Financial Parameters

7/31/2019 Financial Parameters

1/43

Financial Parameters&

Value Drivers

30th June 2008

Deepak SankhlaFinance & Accounts

Baroda


2/43

F&A an exciting subject

Growth & declines ( diff. Parameters )

Earnings

Corporate takeovers M&A

Business re-structuring

Stock markets/ currencies

Industry ups & downs

Impact of globalization

Increasing competition


3/43

F&A is a key link in the value addition chain

Informed decisions

Timely Feedback

Corrective actions

Statutory Compliance

Constructive team

work

Performance

Measurement

Setting up Systems


4/43

Generally Accepted Accounting Practices

Fiscal period

Going concern

Historical monetary unit

Conservatism ( provisions )

Quantifiable items / transactions

Consistency

Full disclosure

Materiality

Accrual


5/43

1

3

4

2

5

6

Financial Statements

Value Drivers

PMS in L&T

Financial Parameters - Ratios

?????

Budgets

Scope


6/43


7/43

Financial Statements

Objectives

Provide Information on Performance of Business Operations

Changes in Financial Position

Profit & Loss Account

Balance Sheet

Notes to Accounts

Cash Flow Statement


8/43

Balance Sheet

BALANCE SHEET ITEMS:

ASSETS: What you have? LIABILITIES: How you have?

ASSETS: Fixed Assets Investments

Current Assets e. g. cash, bank balance, inventory, debtors, etc.

LIABILITIES:

Equity Capital

Reserves & Surplus

Debt or Borrowed funds

Current Liabilities e.g. creditors, provision for expenses, etc.


9/43

Profit & Loss Account

PROFIT & LOSS ACCOUNT ITEMS:

INCOMES: Sales

Other Income

EXPENSES: Manufacturing

Other Indirect Expenses

Interest

Depreciation

PBT

Less: Tax

PAT


10/43

Cash Flow

Advance Paymentsfrom Customers

Progress Paymentsfrom Customers

Sale Proceeds of

Investments and FixedAssets

Equity subscription

Advances and ProgressPayments to Vendors

Purchase ofInvestments and FixesAssets

Payment of expenseslike travel advance, siteexpenses, insurance,power, salaries, etc.

INFLOW OUTFLOW


11/43

Difference between Cash Out Flow & Cost

Vendor Advances

Progress Payments(Against Bills)

Travel / Insurance/Site Expenses

Nil

OUTFLOWS

Nil

Vendor Bills

Travel / Insurance/Site Expenses

Depreciation / OtherNon Cash Charges

COST


12/43


13/43

Financial Parameters - Ratios

Financial Ratios are useful in assessing thefinancial performance and financial condition of a

firm.

Liquidity Ratios

Profitability Ratios

Ownership Ratios

Turnover Ratios


14/43

Liquidity Ratios

Liquidity Ratios show the ability of a firm to pay its shortterm debts as they mature.

Current Ratio

= Current Assets / Current Liabilities

Quick Ratio (also Acid-test Ratio)

= Quick Assets / Current Liabilities

where Quick Assets = Current Assets Inventory


15/43

Profitability Ratios

Profitability ratios are used to measure a firms efficiencyand ability to generate profits.

Gross Profit margin

= Gross Profit / Sales

Net Profit Margin

= Net Profit (PAT) / Sales


16/43

Ownership Ratios

Ownership ratios help to analyse the present & futureinvestments in a firm and to compare the investments

with factors such as Debt, Earnings, Dividends & Stock

Price

Return on Equity or Net Worth (RONW)

= Net Profit / Avg. Equity

Earnings Per Share (EPS)

= Net Profit / No. of Shares Outstanding

Price Earnings Ratio (P/E)

= Market Price of Shares / EPS

Debt Equity Ratio

= Total Debt / Total Equity

Debt Service Coverage ratio

= (PAT + Depreciation + Non Cash Expenses + Interest on Loans) /

(Interest on loans + Repayment)


17/43

Turnover Ratios

NWC

Sales (LTM)

Sundry Debtors

Avg. Sales per day (LTM)Sundry Debtors (No of days' sales)

=

=

Net Working Capital (%age to Sales)


18/43


19/43

Value Drivers


20/43

What are Value Drivers?

Value Drivers represent the primary operating levers responsiblefor creating (or destroying) value in a business.

