NBC1 2008, (c) 2008 Jay A. Smith 1 Class 9 Finance & Accounting (Continued)

NBC1 2008, (c) 2008 Jay A. Smith

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Class 9

Finance &Accounting(Continued)


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Financial Topics for Today

Balance Sheet Income Statement / Profit & Loss

Statement Business Ratios Pro Forma Statements (Forecasts) Breakeven


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MBA Hand Out – Balance Sheet

Assets Current

Cash & Securities Accounts Receivable Inventory

Long-Term Property Plant Equipment Long-term Securities

Liabilities - Current Accounts Payable Notes Payable Current Long-Term Debt

Liabilities – Long-Term Long-Term Debt Mortgages

Equity Paid-In Capital Retained Earnings


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Balance Sheet

Assets Debt & Equity

Short TermAssets & Investments

Long TermAssets

Long-term InvestmentAssets

Short TermDebt

Long TermDebt

Equity

BALANCE SHEET EQUITY == MARKET VALUE OF THE COMPANY (VALUATION)

BALANCE SHEET EQUITY = Investments from outside + Retained Earnings (Cumulative profits/losses)

ASSETS = DEBT + EQUITY

• EQUITY = ASSETS – DEBT• DEBT = ASSETS – EQUITY

“LEVERAGE” = DEBT / EQUITY

• Assets: things the company owns• Equity: ownership of the company (stock)• Debt: what the company owes (loans, bonds)


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Ben’s Benri Bento Company

Assets Liabilities

Equity


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Ben’s Benri Bento CompanySalesCost of SalesGross Profit

MarketingR&DG&A (General & Admin.)Operating Expenses

Operating Income

Non Operating Expenses

Pretax Profit

Taxes

Net Income


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MBA Hand Out – Income Statement

Sales (Net Sales = Gross Sales – Returns) Expenses (product costs, indirect costs overhead)

Marketing Research & Development (R&D) (Selling), General & Administrative ((S)G&A) Depreciation (non-cash, usually small for Ventures)

Gross Profit Operating Profit/Income (or Loss) Net Profit/Income (or Loss)


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Depreciation

Non-cash expense (income statement) Accounting technique to represent the dec

rease (de-appreciation) of asset values over time (balance sheet)

Rates set by the tax authorityLowers pretax income (and taxes)Straight line vs. accelerated


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Homework

Explore Park 24 Website http://www.park24.co.jp/ (J&E)and Kyocera Websites www.kyocera.com (E) www.kyocera.co.jp (J)

Email the amounts below for both companies to [email protected] :

Net Sales Net Income Cash & Cash Equivalents

For Fiscal Year Ending October 31,2007 (Park 24) For Fiscal Year Ending March 31, 2008 (Kyocera)

Check website for helpful links

http://www.12manage.com/ http://www.studyfinance.com/lessons/finstmt/index.mv

Find a good Japanese language finance/accounting website or book


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HomeworkA-san B-san C-san D-san E-san

Explore Park 24

Net Sales:73,151

Net Income:6,792

Cash Balnce:5,742

(millions of yen)

Park 24;

Net Sales 75,458

Net Income 6,840 (millions yen)

PARK 24

Net Sales: 75,458 million yen, +15.6% (page 6, 27)

Net Income: 6,841 million yen -4.7% (page 6, 27)

Cash & Cash Equivalents: 8,029 million yen (page 31, 37, 40)

Net Sales: 75,458 million yen

Net Income: 20,245 million yen

Cash & Cash Equivalents: 34,503 million yen

For Fiscal Year Ending October 31,2007

・ Net Sales

75,458 million

・ Net Income

6,840 million

・ Cash & Cash Equivalents

8,028 million

Kyocera

Net Sales:1,290,436

Net Income:107,244

Cash Balnce:447,586

(millions of yen)

Kyocera;

Net Sales 1,290,436

Net Income 107,244 (millions yen)

I have no idea how to calculate "cash & cash equivalents" from balance sheet

KYOCERA (March 31, 2008)

