Understanding Business Drivers – Taking the mystery out of Accounting ... And much more to come …

Understanding Business Drivers – Taking the mystery out of Accounting ...

And much more to come ….

Presented byJohn Petty, FCPA, FCA Client Director, Pitcher Partners0417 367 [email protected]

AndYvette Pietsch, FCAPartner, Taxation & Business AdvisoryPitcher Partners(02) 9221 [email protected]

P & L Statement

Balance Sheet

Session outcomes

• List the three key financial reports

• Detail what the key financial reports do and do

not tell you, limitations and when to use

• Latest Information reporting trends

The Key Financial Reports

•The Profit and Loss Statement (P & L)

[Statement of Financial Performance]

•The Balance Sheet (BS)

[Statement of Financial Position]

•The Cash Flow Statement (CFS)

[Statement of Cash Flow]

Profit and Loss Statement (P & L)‘Statement of Financial Performance’

Displays:

• Profit or Loss for period (one or other)

Does not display:

• Cash flow for period

• Cash position

• Funds available for distribution

Monthly does not record reality or performance

Profit & Loss StatementSales xxxLess: Cost Of Goods Sold

Opening Stock xxAdd: Purchases xx Less: Closing Stock xx

xxx= Gross Profit (GP) xxx

Less: Business Expenses xxx NET PROFIT before Tax xxxLess: Tax XProfit After Tax yyyy

Balance Sheet‘Statement of Financial Position’

Displays:

• Assets and liabilities & net worth

• Short term and long term indebtedness

Does not display:

• Market value of assets or business as total

• Intangible assets

• Off Balance Sheet financing of assets

Monthly does not record reality or performance

AssetsCurrent xxxNon-Current xxxTotal Assets xxx

Less: LiabilitiesCurrent xxxNon-Current xxxTotal Liabilities xxx

Net Assets XXXXRepresented by:

Owners Equity:Share Capital xxxRetained Profits xxx

XXXX

Balance Sheet – Narrative Format

What the Funds have been invested in

Current AssetsCash on HandAccounts ReceivableStockPrepaid Expenses

Non Current AssetsPlant and EquipmentMotor VehicleGoodwill

How the Business is financedCurrent LiabilitiesBank OverdraftAccounts PayableAccrued Expenses

Non Current LiabilitiesLoans

ProprietorshipShare CapitalRetained Profits

Balance Sheet --- ‘T’ Account format

Cash Flow statement

Displays:

• Cash flow from operations generated in period

• Cash flow from borrowings

• Cash flow from sale of assets (selling the farm)

{HISTORICAL}

Does not display:

• Future cash flow position

Cash Flows from Operating ActivitiesReceipts from customers xxxPayments to suppliers xxxIncome taxes paid xxx

xxx

Cash Flows from Investing ActivitiesPayments for Property, Plant & Equipment xxxProceeds from sale of PPE xxx

xxx

Cash Flows from Financing ActivitiesProceeds from borrowings xxxRepayments of borrowings xxx

xxx

Net increase/(decrease) in cash held XXX

Cash at beginning of the period XXXCash at the end of the period XXX

Cash flow statement

RATIO ANALYSIS

Profitability

Liquidity

Efficiency

Financial

Shareholder value

Other non financial

PROFITABILITY RATIOS

Gross Profit Ratio %

Gross Profit

Sales X 100

Net Profit Ratio %

Net Profit

Sales X 100 Operating Expense Ratio %

Expense Item

Sales X 100

Return on Investment

Pre Tax Profit

Owners Equity X 100

LIQUIDITY RATIOS

Current Ratio

Current Assets

Current Liabilities

Quick Asset Ratio

Current Assets - Stock

Current Liabilities - Bank O/Draft

Gearing / Debt to Equity Ratio

Total Liabilities

Owners Equity

Interest Cover

Net Profit + Interest Expense

Interest Expense

EFFICIENCY RATIOS

Stock Turnover (days)

Average Stock x 365

Cost of Sales

Days to Collect Debtors

Average Debtors x 365

Total Credit Sales

Average Days to convert stock to cash

Stock Turnover + Days to collect debtors

SHAREHOLDER VALUE RATIOS

ROSF Ratio

Net profit

Shareholder funds

PE Ratio

Share selling price

Earnings per Share

EPS

Net profit

Per shareNTA

Net tangible assets

Share

Dividend per share

Dividend earned per share

OTHER NON FINANCIAL RATIOS

Sales per employee

Total Sales

No of employees

Assets per employee

R & D Per $ of sales

WORKING CAPITAL RATIOS

Average stock turnover (days)

COGS

Average stock Days/debtors ratio

Trade debtors

Average Daily salesWorking capital ratio

Current assets

Current liabilities Liquid ratio

Quick assets

Quick liabilities

Value has shifted from Tangible to Intangible Assets

Percentage of market value related to …

Intangible Assets

Tangible Assets

1982 1992 2000

38%

62%

62%

85%

38% 15%

Intangible Assets

Tangible Assets

2000

85%

15%

The Intellectual Capital Model:Human Capital (the skills & knowledge, culture and loyalty of our people)

Structural Capital(patents, processes, databases, networks, recipes, formulas, etc)

Customer Capital(relationships with customers and suppliers)

Value has shifted from Tangible to Intangible Assets

Percentage of market value related to …

SLAM DUNK!

