Management: operations, organisations and financial analysis
Management: operations, organisations and financial
analysisYoram Krozer, University of Twente - CSTM and Sustainable
Innovations Academy9/30/2014MEEM accounting,
[email protected] analysisLecture 19/30/2014MEEM
accounting, [email protected]
Lectures9/30/2014MEEM accounting, [email protected]
accounts (terms, depreciation, reporting)Management accounting
(allocation, capital, profit)Public decisions (cost-effectiveness,
cost-benefit)Exam: knowledge and understanding of the slidesOn
group request: classes for exercisesOn group request: discussions
about topics (e.g. income growth, distribution, innovations,
etc.
Learning goalsLecture 1 Financial accountingCosts and
RevenuesDepreciationFinancial reportsCash flowFinancial
analyses
9/30/2014MEEM accounting, [email protected] and
Revenues9/30/2014MEEM accounting, [email protected]
Accounting?Various demands and compliance optionsGiven scarce
resources choices are necessaryAccounting provides information to
decideExamplesWhat are costs of energy and environment?What are
profits of environmental performance?What are the least cost
projects?9/30/2014MEEM accounting, [email protected] about is
peoples appreciation of natural and moral goodsNatural and moral
goods in economics are about products, services, images, and so
onEconomics is about decisions how to create and allocate the
natural goods for welfareWelfare means satisfying individual and
collective demands given scarce resources More welfare is not
necessarily uses more natural resource use (e.g.
singing)Economics9/30/2014MEEM accounting, [email protected] cost
is an efforts usually expressed in the money term (also proxies of
the costs)Variable or direct cost is proportional to volumeFixed or
indirect cost is not proportional to volumeUnit cost or marginal
cost is the total cost divided by volume of product, service or
imageNot all costs matter but particularly those that are:Relevant,
i.e. address the decision makingAvoidable, i.e. can be influenced
by decision
Costs9/30/2014MEEM accounting, [email protected]: 1. land,
2. material, 3. labour, 4. machine 5. building, 6. third-party
services, 7. taxes, 8. patent, 9. research, 10. licence, 11. staff,
12. management, 13. boards, 14. waste treatment, 15. emission
taxes, 16. emission permits.Is nr. 1 variable or fixed?Is nr. 6
variable or fixed?Is nr 11 variable or fixed?Is nr 15 variable or
fixed?Types of costs and revenues9/30/2014MEEM accounting,
[email protected] costs are costs created by past decisions
that are unavoidable, e.g. costs of old roads.Costs of unsold
goods, which are reported as an inventory or a stock value, e.g.
books on shelves.Depreciation, which is the cost of wearing-off of
productsAmortisation, which is the cost wearing-off of services and
images, e.g. licence and brand nameStocks, Depreciations,
Amortisation are proxies for income and expenditures
Approximations (proxies)9/30/2014MEEM accounting,
[email protected] total cost: all cost + proxies in a unit of
time (e.g. year)Incremental or additional costs: the cost
difference between alternatives (e.g. a cost of energy
saving)Opportunity costs, i.e. a value loss due to decision, (e.g.
1 hour study means 1 hour less earning)Also considered in
management Product costs related to a good, service, or imagePeriod
costs attached to production in a periodIn
calculations9/30/2014MEEM accounting,
[email protected] names for generation of money:
revenues income, sales, turnover, proceedsRevenues are due to
willingness and ability to payRevenue are sales, rents, interest,
dividend, licenseDo not confuse a cost and a revenue because they
can differ a lotIn the energy and environment management: Usually
cost savings due to better performanceUsually revenues from the
technology sales 9/30/2014MEEM accounting,
[email protected] or Sales = quantity units x unit
priceGross Profit = sales costs of sales costs of sales =purchase +
manufacturing costNet Profit = turnover total costs, total costs =
costs of sales + overhead* + taxRetained Profit (owners income) =
Net Profit Dividend What is dividend?* Fixed/indirect costs in
organisation, administraion etc.A few basic equations9/30/2014MEEM
accounting, [email protected]: what are the fixed and
variable costs in this classroom?
9/30/2014MEEM accounting, [email protected] bought a car at
a cost of 2 000 for 2 years.The drive cost per km is 0.10 (e.g.
fuel, repair)The train ticket for 50 km costs 10
a. What costs can be fixed, variable, relevant, sunk?b. What are
the annual costs of the car?c. What are the car unit costs?d. Was
it a good decision to buy this car?