Link between value creation & operating decisions.

Value Drivers are at the root of business performance becausethey are leading indicators of performance.


21/43

Why Value Drivers?

Performance Measurement

Take Stock & Course Correct

Allocate & re-allocate resources

Reward Good Performers

Give an account to stock holders

Strategy development


22/43


23/43

Net SBU Earning (NSE)

PBIT Tax

NSE / Average Employees

NSE per Person


24/43

ROCE Return on Capital Employed

NSEANFE

Average NetWorking Capital

ANFE Average Net Funds Employed

+ Average NetFixed Assets

(PBIT-TAX)ANFE

or


25/43

NSE + Depreciation Increase inNWC Increase in Capital

Expenses

FCF- Free Cash Flow

Free Cash Flow represents the cash that a company

is able to generate after laying down the moneyrequired to maintain or expand its asset base


26/43

Concept of Economic Value Added

Economic Value Added is a financial performancemethod to calculate the true economic profit of a firm.

It is an estimate of the amount by which earningsexceed or fall short of the required minimum rate ofreturn for shareholders or lenders at comparable risk.

Economic Value Added is the excess of ROCE (Returnon Capital employed) over WACC (Weighted AverageCost of Capital)


27/43

EVA

Rate ofReturn

CapitalchargeEVA

X Capitalused

Efficiency Size

EVA accounts for the Market Value that Management adds to,

or subtracts from, the capital it has employed.

NOPAT

Capital

ChargeEVA

Capitalused

(ANFE)

Cost ofCapital(WACC)

X


28/43


29/43

Value Drivers- Others

International Sales % of Total Sales

Outstanding > 6 months % of Total Outstanding

Retention % of Total Outstanding

Customer Advance % of Order backlog

Sundry Creditors (Days Payable)

Sundry Debtors (Days Sales)


30/43

PMS in L&T


31/43

Basic premises

Operating Divisions are profit centres

Operating Divisions are accountable for their post-taxearnings

Corporate performance depends on performance ofindividual departments

Every manager influences performance of his departmentand the company and it is essential to identify parametershe controls and report actual performance against suchparameters

April 07


32/43

April-07

Particulars

Bud Act Var Bud Act Var

Direct Order Booking

- Customer 0.00 0.00

- Inter-unit (Inter OD) 0.00 0.00

- Intra (Inter SBU) 0.00 0.00

Total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Direct Sales




Total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Direct Order Backlog




- FEV/ Other adj. in BLog. 0.00 0.00

Total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Details :

Direct Order Booking

Physical Exports 0.00 0.00

Deemed Exports 0.00 0.00

Direct Sales


Deemed Exports 0.00 0.00

Direct Order Backlog


OPERATIONAL INDICATORS

Last yr

Act

This year Last yr

Act

This year

This month Financial year-to-date


33/43

April-07

Particulars


Customer Sales A1 0.00 0.00

Cost of Sales A2 0.00 0.00

Less: Inter-OD Margins A3 0.00 0.00

Gross Margin - Customer Sales A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

I-U Sales B1 0.00 0.00

Cost of Sales B2 0.00 0.00

Gross Margin - I-U Sales B 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Intra Unit Sales C1 0.00 0.00

Cost of Sales C2 0.00 0.00

Gross Margin - Intra Unit Sales C 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Closed jobs - costs booked D

Other Income E 0.00 0.00

Marketing Expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Less : Exps recovered on projects F1 0.00 0.00

Net Marketing Expenses F 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

(Under)/ Over Recovery of Exe. exps. G 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

PBDIT H 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Operating Margin as % to Sales H1 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Depreciation I 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

PBIT [SBU- Pre-Tax Earnings] J 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Tax on PBIT K 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NOPAT [Post-tax SBU Earnings] L 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

ANFE 0.00 0.00 0.00

ROCE M #DIV/0! #DIV/0! #DIV/0!

