Finance for CEOs

Topics
• Finance Cycle of an organization
• Reading & Interpreting Financial Statements
• Investment Decisions & Capital Budgeting
• Cost Management & Break Even Analysis
• Valuation Metrics & Fund Raising
• Corporate Governance Fundamentals
 THREE KEY AREAS

• PRODUCTION/OPERATION

• MARKETING

• FINANCE
Finance and Accounts
 Finance in Nutshell

1. What long-term investments should the

firm undertake? (capital budgeting
decisions)
2. How should the firm fund these
investments? (capital structure decisions)
3. How can the firm best manage its cash
flows as they arise in its day-to-day
operations? (working capital management
decisions)
Hierarchy of Financial Knowledge
 Freeze - Investments
Liquid Cash Fixed Assets

THE FINANCE Operations

CYCLE Unfreeze

Entrepreneur Cash From

Operations
Financial Statements
 Accounting Records
Chart of Accounts
• Detailed list of all accounts
• Coded according to respective class of
accounts
• Assets:1
• Liabilities: 2
• Owner’s equity: 3
• Revenue: 4
• Expenses: 5
 Financial Statements
• Income Statement ( Profit & Loss Account)
• Balance Sheet
• Cash Flow Statement
 Profit and Loss Account
• Total Revenue (Top Line)
• Gross profit on sales = Total revenue – Cost of
goods sold
• Operating profit = Gross profit on sales –
Operating expenses
• EBITDA (Earnings Before Interest and Taxes,
Deprn.)
• PBT = Profit Before Tax
• PAT = Profit After Tax (Bottom Line)
 Net Sales Revenue Risk
 Cost of goods sold
 stocks
 Wages and salaries
 Other manufacturing expenses
 Gross Profit Gross Profit Margin
 Operating expenses
 Selling & Administration expenses
 Depreciation
Depreciation Policy
 Operating Profit
 Non-operating surplus/deficit
 Earnings before income and tax
 Interest Business Risk
 Profit before tax
Financial Risk
 Tax
 Profit after Tax Tax Planning
 Dividends Return on Equity
 Retained earnings
Dividend Policy
 Share Capital
Balance Sheet
 Equity
 Preference Capital structure and
 Reserve &Surplus Cost of Capital
 Secured Loans
 Debentures
 Loans and advances
 Unsecured Loans
 Current Liabilities and Provisions
Working Capital
 Trade Creditors
financing policy
 Provisions
 Fixed Assets (net)
 Gross block
 Less: depreciation Capital Budgeting
 Investments
 Current Assets, loans and advances Portfolio Management
 Cash and bank
Cash Management
 Receivables
Credit Management
 Inventories
Miscellaneous expenditure and losses Inventory Management
 Analyze Financial Statements
Methods of analysis
• Horizontal analysis
• Trend analysis
• Vertical analysis
• Ratio analysis
 Types of Ratio Analysis
Liquidity ratios
•Determine a company’s ability to generate cash
Activity ratios
•Evaluate how well a company uses its assets
Leverage ratios
•Determine a business’s ability to meet its long-
term obligations
Profitability ratios
•Determine returns for investors
 Current Ratio
Reflects whether a company has sufficient
current resources to meet obligations
• Current Ratio = Current Assets / Current
Liabilities
• Expressed as a decimal
• Value should not be below 1
 Cash Flow Statement

Includes three categories of accounts:

• Operating activities
• Investing activities
• Financing activities
 Operating Activities
Cash inflows and outflows that relate to daily operations
• Generally result from purchase and sale of product or
service
• Example:
• Collecting from customers
• Paying suppliers
• Paying employees
• Paying interest and tax
 Investing Activities
Involve the acquisition and sale of long-term
assets
• Example:
• Purchasing stocks
• Selling fixed assets
• Selling debt or stocks
• Loaning money
• Purchasing fixed assets
 Financing Activities
Result from issuance and repayment of long-term
liabilities and capital stock
• Example:
• Issuing Shares
• Buying back your own stock
• Issuing loans
• Making loan payments
 Cash is King

• “Turnover” is Vanity
• “Profit” is Sanity
• “Cash” is Reality
 Poor Debtor ControlInadequate
Excess Stock
Creditor Terms
Excess Excess
Withdrawals Investment in
Under Fixed Assets
Capitalized
Bank
Cash Problems Problems
Profit Problems