Commuting 20 000 km a year9/30/2014MEEM accounting,
[email protected] asset depreciation9/30/2014MEEM
accounting, [email protected] is the main fixed asset around
you ? How many years is this asset fixed ?What can be its value per
year?Is your computer depreciated?Depreciation is only a value in
accounts (a proxy)
P.M. depreciation is included in the profit-loss accounts and in
balance sheets but it is excluded in the cash flow analysis (only
cash is included)Depreciation of the fixed costsFixed costs must
divided in time: Depreciation is spreading fixed asset in
timeOriginal price (- expected Salvage Value*) Accumulated
Depreciation = Book valueAccumulated is value t2 adds to value t1,
etc.Salvage value is the remaining value after useMain methods are
straight line, Declining-balance (accelerated**), usage based (e.g.
mileage)* Follows legal framework, 0 salvage value if 0 sales after
use** For tax exemption,like Cleantech depreciation9/30/2014MEEM
accounting, [email protected] AssetValue (euros) Straight
line depreciation (usual)Depreciation = Original price : number of
years in use9/30/2014MEEM accounting, [email protected]
Value (euros) Declining (double) balance depreciationDepreciation =
Original prices x fixed percent that corresponds to the years in
use9/30/2014MEEM accounting, [email protected]: declining =
percent x 1B: double declining = percent x 2 Depreciation: linear
and (double) declining balance (idem
accelerated)Year012345678Deprec. Linear0125125125125125125125125BV
linear10008757506255003752501250Deprec. declining balance 12.5%
(*)0125109968473645649BV
accelerated1000875766670586513449393344100% : 8 years = 12.5% a
yearUsually double declining balance: 100% : 8 = 12.5 x 2 = 25% a
year9/30/2014MEEM accounting, [email protected] would be the
annual depreciation for a triple declining balance?Total, unit and
incremental costsIs your computer fixed of variable cost? What is
the total cost of it?What is the annual cost of it?What is the unit
cost (think about volume)?Suppose you have extra software for 200
euroWhat is the incremental cost?What is the total cost?What is the
unit cost?
9/30/2014MEEM accounting, [email protected]
Accountants perspective
9/30/2014MEEM accounting, [email protected] person company:
one person provides the equity, bears the risks and holds all
possessionpartnership firm: more people provide equity. Private
liabilities cannot be taken from the firm capital. Ltd (private
limited company/close company; Dutch: BV, Germany GmbH); a legal
entity.Plc (public limited company/public corporation; Dutch: NV,
Germany: Gesselschaft); a legal entity.
Different companies9/30/2014MEEM accounting,
[email protected] groups ask for information about past,
present and future:- investors (dividends?)- lenders (due
repayment?)- employees (wage and job prospects?)- suppliers (due
payment?)- customers (reputation?)community (economic and societal
impacts?)Various interests9/30/2014MEEM accounting,
[email protected] statements1. Balance sheet summarizes
the financial position at a point of time (usually annually)2.
Profit and loss account summarizes principal components of the
activities in a period. Both are legally demanded (sometimes also
social and environmental reports). 3. Cash-flow summarizes
summarized income and expenditures to assess liquidity in a
period9/30/2014MEEM accounting, [email protected], year,
comparative yearFew details, extra information in
footnotesSpecifications in the financial statements: assets,
liabilities, capitalBasic formula: Assets Liabilities = Capital (or
Equity)It also means: Debit or Assets (left side of the balance) =
Credit or Liabilities + Capital (right side of the balance)
Balance sheet9/30/2014MEEM accounting, [email protected]
Assets (debit) Liabilities & Equity (credit)
Buildings (fixed)Machine (fixed)Inventory (current)Cash money
(current)
Purchases (short term)Loans (long term)Capital:- Shares- Profits
or losses- Reserves/ProvisionItems on a balance sheet9/30/2014MEEM
accounting, [email protected]
9/30/2014MEEM accounting, [email protected] assets are
owned or controlled values that cannot be turned to cash in a short
period of timeCurrent assets can be turned to cash within a year
like stock, cash, bank, debtors.Stock are valued at cost to bring
product to its present condition, not its sales price for
prudenceLarge stocks imply high costs of bringing to the present
condition, or high risk of lossesMany disputes about assets value,
e.g. oil reserve?