Net Sales: 1,290,436 million yen, 0.5% (page 1)

Net Income: 107,244 million yen, 0.7%, (page 1)

Cash & Cash Equivalents: 447,586 million yen (page 1)

Net Sales: 1,290,436 million yen

Net Income: 107,224 million yen

Cash & Cash Equivalents: 115,703 million yen

・ Net Sales

1,290,436 million 0.5%up

・ Net Income

107,244 million 0.7%up

・ Cash & Cash Equivalents

447,586 million

http://www.park24.co.jp/data/current/library-290-datafile.pdf

http://global.kyocera.com/ir/pdf/results080425e.pdf


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So What?

Profit Margin

(Return on Sales)

Net Income

Net Sales

Cash

Net Income

Other…

Park 24 Sales

Parking Space

Kyocera Sales by division

Sales By Region


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Income Statement (P&L, Profit & Loss Statement)

SUPERIOR SOFT CORP. 2003

Total Sales $4,000,000 100%

Cost of SalesMaterials/ parts $100,000 3%Manufacturing $150,000 4%Commissions $400,000 10%Shipping $80,000 2%Total Cost of Sales $730,000 18%Gross Profit $3,270,000 82%

Operating CostsSalaries $800,000 20%R&D $500,000 13%Rents $100,000 3%Marketing $300,000 8%Other $100,000 3%Total Operating Costs $1,800,000 45%

Operating Profit $1,470,000 37%Non- Operating Costs $50,000 1%Pre- Tax Profit $1,420,000 36%Taxes 426,000 11%Net Income 994,000 25%


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Business Performance Ratios

Allows to compare (like batting average) to other “comparable” companies versus management expectations/actual vs. plan

Profit Margin (profit/net sales) Gross profit margin (sales – cost of sales) / sales Operating profit margin (operating income/ sales) Net profit margin [Return on Sales (ROS)] (net income/sales)

Asset Utilization (sales/assets) Inventory turnover (sales/inventory) Same-store sales (sales/same-store yr vs. yr.) Return on Assets (ROA)

Leverage (assets/debt, debt/equity) Return on Equity (ROE) = Net Income/Equity


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Dupont Model

Net Income Sales Assets Net IncomeROE = x x =

Sales Assets Equity Equity

(ROS) (Asset Turns)

ROA Leverage

Return on Equity = Return on Assets x Leverage (ROE) (ROA)


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Forecast Income StatementSUPERIOR SOFT CORP. 2005

Price/ Unit 400Units Sold 10,000

Total Sales $4,000,000 100%

Cost of SalesMaterials Per/ unit 10 $100,000 3%Manufacturing Per/ unit 15 $150,000 4%Commissions Sales Price 10% $400,000 10%Shipping Per/ unit 8 $80,000 2%Total Cost of Sales $730,000 18%Gross Profit $3,270,000 82%

Operating CostsSalaries budget $800,000 20%R&D budget $500,000 13%Rents budget $100,000 3%Marketing budget $300,000 8%Other budget $100,000 3%Total Operating Costs $1,800,000 45%

Operating Profit $1,470,000 37%Non- Operating Costs $50,000 1%Pre- Tax Profit $1,420,000 36%Taxes Rate 30% 426,000 11%Net Income 994,000 25%


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“Pro-forma” Statements

Forecasts of Key Financial Statements Income Statement, Balance Sheet

Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.