Turnover Overheads

Margins Materials
Product LabourCosts
Costs
Costs Pricing
 Steps to be + on Cash
• Invoice regularly – Timely with Accuracy
• Provide Maximum relevant information
• Insist on payment immediately
• For large bills let the customer pay by installment
• Do credit checks to avoid having customers who
don’t pay
• Predict Disputes in invoicing
• Sell for cash or credit card rather than on credit if
your industry practices permit
 Steps to be + on Cash
• Add late payment charges, fees or interest for
late payments
• Pay bills only on their due date, unless there is
a discount for early payment
• Spread out payments to your suppliers over the
month
• Reduce stock on hand to only the most
necessary items
• Have a sale to move old stock
 Steps to be + on Cash
• Lease instead of purchasing equipment
• Avoid over estimating provisional taxes
• Deposit cheques and cash daily
• Increase sales volumes
• Increase prices
• Identify new customers – small customers are
better pay masters
 Days Sales Outstanding
Activity ratio
• Indicates the length of time a business must
wait after making a sale before receiving cash
• Days Sales Outstanding = Accounts
Receivable / Average Sales Per Day
• Average Sales Per Day = Annual Sales / 365
• Value should be low
“The only profit center is a customer
whose cheque hasn’t bounced,
everything else is a Cost” – Peter Drucker
 How to Differentiate

• Price
• Features/Product
• Value
 Yesterday - Today

• Yesterday • Today
– Cost is a Fact – Price is a Fact
– Price is a Policy – Cost is a Policy
 Costing System

• Cost Estimation
• Cost Measurement
• Cost Analysis
 Cost Measurement Systems

• Cost of Manufacturing/ Operation

• Cost of Marketing
• Cost of Poor Quality
 Things to Worry
• Over Confidence about high margins
• Profit-eater products
• Assumptions about Shrink & Dump
• Over Focus on Return on Sales and lesser
Focus on Return on Capital Employed (ROCE)
• Un-Productive Assets
• Un Productive – Inventory
• High Fixed Costs
 Cost Reduction
• Tactical Cost Management
• Strategic Cost Management
 Structural Risk
E
c
o TOP LINE
n
o
m
y

? EBIT

BOTTOM LINE
 Few Costing terms

• Variable Cost – changes on per piece basis

• Fixed Cost – unaffected by the change in level
of activity
• Contribution = Sales – Variable Cost
• Break Even Point = Sales level at no profit-no
loss
– i.e. Total Contribution = Fixed Cost
 Sales
COST/SALE

Break Even
Point Total Cost
S

Fixed Cost

VOLUME
 BEP

Total Fixed Cost

Contribution
 Fundamentals of Budgeting

Budgeting is the process of planning and

controlling the financial activities for an
upcoming accounting period by:
• Analyzing present performance
• Setting objectives for improving its future
financial health
 Importance of Budgeting
Benefits
• Facilitates planning
• Enhances communication
• Reinforces accountability
• Identifies problems
• Motivates employees
 “Pro Forma” Financial Statements
Forward-looking documents
• Created when setting a budget
• Used to establish the projected financial
activity for an upcoming accounting
period
• Used only for internal purposes and not
viewed by external parties
 Capital Budgeting
• Net Present Value(NPV)
• The delta of Discounted Cash inflow over
cash outflow
• Pay Back Period(PBP)
• Time to get back the cash after considering
time value of money
• Internal Rate of Return (IRR)
• Rate at which NPV becomes Zero
• Debt Service Coverage Ratio
• Times cash generated against repayment
obligations
 Valuation Matrices
• Discounted Cash Flow (DCF)
• Net Asset Value (NAV)
• Earnings Before Interest Tax After
Depreciation (EBITDA) Multiple
• Turnover Multiple
• Gross Merchandise Value
 Fund Raising
• Accelerator
• Angel
• Venture Capital (VC)
• Private Equity (PE)
• Listing (SME Exchange/ Main
Board)
 Fundraising Steps
• Business Plan
• Teaser Document – Elevator Pitch
• Road Show before investors
• Preliminary Discussions
• Term Sheet
• Due Diligence
• Share Holders Agreement
• Fulfillment of Condition Precedents
• Wire the Money
 The Golden Rules

• Never Divert your “Short Term Funds” for

“Long Term Use”
• Be “Over-Cashed” than “Under-Cashed”
• Never allow your Bank OD to be the “Shock
Absorber” of Profitability
felix.ka@gmail.com
+91-9447155461