Management: operations, organisations and financial analysis Yoram Krozer, University of Twente - CSTM and Sustainable Innovations Academy 06/14/2022 MEEM accounting, [email protected] 1

Pria Financiela

Embed Size (px)


finans and stuff

Citation preview

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]