未来について予言しようとするのは、夜の田舎道をライトなしで、後ろの窓を見て運転しようとするような事と同じである。

PETER DRUCKER

on Forecasting:


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Venture Forecasting Issues

Venture forecasts are inherently inaccurateLittle or no historical data or trendsExpanding into new areas

Key: identify, model drivers accuratelyRenewal rates, advertising yield, production

yield, What happens if basic assumptions change

Time

PotentialProfitReward

Money

Losses &Investments

Time


Money

Losses &Investments


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Sample Pro-Forma Cash Flow Forecast

1月 2月 3月 4月 5月 6月 7月 8月 9月 10月 11月 12月 1年 2年 3年10%

Units Sold 10% 0 100 150 200 300 400 440 484 532 586 644 709 4,545 9,000 15,000Avg. Unit Price 10 10 10 10 10 12 12 12 12 12 12 12 11.7 12 12

Sales 0 1000 1500 2000 3000 4800 5280 5808 6389 7028 7730 8503 53,038 108,000 180,000Cost of Sales 60% 0 600 900 1200 1800 2880 3168 3485 3833 4217 4638 5102 31,823 64,800 108,000Gross Profit 0 400 600 800 1200 1920 2112 2323 2556 2811 3092 3401 21,215 43,200 72,000

SG&A 200 200 200 200 200 300 300 300 300 300 300 300 3,100 6,000 11,800R&D 500 600 400 400 300 300 300 300 300 300 300 400 4,400 8,300 16,000Marketing 10 50 50 600 600 600 800 800 600 600 400 400 5,510 11,010 21,970Depreciation 10 50 100 100 100 100 120 120 120 140 140 140 1,240 2,470 4,890Operating Profit (720) (500) (150) (500) 0 620 592 803 1236 1471 1952 2161 6,965 14,651 29,801

NonOper. Inc. 100 70 50 30 20 10 (20) 20 (50) 20 20 30 300 500 930Pretax Profit (620) (430) (100) (470) 20 630 572 823 1186 1491 1972 2191 7,265 15,151 30,731Taxes (lets assume no taxes) 0 0 0Net Income (620) (430) (100) (470) 20 630 572 823 1186 1491 1972 2191 7,265 15,151 30,731

Depreciation + 10 50 100 100 100 100 120 120 120 140 140 140 1,240 2,470 4,890Capital Expenditures ー 1000 1000 50 0 0 500 0 0 500 0 0 0 3,050 5,100 9,200

Cash Flow (1,610) (1,380) (50) (370) 120 230 692 943 806 1,631 2,112 2,331 5,455 12,521 26,421

Cumulative Cash (1,610) (2,990) (3,040) (3,410) (3,290) (3,060) (2,368) (1,425) (619) 1,012 3,124 5,455 5,455 17,976 44,398

total finance needed

• Depreciation: accounting method to expense cost of an asset. “Non-cash” expense• Run-rate: Annualized business size at any given time. 11月 run-rate= 644 x 12 = 7,728

From 6 月


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Revenue Models Subscription/Membership

Sports club, magazine, YahooBB, cable, NHK Volume/Unit-based

Restaurant, hair salon, clothing shop, taxi Advertising-based (user doesn’t pay or pays less)

Google, Broadcast TV, Newspapers Transaction Fee

Payment to conduct a transaction (Yahoo Auction, Ebay) Licensing/Syndication/Royalty

Fee to use (or resell) product, service, or mark Snoopy, Hello Kitty, AP, Star Wars, The Beatles, Incredibles Software, Copyrights, Patents, Trademarks, Franchises


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New York Yankees Revenues

Ticket Sales

Food & DrinksSales/Attendee

Price/ticket

# of Attendees

Attendees

# of Tickets

MerchandiseTotal Revenue

Television

Other

Cable Contract

Broadcast

Stadium Lease

MLB Sharing

Licenses

+

+

+

+


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Family Mart Cost Structure

COGS

I.T.Maintenance

Units Bought

Development &Implementation

Corporate staff

Cost/Unit

PayrollTotal Costs

Facilities

Marketing

Sq m/store

Price/sq m

Cost/Store

Company-wide

Staff/store & Cost/store staff

COGS=Cost of Goods

Sold

+

+

+

+


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Key Expenses

Cost drivers (what factors affect costs) People: Staff Salaries (full-time, part-time), contractors… Things: Supplies, parts, equipment, facilities… Activities: Manufacturing, Selling, Marketing/Advertising, R&D…