Capital Charge on ANFE N 0.00 0.00 0.00 0.00 0.00 0.00

EVA O 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Key: H = A+B+C+D+E-F+G+I ; J = H-I

ROCE , EVA, ANFE based on LTM

Last yr

Act

This year Last yr

Act

This year

FINANCIAL PERFORMANCE



34/43

April-07

Particulars


Working capital

MMI/ GIT/ FG A 0.00 0.00

Work in progress B 0.00 0.00

Customer Outstandings D 0.00 0.00

- Outstanding > 6 months D1

- % to total Outstanding D2

- Retention included above D3

Cash and Bank Balances E 0.00 0.00

Other Current Assets F 0.00 0.00

Gross Working Capital G 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Customer Advances (Interest-free) H 0.00 0.00

- as % of Backlog H1

Vendors Credit / (Debit) I 0.00 0.00

- Due for > 6 months I-1

- % to total Creditors I-2 #DIV/0! #DIV/0! #DIV/0!

Due to Customer J 0.00 0.00

Other Liabilities & Provisions K 0.00 0.00

- Total Current Liabilities L 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Working Capital M 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Fixed Assets N- Gross (Month End) N1 0.00 0.00

- Net (Month End) N2 0.00 0.00

Investments O 0.00 0.00

10% of Non-fund based resources P 0.00 0.00

Net Funds employed Q 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Key: G = A+B+D+E-F ; L = H +I+J+K ; M = G -L ; Q = M+N2+O+P

RESOURCE UTILISATION

This month Average 12month-to-date

Last mth

Act

This year Last yr

Act


35/43

Particulars


Turnover Ratios-as % of Sales

Avg. Gross Working Capital to Sales (%) R1

Avg. Net Working Capital to Sales (%) R2

Avg. Net Funds emplyed to Sales (%) R3

Free Cash flow S

Net Group EarningsAdd: Depreciation

Less: Increase in Working Capital

Increase in Fixed Assets / Invsts.

Free Cash Flow 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Marketing Expenses: (Dom+Intl.)

Personnel Related Expenses 0.00 0.00

Travelling & Conveyance 0.00 0.00

Sales Promotion Expenses 0.00 0.00

Net Distribution Cost 0.00 0.00

Other Direct Expenses 0.00 0.00Establishment Expenses 0.00 0.00

Depreciation 0.00 0.00

Total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Execution Expenses

Personnel Related Expenses 0.00 0.00

Travelling & Conveyance 0.00 0.00

Other Direct Expenses 0.00 0.00

Establishment Expenses 0.00 0.00

Depreciation 0.00 0.00

Total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Less : Recoveries0.00 0.00Under/(Over) Recovery 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Intl. Marketing Exps (Statistical Info)

Sales per person

Computation of tax

SBU - PBIT 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Tax / Fiscal Benefits

Margin on Capital jobs

Dividend

Depreciation shield (Tax - Book)

Taxable Income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00


Last yrThis year

Last yrThis year


36/43


37/43

Types of Budgets

Revenue Budgets to fix targets for Operational indicators

Order Booking

Sales

Order Backlog

Financial indicators Earnings

Capital Usage

Capital Budget For capital expenditure proposals

Allocation of resources Appraisal using

Pay-back period

IRR

Manpower Budget


38/43


39/43

QUIZ

1. The advance paid to a vendor forms part of the Project cost

2. Goods dispatched by the vendor to the project site, where job is beingexecuted, will automatically become outstanding from the Customer

3. Gross Margin of a Project is equal to Sales minus Cost incurred for theProject

4. Cost Overrun due to purchase of excess material for the project does have

effect on the bottom-line of OD

5. EVA is equal to ROCE (Capital Charge * Capital Employed). This meanthat EVA will increase if we increase the Capital Employed

False

True

False

False

True


40/43

6. ROCE % = (PBIT Tax) / (Average Funds Employed) *100

7. Capital charge = Simple Average Cost of Capital

8. To improve EVA should the various elements of Capital Employed bereduced

9. Working Capital for an OD is Negative which means that the Capital is

required to be invested by the Company

10. Companies can be profitable yet destroy Shareholders Value

True

False

True

False

True


41/43

11.Additions to Fixed Assets has bearing on Profits, ROCE and EVA

12.Free Cash Flow does get reduced because of higher Working Capital vis--vis end of last year Working Capital position

13. Material purchased at a price higher than the estimated cost affectestimated ROCE & EVA

14. Non-realization of money from Customer affects ROCE & EVA

15. Advance received from the Customer is reflected as Sales

True

True

False

True

True


42/43


43/43

Good Luck!!

Documents

Financial Parameters