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Financial Parameters&
Value Drivers
30th June 2008
Deepak SankhlaFinance & Accounts
Baroda
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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
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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
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Generally Accepted Accounting Practices
Fiscal period
Going concern
Historical monetary unit
Conservatism ( provisions )
Quantifiable items / transactions
Consistency
Full disclosure
Materiality
Accrual
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Financial Statements
Value Drivers
PMS in L&T
Financial Parameters - Ratios
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Budgets
Scope
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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
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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.
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Profit & Loss Account
PROFIT & LOSS ACCOUNT ITEMS:
INCOMES: Sales
Other Income
EXPENSES: Manufacturing
Other Indirect Expenses
Interest
Depreciation
PBT
Less: Tax
PAT
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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
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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
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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
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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
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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
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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)
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Turnover Ratios
NWC
Sales (LTM)
Sundry Debtors
Avg. Sales per day (LTM)Sundry Debtors (No of days' sales)
=
=
Net Working Capital (%age to Sales)
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Value Drivers
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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.
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Why Value Drivers?
Performance Measurement
Take Stock & Course Correct
Allocate & re-allocate resources
Reward Good Performers
Give an account to stock holders
Strategy development
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Net SBU Earning (NSE)
PBIT Tax
NSE / Average Employees
NSE per Person
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ROCE Return on Capital Employed
NSEANFE
Average NetWorking Capital
ANFE Average Net Funds Employed
+ Average NetFixed Assets
(PBIT-TAX)ANFE
or
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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
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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)
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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
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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)
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PMS in L&T
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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
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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
- 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 Order Backlog
- Customer 0.00 0.00
- Inter-unit (Inter OD) 0.00 0.00
- Intra (Inter SBU) 0.00 0.00
- 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
Physical Exports 0.00 0.00
Deemed Exports 0.00 0.00
Direct Order Backlog
Physical Exports 0.00 0.00
OPERATIONAL INDICATORS
Last yr
Act
This year Last yr
Act
This year
This month Financial year-to-date
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April-07
Particulars
Bud Act Var Bud Act Var
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
This month Financial year-to-date
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April-07
Particulars
Bud Act Var Bud Act Var
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
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Particulars
Bud Act Var Bud Act Var
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
This month Financial year-to-date
Last yrThis year
Last yrThis year
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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
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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
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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
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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
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Good Luck!!