Relative size? Importance? How predictable? How will they change over time? How flexible, adaptable? Types:

Variable (changes directly to volume) Semi-variable (increases in step-wise fashion) Fixed (do not change with volume of sales) Non-recurring (unusual or infrequent expenses)


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Model Driven Pro-Forma P&L

Month

Assumptions for Model ISP 1 2 3 4 5 6 7 8 9 10 11 12 Year 1

Past Members 0 333 650 951 1,403 1,833 2,241 2,796 3,323 3,823 4,299 4,751

3,000 acquisition cost New Members 333 333 333 500 500 500 667 667 667 667 667 667

5% attrition per month Lost Members 0 (17) (33) (48) (70) (92) (112) (140) (166) (191) (215) (238)

Total Members 333 650 951 1,403 1,833 2,241 2,796 3,323 3,823 4,299 4,751 5,180 5,180

Fee/Member 2,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Member Revenue 666,667 1,950,000 2,852,500 4,209,875 5,499,381 6,724,412 8,388,192 9,968,782 11,470,343 12,896,826 14,251,984 15,539,385 94,418,347

1,000,000 each 1,000 members Ad Revenue 0 0 0 0 1,000,000 1,000,000 2,000,000 2,000,000 3,000,000 3,000,000 4,000,000 4,000,000 20,000,000

Total Revenue 666,667 1,950,000 2,852,500 4,209,875 6,499,381 7,724,412 10,388,192 11,968,782 14,470,343 15,896,826 18,251,984 19,539,385 114,418,347

Support

1 per 100 members # of Staff 3.33 6.50 9.51 14.03 18.33 22.41 27.96 33.23 38.23 42.99 47.51 51.80 51.80

200,000 per staff Cost/Support 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000

Staff Salary 666,667 1,300,000 1,901,667 2,806,583 3,666,254 4,482,941 5,592,128 6,645,855 7,646,895 8,597,884 9,501,323 10,359,590 63,167,787

budget Marketing 1,000,000 1,000,000 1,000,000 1,500,000 1,500,000 1,500,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 19,500,000

budget R&D 800,000 800,000 800,000 800,000 800,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 12,400,000

budget SG&A 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 12,000,000

Operating Exp. 3,466,667 4,100,000 4,701,667 6,106,583 6,966,254 8,182,941 9,792,128 10,845,855 11,846,895 12,797,884 13,701,323 14,559,590 107,067,787

Operating Profit (2,800,000) (2,150,000) (1,849,167) (1,896,708) (466,873) (458,529) 596,064 1,122,927 2,623,448 3,098,942 4,550,661 4,979,795 7,350,560

Strategy Implication: Get More Members Sooner


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Sample Pro-Forma Cash Flow Forecast

1月 2月 3月 4月 5月 6月 7月 8月 9月 10月 11月 12月 1年 2年 3年10%

Units Sold 10% 0 100 150 200 300 400 440 484 532 586 644 709 4,545 9,000 15,000Avg. Unit Price 10 10 10 10 10 12 12 12 12 12 12 12 11.7 12 12

Sales 0 1000 1500 2000 3000 4800 5280 5808 6389 7028 7730 8503 53,038 108,000 180,000Cost of Sales 60% 0 600 900 1200 1800 2880 3168 3485 3833 4217 4638 5102 31,823 64,800 108,000Gross Profit 0 400 600 800 1200 1920 2112 2323 2556 2811 3092 3401 21,215 43,200 72,000

SG&A 200 200 200 200 200 300 300 300 300 300 300 300 3,100 6,000 11,800R&D 500 600 400 400 300 300 300 300 300 300 300 400 4,400 8,300 16,000Marketing 10 50 50 600 600 600 800 800 600 600 400 400 5,510 11,010 21,970Depreciation 10 50 100 100 100 100 120 120 120 140 140 140 1,240 2,470 4,890Operating Profit (720) (500) (150) (500) 0 620 592 803 1236 1471 1952 2161 6,965 14,651 29,801

