Business Management
$, revenue & cost planning
Session 1 - 3
Feb 17 – Mar 03, 2014
Financial Planning
past, present, future $
• Differs from one type of business to another - static vs.
dynamic prices (hotels, airlines)
• SAP, Oracle, Helios, HP, Vision32 –> Enterprise Performance
Management system, ERP (enterprise resource planning)
system (Accenture)
• Milestones
• Revenue planning – on the basis of historical/market data
• Cost planning = budgeting + controlling = spending + saving
– Term often times associated w/building construction
• $ P/L forecast – projection of income and expenses -> what $
do we need and how are we going to get it?
$ planning?
• Planning the consumption and earning of $ -> WHY?
– Receivables are nice but they don’t pay the bills -> cash flow issues ->
investment project milestones endangered, taxes, operational issues …
• Evaluation of entrepreneur’s/investor’s current $ situation ->
predict:
1. Future cash flows
2. Future values of assets (FV)
3. Exit strategies
Profit/Loss $ planning?
• Income statement
1.
We need a new laptop -> will there be enough $ to buy it? (incometax base reduction due to increase of ops expenses)
2.
We will need 3 new laptops within a year
• Buying them in a year -> Tax base = X
• Buying them now rather -> Tax base X less ops expenses -> now
in possession of assets we will need later
• Which alternative to choose?
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–
Will the $ spent more in taxes if I do NOT buy the laptops now be
lower than what I paid for the laptops? Will the value added
(productivity concerns) outweigh the costs?
Will the future earnings be as predicted? (probability, precision of
data)
How far ahead do we plan for?
Planning ahead
How do we “know” how much $ we will be
making and spending?
• Market data?
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–
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Where does it come from?
Available for our product?
Time vs. $ to be invested to get such data
Reliability issues
• Plan for & minimize TC = FC + VC
– Costing – ABC – activity-based costing
– Maximize time and HR efficiencies -> productivity
– MRP (material requirement planning) – current expenses
Bakery – $ analysis
Bakery – $ analysis
• Average per-unit VC … $0.35
• Estimated monthly FC = $32,343
• Profit .. month 1 = -$12,899, month 2 = -$8,289, month 3 = -$2,007, month
4 -> 12 = $4,024
• B-E units sold per month … pcs ?
– # of units to be sold in order to B-E from the start
• B-E revenue earned per month … $ ?
– Revenue to be earned in order to B-E from the start
• Average per-unit B-E revenue … $ ?
• ROE/ROI by ?th month of ops
• Start-up working capital to survive?
Bakery – $ analysis
Bakery – sales & revenue plan
Answers
• B-E units sold per month … 17,255 pcs
• B-E revenue earned per month … $ 38,336
• Average per-unit B-E revenue … $ 2.22
• ROE/ROI by 9th month of ops
• Start-up working capital to survive = $ 23,195
Life is never easy …
Revenue Management & Planning
• Some businesses (industries) start off with loss, then swing
into 0+ profits, then back to loss and then start making profit
– seasonality factors (ski-resorts, restaurants, hotels, airlines)
• Floating vs. fixed prices
– analyzing micro-level consumer behavior and optimizing product
availability and prices => max. profit
– dynamic revenue management planning => avg Ps, avg Qs and avg TC
– airlines, hotels – choosing the right time to customize the product for
the customer (of our choice)
• Do all industries face seasonalities?
Cost planning, control, analysis – reverse
marketing?
• Start-up project/business – set your goals
– Budget -> milestones -> operational level breakdown -> back-check ->
evaluation
– Project manager OR CEO or executive level -> project manager ->
departments -> reporting to 1 level up at each level -> performance
evaluation
• Established operations – objectives defined
– Current balance of actual vs. planned expenses => adjust current
budget -> adjust $ for & timing of milestones -> re-adjust op level costs
-> evaluation of cost-management performance
– Performance cycle complete -> report to 1 level up at each level ->
performance evaluation
Cost planning, control, analysis –
closer look
• Budgeting first
– total $ available at beginning + new $ coming from external sources
– then cost breakdown by milestones/time periods/activities
– applying prices to the purchase/hire of inputs within a time frame:
• HR (aka Human Capital)
• “raw” material – semi-finished products (tangible items vs. intangible
services)
• Inflation, IR
• Degree of cost assignment precision – how accurately are costs assigned
to items/activities
• Cost control
– Degree of freedom and competency of decision-making at level
– Instantaneous checks of actual against planned costs
Cost planning, control, analysis –
closer look
• Buffers
A. additional time needed for building a back-end mechanism of a
website:
1. Individual ops took longer and/or
2. Higher expenses incurred by supplier and/or
3. Unexpected (unaccounted for) problems/issues occurred
B. Inflation, IR, loss of HR, dynamic developments on the market …
C.
