Understanding the Reports That Cross Your Desk

Michael Allen

Principal, Corporate Finance

Understanding Reports That Cross Your Desk

• The Issue of Reports

• Financial Reports

• Contents of Annual Reports

• The Media and Annual Reports

• Management Reports

• Understanding Management Reports

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• ASX Rule 3.1 for Listed Companies

• The Balance Sheet

• The Profit & Loss Statement

• The Statement of Cash Flows

• Thinking Like a General Manager

The Issue of Reports

The type of reports that will cross your desk will vary based on:-

• The type of business you work for: conglomerate vs government department

• The style of CEO you work for e.g. detail person or big-picture person

• The use of email

• The time of year

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Supporting your boss requires:-

• Knowing which reports are important and which are not

• Understanding the issues arising from those reports

• Being able to communicate about those issues

Do not assume reports are complete or accurate

Financial ReportsTwo main types:-

• Annual Reports o Prepared for shareholderso Have public relations issues

• Management Reports (monthly)o Prepared for internal purposeso Vary hugelyo Could include lots of individual reports that inform Management and the

Board on status of the business and legal entitieso May have public relations issues – Rule 3.1

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Contents of Annual Reports

• Chairman’s Report

• CEO’s Report

• Operations Report (the “meat”)

• Director’s Report

• Financial Reportso Balance Sheeto Profit & Loss Statemento Statement of Cash Flowso Statement of Changes in Equity

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The Media and Annual Reports (Listed Companies)

Things the media are sensitive to:-

• Profit performanceo vs previous half or previous yearo vs what was expected

• Audit qualificationso e.g. the company is not a going

concern (liquidation pending?)o make sure there is no

qualification or understand what the qualification means

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• Executive and Board remuneration

• Executive and Board shares or options

• Related party transactions

• Discussions to buy or sell businesses or major strategies

• Strategies/purchases that have not worked

• Forecasts for the future of the business

Management Reports

Ideally these reports should cover:-

• Budget versus actual profit and loss

• Reforecast of year end result (for ASX listed companies)

• Balance Sheet positions

• Cash position and forecast if an issue

• KPIs of the business

• Have an issue based commentary in words and not just be a pile of figures

• BHP does not need to discuss cash flow problems as it does not have any

• Many businesses do have cash flow issues!

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Understanding Management Reports

• Develop relationships with key report producers

• If you don’t understand important points then asko People don’t mind explaining their output

• Think in terms of an investor

• Understand KPI’s

• If you note what you think is a missing KPI of significance, raise it with your boss. You might find it becomes their idea very quickly!

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ASX Rule 3.1 – for Listed Companies

• This rule creates stress points for listed companies

• The rule requires stock exchange announcements for matters which may cause a change in share price

• Profit downgrades or upgrades are typical examples

• The rules are specific about when announcements should be made

• The interplay between the need to announce quickly and get authorised by the Board is difficult

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Secrets of the Balance Sheet

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Balance Sheet Example

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$Current Assets

Cash 300,000 Trade and other receivables 700,000 Inventory 300,000 Other 100,000

1,400,000 Current Liabilities

Trade and other payables 1,000,000 Provisions 100,000 Interest bearing liabilities 700,000 Other 100,000

1,900,000 Non Current Assets

Fixed Assets 700,000 Intangible assets (goodwill) 2,000,000 Deferred tax assets 100,000

2,800,000 Non Current Liabilities

Trade and other payables 100,000 Provisions 200,000 Interest bearing liabilities 1,000,000

1,300,000

Net Assets 1,000,000

EquityIssued Capital 400,000 Reserves 100,000 Accumulated Profits 500,000

Total Equity 1,000,000

Secrets of the Profit & Loss Statement

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Profit & Loss Statement Example

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$Revenues 11,000,000

Cost of Goods SoldOpening inventory 500,000 Purchases 6,000,000 Closing inventory 300,000 Cost of Goods Sold 6,200,000

Gross Profit 4,800,000

Operating ExpensesAdministrative expenses 550,000 Bank charges 80,000 Interest expense 200,000 Depreciation 25,000 Insurance expenses 300,000 Legal expenses 150,000 Impairments 10,000 Wages 2,000,000 Research and Development 500,000 Rent 500,000 Telephone 50,000 Utilities 120,000

Total Expenses 4,485,000

Profit before Tax 315,000 Taxation (30%) 94,500 Net Profit after Tax 220,500

Secrets of the Statement of Cash Flows

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Statement of Cash Flows Example

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$Cash flows from operating activitiesNet Profit after Tax 220,500Adjustments for:

Depreciation and Amortisation 25,000Impairments of PPE, financial assets and intangibles 10,000

Changes in assets and liabilities:Trade and other receivables (200,000)Inventories 200,000Trade and other payables 140,000

Net cash flow from operating activities 395,500

Cash flows from investing activitiesProceeds from sale of investments 100,000Net cash flow from investing activities 100,000

Cash flows from financing activitiesProceeds from issue of ordinary shares 100,000Increase (decrease) in debt (300,000)Net cash flow from financing activities (200,000)

295,500Net increase (decrease) in cash and cash equivalents

Thinking Like a General Manager

• To think like a General Manager you need to understand the business

• What is the business model?

• What are the key drivers? e.g. sales level, margins achieved, resource prices, new customers

• What are the key risks affecting business performance?

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Summary

• Learn the Business• Identify the Key Reports• Understand the Key Reports

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QUESTIONS