NonOper. Inc. 100 70 50 30 20 10 (20) 20 (50) 20 20 30 300 500 930Pretax Profit (620) (430) (100) (470) 20 630 572 823 1186 1491 1972 2191 7,265 15,151 30,731Taxes (lets assume no taxes) 0 0 0Net Income (620) (430) (100) (470) 20 630 572 823 1186 1491 1972 2191 7,265 15,151 30,731

Depreciation + 10 50 100 100 100 100 120 120 120 140 140 140 1,240 2,470 4,890Capital Expenditures ー 1000 1000 50 0 0 500 0 0 500 0 0 0 3,050 5,100 9,200

Cash Flow (1,610) (1,380) (50) (370) 120 230 692 943 806 1,631 2,112 2,331 5,455 12,521 26,421

Cumulative Cash (1,610) (2,990) (3,040) (3,410) (3,290) (3,060) (2,368) (1,425) (619) 1,012 3,124 5,455 5,455 17,976 44,398

total finance needed

• Depreciation: accounting method to expense cost of an asset. “Non-cash” expense• Run-rate: Annualized business size at any given time. 11月 run-rate= 644 x 12 = 7,728

From 6 月


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Breakeven

Time


Money

Losses &Investments

Time


Money

Losses &Investments

Breakeven

How much does company need to sell to cover its costs

Revenue = Costs Profit/loss = 0


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Using Breakeven

Sense of risk How many customers do I need?

Compare to market size (what %)Compare to market share (what %)

Is my pricing right? Are my costs too high?


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Variable & Fixed Costs

Variable Costs: Increases directly with each product sold (unit volume) Materials, parts, (assembly), commission, shipping

Fixed Costs Does not change with volume (# of units) produced Management salaries, rent, R&D, buildings, equipment,

marketing Breakeven

# units sold x contribution per unit = fixed costs After breakeven, contribution becomes profit


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Contribution = Revenue – Variable Costs

Cost

Price to Channel

Price to customer

Variable Cost


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Breakeven ExamplesSoftware Software Computer Computer

Unit Price $400 $200 $400 $500

Cost of SalesMaterials $1 $1 $200 $200Manufacturing $10 $10 $100 $100Packaging $20 $20 $20 $20Commissions $20 $20 $10 $10Shipping $10 $10 $30 $30Total Cost of Sales $61 15% $61 31% $360 90% $360 72%

Contribution $339 85% $139 70% $40 10% $140 28%

Fixed CostsSalaries $1,000,000 $1,000,000 $1,000,000 $1,000,000R&D $500,000 $500,000 $100,000 $100,000Rents $100,000 $100,000 $100,000 $100,000Marketing $300,000 $300,000 $300,000 $300,000Other $100,000 $100,000 $100,000 $100,000Total Fixed Costs $2,000,000 $2,000,000 $1,600,000 $1,600,000

Total Fixed Costs $2,000,000 $2,000,000 $1,600,000 $1,600,000Contribution $339 $139 $40 $140Breakeven Units 5,900 14,388 40,000 11,429


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Homework

Start thinking about a business idea to develop during the rest of the course

Visit the websites of 2 companies that interest you and/or related to a business idea you are thinking about. Look at their company information sections. What are their revenue sources?


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Problem Solving Business Idea Think of an idea to fix a problem in the world or expand a new

opportunity Energy, water, air, heat, pollution, forests, oceans, acid rain, noise Humans, animals, plants, rocks Housing, transportation, communication, information, knowledge Government, corporations, communities, schools, associations, family Entertainment, information, education, religion, arts, sports, beauty War/weapons, hunger, homelessness, shelter, healthcare Love, fear, vanity, lust, jealousy, hate, curiosity, Whatever bothers you Whatever you are really interested in Money, jobs Space, time Life, wisdom, fun, happiness, joy

Make it your business


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Documents

NBC1 2008, (c) 2008 Jay A. Smith 1 Class 9 Finance & Accounting (Continued)