Assets (Debit)9/30/2014MEEM accounting,
[email protected] and Capital (Credit)Equity or
Capital is shareholders financial stake that can bring a profit or
loss; The financier expenditure to get stake is called
investmentsProvision is an amount to compensate possible losses
caused by doubtful debtors, or incidentsLiability money owed to a
person or organisation:current: suppliers, taxes, dividendslong
term: loans9/30/2014MEEM accounting, [email protected]
entry bookkeeping: always in balance
Fixed assetsEquity- intangible (godwill)- share capital-
tangible- reserves/provision (retained profits)Current assets -
inventories - claims Long Liabilities - cash / bank Current
Liabilities Basic in any balance sheet9/30/2014MEEM accounting,
[email protected] sheetMake your balance sheet by
September, 17, 2013Specify:Assets: fixed and currentEquity: share
and reservesLiabilities: long and currentItems should be realistic,
numbers can be fictive
9/30/2014MEEM accounting, [email protected]+Sales turnover
100-costs of sales (manufacturing) 80=gross profit 20-period cost
(non-manufacturing) 10=profit before tax 10-tax 2 -provision
(reserves) 2=profit after tax 6-dividends 2= retained profits
4Check the lay-out
Focus of the courseProfit loss account9/30/2014MEEM accounting,
[email protected] and Loss Account
9/30/2014MEEM accounting, [email protected] analysis:
comparison to the salesHorizontal analysis: comparison between
years34Comparing of two years (horizontal analysis)Estimate growth:
(Cost period 2 / Cost period 1): what are the main changesComparing
cost and profits to the sales (vertical analysis)Estimate the share
of profits and cost factors: what are the main issues and
changes.Exercise: answer question of a simple PL (next slide)Useful
PL information9/30/2014MEEM accounting, [email protected]
Loss (PL) of a trading companyPL report yearPL report
yearHorizontalVertical201Y201X1Y/1X201Y201XSales1100950116%100%100%Cost
of salesopening stock1000add purchases300250closing stock-60-10Cost
of sales340240Gross profit760680107%69%75%ExpensesShop
rental150150Electra, water2010Wages250150Insurances3030Delivery
vans150150600490122%55%52%Net profit16019073%15%23%Taxes4050Profit
after
tax12014073%11%17%interest2020Profit/Loss14016076%13%19%Dividend3040Retained
profit11012076%10%15%1. What are likely the variable and fixed
costs? 2. What are likely proxies for the expenditures? 3. What is
the main factor that caused the lower profit?9/30/2014MEEM
accounting, [email protected] Purposes: select profitable
projects, assess if a company can meet obligationsComparing the
incoming and outgoing cash flows Cash flows = outgoing (-) +
incoming money (+) = expenditure (-) + revenues (+)Outgoing money =
total costs (depreciation + amortisation + inventory value)Business
activities can be divided into the financial and operational cash
flows.Cash flow (or Operational) analysis9/30/2014MEEM accounting,
[email protected] Cash flows: operational and financialCash inflow
Cash outflowEquity capital (F)Loan (F)
Sales Revenue (O)Savings (O)Working capital repayment (O)Scrap
values (O)Subsidies (O)
Dividends (F)Loan repayment (F)Interest payment (F)Fixed
investment (O)Pre-production expenditures (O)Working capital
(O)Operating costs (O)Marketing costs (O)Corporate tax (O)F =
Financial; O = Operational9/30/2014MEEM accounting,
[email protected] cash flowCash
flowIncomingOutgoingNetOperationssales100Material
costs20labor60subtotal1008020FinancingLoan taken40loan
repayment10taxes10subtotal402020Investmentspurchased
capital020-20Net Cash flow209/30/2014MEEM accounting,
[email protected] Operational or Liquidity analysis (not
exam)OperationaltimetimeLoantimeEquity9/30/2014MEEM accounting,
[email protected] Decision rule: if the cumulative NCFs is
positive every year, the organization will be able to meet its
financial obligations Total annual Net cash flows timeCumulative
Net cash flows timeOperational, Liquidity analysis 9/30/2014MEEM
accounting, [email protected] analyses indicators of
business performance (not on exam)9/30/2014MEEM accounting,
[email protected] there enough cash to meet current liabilities?
If not, companys survival is at stake. Options1. Net working
capital = current assets - curent liabilities2. Current ratio =
current assets /current liabilities3. Quick ratio = (current assets
- inventories) / current liabilitiesThe higher the outcome, the
more positive. The current and quick ratio should be above
1.Liquidity9/30/2014MEEM accounting, [email protected] the
company meet all liabilities? Solvable means that it can pay debts
(risk for financiers)Debt ratio = total liabilities / total assets
(in Gowthorpe called gearing ratio) Interest coverage ratio =
(profit before tax + interest liability)/ interest liabilitiesDebt
ratio: the lower ratio, the better solvability, the less risk for
financers. Interest coverage ratio: the higher ratio, the lower
risk. Solvability9/30/2014MEEM accounting,
[email protected] revenue to the investments that has
generated this revenue 1. Pretax = (net profit* / equity) x 100%2.
Posttax = (profit after tax+interest burden)/ equity3. Return on
capital (ROI) = (profit before interest and tax / equity and long
term capital)* Net profit = sales (costs of sales + other costs +
taxes)Profitability9/30/2014MEEM accounting,
[email protected] intense production factors are used1.
Turnover rate = Turnover (sales) / Total capital 2. Turnover rate
inventories = Turnover/Average inventory3. Average length buyers
credits = Average buyers credits / sales on account * 124. Average
length suppliers credits = Average supplier credits / purchases on
account* 12Activities (leverage)9/30/2014MEEM accounting,
[email protected] have learned: Many basic terms in
financial assessmentsDefine fixed and variable costsTwo methods of
depreciationCalculate total, incremental and unit costsBasics of
Balance and Profit-Loss sheet Basics of the Cash Flow
AnalysisTouched Ratio analysis
9/30/2014MEEM accounting, [email protected]
