product 2 Sales Income Other Income Finance Income Direct Costs Staff Rental Other Indirect Cost Other / Overhead BS Positions Completeness, Transparency, Reliability

88 MIS Model Analysis by Timeline Analysis by Product Year 1 Year 2 Defined Financial Categories Fee Provn Salary Mrktg Intrst Rental Profit Prod1 Prod2 Centr Prod1 Prod2 Centr Total

89 Budgeting Overview Strategic Budgeting Growth Indicators Business Potentials Operative Budgeting Budgeting (Key Data & Impacts Analysis) Cash Budgeting Daily Compare Actual vs. Plan

90 Types of Budgets Corporate Budget Business Division Budget Projects Budgets Profit Center Budgets Resources Budgeted Income / Balance Sheet Statements Financial Budget Profit calculations Sales Budget Production, Inventories, Materials Marketing Profit Project Costs Development Budgets Resources Future Income Staff Investments Activities Costs

91 Horizontal Budgeting Process Sales Budget Development Production Budget Investments Finance Budget Liquidity Stuff / Resources Training

92 Feedback Vertical Budgeting Process Management Top Down Set Targets Bottom Up Final Budget Budget Responsibilities Information Feedback Budget Implementation Workforce

93 Investment Planning Investment Need Investment Alternatives Risk & Reward Financing Maintenance Accounting Impacts Rentability DCF Financial Impacts Profitability Action Implement

94 Investment Alternatives Buy Increase Type content Assets Negative Type Cash sub Flow content on sales price Cost due to accruals Liability if Financing Rent / Lease No Asset impact Negative Cash Flow on Rental fees Cost due to rental fees Leasing Liability Economic Aspects: Flexibility, Service, Conditions (price and expenses), Usage, Guarantee

95 Financing Mix Corporate Finance Mix To Consider: Costs (interests / Dividends) Control Information duties Strategic Investments Shareholders Bank Loans Retaine d Earnings Private Equity Capital Markets Supplier Credits

96 Liquidity Management Incoming Payments Outgoing Payments Liquidity Cash Flow Analysis Liquidity Lines Profitability Type of Payment Supplier Credit Storage Time

97 Market Rate Marke t Rate Company Risk Evaluation Valuation: Risk Related Return Portfolio Rate Market / β-portfolio Portfolio Rate Discounted Cash Flow Market / β-portfolio Valuation against market expectations. Also in combination with loss potentials. Returns above markets also assume higher risks Based on returns from investment against standard interest rate

98 MIS Architecture Annual Report Revenues Costs Revenues Tax Costs Tax Adj Tax Adj Profit Tax Income

99 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Management - MIS 6. Cost Management Q&A

100 Cost Types Business Category Operational Costs Financial Costs Extraordinay Costs Felixibility Variable Costs Fixed Costs

101 Cost Allocation Identify the cost type Direct Costs Indirect Costs Set Up Cost Center for Cost Allocations Assign direct related Cost to the Cost Centers (Staff, rental, travel) Identify allocation key to allocate Indirect Costs to Cost Centers (Admin, Server, Tax, Finance). - Keys based on headcount, SQM, revenues, costs, time, other

102 Activity Based Costing Resource Drivers Activity Drivers Expenses by Department Activity Costs by Department Cost - Objects Costs Product, customer, channes ets Steps for a simple Cost Analysis: 1. Define Cost objects, indirect activities & resources (costs). 2. Determine costs for indirect activity. 3. Identify Cost drivers for each resource. 4. Calculate the total indirect product costs for each cost object type. 5. Divide the total costs by quantity for indirect cost per individual cost object.

103 Cost Management Operational Cost Management Outsourcing, Efficiency Gaines, Replacements Financial Cost & Investment Planning Lease 0r Buy Decisions, Interna; vs external Funding Cost Bugeting Completeness of cost impacts (hotorical or foeward looking)

104 Section Header Title 1. Introduction & Finance Stakeholders 2. Accounting Overview 3. Financial Reporting 4. External Financial Analysis 5. Internal Financial Analysis - MIS 6. Cost Management Q&A

105 THANK YOU FOR ANY FURTHER INFORMATION Michael F Hartung mfh1online@gmail.com