HR and legal aspects
• Capacity to make decisions and take action
• i.e. education (needed and/or required by law), experience
• Use precedent where possible
Cost planning, control, analysis –
closer look
What happens if costs exceed $ available?
• Re-allocation / re-distribution of $:
– within departments, items
– at milestones
• Re-definition of objectives at each level
• More $ obtained
– Depending on projected revenues & profits -> ROE, ROI …
EBITDA, EBIT – to buy or not to buy
• EBIT … how profitable a business is
– Net income before interest payments and taxes are taken into account
– i.e. revenue – COGS – op expenses – (depreciation + amortization)
– i.e. measure of how effectively a company is able to generate $, excluding
inflow and outflow of $ from non-recurring/discontinued operations
– i.e. how much $ a company is able to pay off its creditors with
– More suitable for production-oriented companies & present in different
tax environments ??
• EBITDA … same as EBIT yet also excluding depreciation and
amortization
– Net income with interest, taxes, depreciation, and amortization
– More suitable for service-oriented companies & present in different tax
environments ??
– Does not include $ for funding working capital and replacement of old
equipment
EBT, EAT – to buy or not to buy
• Earnings Before Tax … more inclusive than EBIT, EBITDA
– revenue – COGS – op expenses – (depreciation + amortization) –
interest
– More suitable for companies present in different tax environments ??
– All inclusive except for taxes
• Earnings After Tax ... same as EBT except
– Revenues – all expenses – taxes
– Also may be -> EAT less dividends = Retained Earnings
– Esp. useful for reporting to shareholders 
Cash $ planning ahead - cash-flow
projections – e.g. freight-forwarder?
• Cash $ inflow & outflow -> balance for every period
– By activities, ops
– By deadlines
– By milestones
• Payments and earnings known and accounted for
– Operational level
•
detailed schedule and plan of ops -> in, out, balance
• Ability to avoid insolvency -> capacity to make payments on:
– Periodic invoices
• Phone bill, light bill, HR, production tangible inputs -> FC in long-term-> purchase
dept.
– One-time purchases
• website launch, ERP (pre-paid products, invoice … 2 – 4 weeks maturity)
– Variable current costs
•
fuel expenses, automobile maintenance, office supplies, bonuses paid out
Cash $ planning ahead - cash-flow
projections – e.g. freight-forwarder?
• Ability to avoid insolvency -> capacity to collect revenues
(varies among industries across countries):
– Pre-paid products win – cash $ in advance
• Pro-forma invoice – different tax policies across countries
• i.e. issuing PI for 100% amount and provide product upon receipt of $
• The downside – costs incurred prior to the provision of good/service
– Invoices
• Pro-forma invoice – e.g. CZ – possible to issue PI for 100% of the amount
and exclude it from taxes until the $ is received
• Maturity dates –> 1 – 30 days after delivery
• Worsening payment morale -> high receivables = THREAT
Direct vs. indirect C/F statement
• Direct method
– Cash flow from op activities includes cash from customers and cash
paid to suppliers
– Bakery example - with the use of link below
–
http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/cash-flow-direct.asp
• Indirect method
– STEP #1 – finding accrual basis net income from reported net income
– STEP #2 – net income gets adjusted for items which affected the
reported net income but did NOT involve cash
– Incl. adjustments to convert total net income to cash from op activities
– Bakery example - with the use of link below
–
http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/cash-flow-indirect.asp
Free Cash Flow - FCF
• Measuring $ performance = op cash flow – capital expenditures
– Cash $ that a firm is able to generate after the outflow of $ for
maintenance/expansion of own assets
– Important for shareholders
• shows how well a corporation is able to inject $ into R&D (new product
creation), make acquisitions, reduce debt, pay dividends
$ planning – Balance Sheet
• A snapshot of a business at a given date -> planning for:
– Sources of future benefits
– What will have to be given up
– What will be left
• In particular – focus on:
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Working capital - $ to finance daily ops
Liquidity – how fast we are able to pay current debts
Receivables – connected to business concept
Payables
$ planning – Balance Sheet
FMCG retailer example
Setup:
Importing products from abroad -> sale in CZ and planning to expand …
What do we need to plan $ for?
• Assets
– cash $ - what for?
• Before you get started? Immediately after you get started?
– Inventory ? How do you get it? Where do you keep it? Pre-paid
expenses? Fixed assets?
• Liabilities
– Payables – what do we have to pay daily, weekly, monthly? (credit
cards, interest, accrued wages, income tax?)
– Long-term lia’s – loans? What for?
$ planning – Balance Sheet
FMCG retailer example
• Equity – net assets
– What is left and what do we use it for?