Professional Documents
Culture Documents
1
Objective
2
Themes for Today
Finance is a language
3
Agenda
4
Finance Concepts (Operational)
5
Financial Concepts: Independent Company
6
3 Core Finance Concepts to Measure
“Financial Success”
Return on
Investment (ROI)
7
A Business is Only Financially Successful When
All Three Measures are True
Return on
Investment (ROI)
8
The 3 Key Financial Statements
Balance Sheet
9
A Business is Only Financially Successful When
All Three Measures are True
Return on
Investment (ROI)
10
Profit Concepts
Business Economics
Unit Economics
11
A Business is Only Financially Successful When
All Three Measures are True
Return on
Investment (ROI)
12
What is Cash Flow?
13
Why Cash Flow is NOT the Same
as Sales - Costs
Profit does not capture cash from financing activities and pre/late
paid operating revenues & expenses
14
Sources of Cash Flow
Net Income (Revenues - Costs)
Cash to/from Customers (Accounts Receivable)
Cash to/from Warehouse (Inventory)
Cash to/from Equipment (Plant, Property & Equipment)
Cash to/from Vendors (Accounts Payable)
Cash to/from Investments (Investments)
Cash to/from Lenders (Debt)
Cash to/from Owners (Equity Shareholders)
15
Cash Flow Statement
16
Common Causes of the Cash Flow
“Crisis”
Too Little Sales without a corresponding drop in costs
(Overhead eats up cash)
Too Much Sales (growing sales faster than cash flow isn’t sustainable)
Pre-buy inventory/materials for large customers
Pre-hire employees to handle new sales (but customers don’t pay
for 120 days)
Unfavorable Cash Timing of Clients vs. Vendors (A/R vs A/P Mix)
Too Much Debt
17
A Business is Only Financially Successful When
All Three Measures are True
Return on
Investment (ROI)
18
The Concept of ROI
(Return on Investment)
19
Which Business is Better?
Business A Business B
$1 million in Profit $2 million in Profit
20
Which Business is Better?
Business A Business B
$1 million in Profit $2 million in Profit
21
Key Concepts
22
A Balance Sheet Tracks a
Company’s “Investments”
Balance Sheet Formula
Your House - Your Home Loan = The “Net Worth” of Your Home
23
Example Balance Sheet
24
How ROI is Calculated
ROI = “Return” / “Investment”
“Return” is Often
Profit
EBITDA (Earnings Before Weird Accounting Stuff - Interest, Taxes, Depreciation, & Amortization)
Upfront Project Cost (e.g., cost of buying new machine or “capital” investment)
All Capital for Business (Debt from Lenders + “Equity” Money from Shareholders)
25
Common ROI Measures
26
The Balance Sheet Measures ROI
27
Financial Concepts: Division of Big Company
28
The Problem of Finance in
Divisions of Big Companies
29
Common Problems with Finance in
Big Companies
Division Manager Controls Sales & Expenses for
Division... But Who Pays for Corporate-Wide Divisions manage operating cash flow, HQ decides
Expenses (e.g, email system, auditors, medical plan) on some investment & financing decisions
Return on
Investment (ROI) Corporate CFO decides on Debt & Equity Capital
Decisions for Company as a Whole
30
The Role of Proxies & Estimations
31
Profit & Loss Management in
Divisions of Big Companies
Allocated Overhead
32
“Cash Flow” Management in
Divisions of Big Companies
Instead of Full Cash Flow Management... Focus on Proxies:
Inventory vs. Sales (Sales / Inventory)
(What are your “Inventory Turns”?)
Accounts Receivable
Days Sales Outstanding (DSO) = (Receivables / Monthly Sales) * 30
Example: $1 sales/month, $1 receivables at any time = 30 Days
Sales Outstanding... (e.g., What are your DSO’s?)
33
“Balance Sheet” Management in
Divisons of Big Companies
Capital Charge
A way to move the role of the balance sheet onto the P&L
34
Finance Practices in Big Companies
35
The Two Roles of Finance
Departments
What happened?
36
Finance Department Roles
CFO or VP Finance
Controller
37
Controller’s Organization
Controller
Accountants
Accounts Receivable
Accounts Payable
Collections
Contract Administrator
38
Director of Finance Organization
Financial Analysts
39
Financial Processes in Big
Companies
Finance
Annual Budgeting
Capital Investment Analysis
Sales & Expense Forecasting (Continually Updated)
Decision Support
Accounting
Budget vs. Variance Reporting
A/R, A/P
Monthly, Quarterly, Annual “Close” (Public Company Filings)
40
Finance Concepts (Valuation)
41
Financial Valuation Approaches
42
Market (Comparables) Method
Concept:
The value of a company is based on what investors are willing to pay for
comparable companies
43
Market Method - Examples
44
Asset Method
Concept:
Example: A Company with a Market Value of $100 Million that has $110
Million in Cash in the Bank (with no debt) is undervalued.
45
Discounted Cash Flow Method
Concept:
46
Discounted Cash Flow - Example
Project A: Build a New Factory
3% “rate of return”
47
Discounted Cash Flow - Approach
Add up all the future cash in/out flows of the project, adjust (or
discounted) for the “time value of money”
48
Discounted Cash Flow - Terms
Net Present Value = NPV = Today’s Value of the Future Cash In/Out
Flows of Project Added Together
NPV = Yr 0 Cash Flow + Yr 1 “Discounted or Adj” Cash Flow + Yr 2 “Discount/Adj” Cash
Flow, etc...
Discount Rate: $100 next year is worth $90 today, $110 in 2 years is
worth $90 today (Discount rate = approx 10%)
Technical Definition: IRR is the discount rate that causes the NPV to be $0
49
How Discount Rates Are
Calculated
Capital Asset Pricing Model “CapM”
50
Closing
51
Themes for Today
Finance is a language
52
Agenda
53