1 STRATEGIC BUDGETING – ROLLING FORECASTS2 BALANCED SCORECARD / CORPORATE METRICS SCORECARD3 TRIPLE BOTTOM LINE REPORTING 4 AT OR Moving TOWARDS ONE DAY REPORTING5 REPORT ON A PAGE (ROAP)6 ENHANCED CAPITAL AND REDUCED OPERATING SPEND FOCUS7 STRATEGIC REVENUE MANAGEMENT & PRICING8 TARGET PRICING & TARGET COSTING: Manufacturing to a Price9 TOTAL LIFE CYCLE COSTING / STEWARDSHIP10 FULL PRODUCT/SERVICE COSTS11 TOTAL WORKING CAPITAL MANAGEMENT12 PROCESS MAPPING / BUSINESS PROCESS REENGINEERING13 BENCHMARKING – Internal and External14 CUSTOMER PROFITABILITY ANALYSIS ) 15 CUBE MANAGEMENT ) 16 CHANNEL MANAGEMENT )17 ACTIVITY BASED COSTING / MANAGEMENT )18 NEW TRANSFER PRICING MODELS egPURCHASER - PROVIDER ROLE19 SERVICE LEVEL AGREEMENTS / EXPENSE REDUCTION ANALYSIS

20 MANAGING & ACCOUNTING FOR QUALITY21 EVA / SVA / MVA / VBM22 KNOWLEDGE MANAGEMENT23 REAL OPTIONS ANALYSIS : STRATEGIC PREDICTIVE ANALYSIS

Strategic Business Management

Score: … / 23

Bye Bye Budgeting… “The annual budget is dead. Long live the rolling forecast.”Annie Gurton, International Management Magazine

1 July 30 June1 Jan

NEW BUDGET FOCUS/APPROACH:‘ROLLING FORECASTS’

6 X Quarterly Rests

6 X Quarterly Rests

6 X Quarterly Rests

2 4

The 90 day Deliverables

ONE DAY REPORTING (ODR)

ODR focuses on condensing the monthly management reporting cycle so that it can be completed within one working day with the appropriate reports disseminated to management [UPSTREAM & DOWNSTREAM]. It challenges existing practices that have taken anywhere between a couple of days and a few weeks to one that effectively completes the reporting process within an eight hour timeframe.

THE 8 Hour REPORT THE 4 PM REPORT

Then days 2 and 3 are used for management action.

DAY 50

THE BALANCED SCORECARD

Customer Perspective

Goals Measures

Financial Perspective

Goals Measures

Internal BusinessPerspective

Goals Measures

Goals Measures

Innovation andLearning Perspective

How docustomerssee us?

How do we lookto our Shareholders?

What mustwe excel at?

Can we continueto improve ourcreate value?

CUSTOMER

FINANCIAL

LEARNING & GROWTH

INTERNALBUSINESSPROCESSES

FinancialObjectives Measures-

LeadMeasures-

LagTargets Initiatives

“To succeedfinancially,how shouldwe appearto our share-holders?”

Internal Business ProcessObjectives Measures-

LeadMeasures-

LagTargets Initiatives“To satisfy

shareholdersand ourcustomers,whatbusinessprocessmust weexcel at”

Vision and Strategy

CustomerObjectives Measures-

LeadMeasures-


“To achieveour visionhow shouldwe appearto ourcustomers?”

Learning and GrowthObjectives Measures-

LeadMeasures-

LagTargets Initiatives“To achieve

our vision,how will wesustain ourability tochange andimprove?”

HRM/PeopleObjectives Measures-

LeadMeasures-


shareholdersand ourcustomers,what peopleskilss andresourcesmust weexcel at”

SOMETHINGS MISSING: THE MOST VALUABLE ASSET

FINANCIAL

CUSTOMER

LEARNING & GROWTH


HRM/ PEOPLE

Financial Objectives Measures-

Lead Measures-

Lag Targets Initiatives

“To succeed financially, how should we appear to our share-holders?”

ENVIRONMENTALObjectives Measures-

LeadMeasures-



SOCIAL

Objectives Measures-Lead

Measures-Lag

Targets Initiatives

“To achieve our vision how should we appear to our customers?”

TRIPLE BOTTOM LINE REPORTING:Looking for balance

FINANCIAL

SOCIAL / COMMUNITY

ENVIRON-MENTAL


LeadMeasures-




LeadMeasures-




LeadMeasures-




LeadMeasures-



H R M /P eo p leO bjec tive s M easu res-

L eadM easu res-

L agT arge ts In itia tive s“T o sa tis fy

sh a reh o ld e rsan d o urcu s to m ers ,w h a t p eo p lesk ilss an dre so u rce sm u st w eex cel a t”


LeadMeasures-



SOCIALObjectives Measures-

LeadMeasures-


our visionhow shouldwe appearto ourcustomers?”

HRM/ PEOPLE

SOCIAL / COMMUNITY

LEARNING & GROWTH

CUSTOMER

ENVIRON-MENTAL


FINANCIAL

TOWARDS THE SEVEN SCORES OF SUCCESS: THE FULL PICTURE


LeadMeasures-




LeadMeasures-




LeadMeasures-




LeadMeasures-



H R M /P eo p leO bjec tive s M easu res-

L eadM easu res-

L agT arge ts In itia tive s“T o sa tis fy

sh a reh o ld e rsan d o urcu s to m ers ,w h a t p eo p lesk ilss an dre so u rce sm u st w eex cel a t”


LeadMeasures-



SOCIALObjectives Measures-

LeadMeasures-


our visionhow shouldwe appearto ourcustomers?”

HRM/ PEOPLE

SOCIAL / COMMUNITY

LEARNING & GROWTH

CUSTOMER

ENVIRON-MENTAL


FINANCIAL

TOWARDS THE SEVEN SCORES OF SUCCESS: THE FULL PICTURE

Documents

Understanding Business Drivers – Taking the mystery out of Accounting ... And much more to come …