S201 AUTOMATED GROUP LEARNING
(AGL)
AGL NO. 10 FINANCIAL MANAGEMENT
OF WORKING CAPITAL
DAILY WORK PACK - PART 2
Copyright: RGAB/PW 2005/3
AGL
S202 ASSIGNMENT 1.0 REVIEW AND
SHORT QUIZ (45 minutes)
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1,1 INSTRUCTIONS
(a) Assemble in new SG and discuss outstanding
questions from Part I
(c) Do the short quiz which follows. Work on each
question individually and then compare
answers in SG
(d) When all answers have been completed, check
with the correct solution , discuss points arising,
and reassemble in MG when the bell rings,
S203 ASSIGNMENT 2.0 STUDY - CREATIVE
ACCOUNTING (75 minutes)
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2.1 INSTRUCTIONS
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(a) Re-assemble in new SG, study the lecture and discuss
all issues arising.
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(c) Record significant points on the flip chart.
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(d) Review the glossary for any difficulties with new words
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(e) Record significant points in your notebook and
re-assemble in MG when the bell rings.
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S204 ASSIGNMENT 3.0 - LECTURE CREATIVE ACCOUNTING (30 minutes)
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3.1 FINANCIAL STATEMENT OBJECTIVES
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Financial statements are : income statements profit
and loss accounts), balance sheets , cash and funds flow
statements.
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Objective - not scientific accuracy, not "correct", but rather
"useful credible estimates for all partiesconcerned".
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Must be credible.
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S205 3.1 FINANCIAL STATEMENT OBJECTIVES
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Financial statements for banks, shareholders, management,
suppliers and tax authorities may differ.
Company may have several different balance sheets, but
the auditor normally signs only one.
S206 3.2 ACCOUNTING PRINCIPLES
AND TAX LAWS
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Financial statements affected mainly by accounting
principles but also by company and tax laws.
Accounting principles that help us to translate records into
financial statements are: cost, conservatism, consistency,
true and fair, comparability, accounting period, entity,
matching and materiality.
Matching means associating the relevant costs and revenues
in the same accounting period.
S207 3.2 ACCOUNTING PRINCIPLES
AND TAX LAWS (continued)
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Materiality is the key accounting principle. Big amounts are
important. small items are not significant!
Don't bother about small amounts or minor accounting
errors ... "don't polish “peanuts” ... however "satisfying" that
may be ... look for the "coconuts" ...
Although influenced by company and tax law, such
accounting principles are mainly the work of professional
accounting institutes, they enable financial statements to be
“true and fair” (whatever that may be ...}.
S208 3.2 ACCOUNTING PRINCIPLES
AND TAX LAWS (continued)
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In managing working capital we have to use financial
statements and therefore we must understand just how "true
and fair" they may, or may not be ...
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I.A.S. (International Accounting Standards) bring some
consistency to varying national accounting principles,
rules and standards.
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Always ask for the profit according to IAS!!
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S209 3.2 ACCOUNTING PRINCIPLES
AND TAX LAWS (continued)
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Company law sets provisions for a minimum disclosure of
information in published financial statements; often very
little useful data is disclosed!
Financial statements "in accordance with law" are not
necessarily "true or fair" or useful to management.
S210 3.3 COMPANY AND TAX LAWS
(continued)
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Competitors may get more information from other sources
than from financial statements e.g from suppliers ,,,.
Company law eventually follows generally accepted
accounting principles (but may bsometimes be grossly
conservative!)
S211 3.3 COMPANY AND TAX LAWS
(continued)
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Tax law sometimes requires transactions to be recorded in
the books to qualify for tax relief.
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This leads to poor accounting principles and distorted
financial statements.
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Watch out for it ... in the notes to the financial statements.
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S212 3.3 COMPANY AND TAX LAWS
(continued)
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Many companies maintain separate books and
financial statements for tax purposes and thus avoid
distortion of the management accounting.
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NOTE: In some countries watch out for several sets of books:
“one for the bank, one for the tax people, one for my
partner, and one for me " ... ?
S213 3.4 CREATIVE ACCOUNTING
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Myth is that financial statements are "correct"
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Reality is that they are normally manipulated in some way.
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Creative accounting means "adjustment" in accordance
with accounting principles which gives most useful result
for the purpose required; not illegal but may be unethical!
S214 3.4 CREATIVE ACCOUNTING
(continued)
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GAAP - Generally accepted accounting principles , provide
a wide scope for creative accounting since mere
disclosure of changes in the notes to the financial
statements often satisfies the Auditors who ,,,,(in all good
faith) ... may sometimes assume that all readers are expert
accountants.
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Excessive inconsistencies and changes in accounting
principles, however. compel the Auditor to "qualify"
his report; but ... auditors seldom actually do so because
they may thereby lose a client.
S215 3.4 CREATIVE ACCOUNTING
(continued)
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Creative accounting within accounting principles may be
achIeved in many ways. but the general rule is:
“ Don't manipulate the profit unless you really have to ...”
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And thus, to increase the profit of the year:
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(a) Defer costs treat costs as balance sheet assets
rather than expenses. i. e. R & D, advertising, preproduction costs.
(b) Minimize accrual for liabilities don't provide for
all potential losses.
S216 3.4 CREATIVIE ACCOUNTING
(continued)
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(c) Release reserves into the income statement or charge
losses to reserve. Revalue capital assets to create a
capital reserves against which to charge special losses.
(d) Fixed assets - "capitalise" as much as possible;
depreciate over long "horizons" to reduce the annual
depreciation charge e.g. goodwill over 40 years ... ?
S217 3.4 CREATIVE ACCOUNTING
(continued)
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(e) Do not consolidate a subsidiary making huge losses
because it will "distort the position". Alternatively
arrange for such subsidiaries to be less than 51% owned.
Acquire and consolidate only profitable subsidiaries.
(f) Careful treatment of exceptional losses charge losses to
reserve or accumulated profit rather than to the income
statement to "avoid distorting the profit of the year".
S218 3.4 CREATIVE ACCOUNTING
(continued)
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(g) Timing - sell assets now at a profit or defer selling them
at a loss and thus increase the profits of this particular
year.
(h) Inventory - don't be too conservative; don't write off too
much obsolete inventory.
(i) Create a huge “restructuring” charge, and use it as a
semi-secret reserve to ENSURE that profitability bounces
back well ,,, in the following year or so ,,,
S219 3.4 CREATIVE ACCOUNTING
(continued)
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(j) Profit - take profit on uncompleted contracts.
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(k) Take or defer ... Forex and derivative profits or losses
and other legal, environmental, employee, pensioner
contingent liabilities, which are so difficult to identify
and evaluate.
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Note: In some companies the material contingent liability
for legal claims ... may be the key to profit or loss this year ...
which may thus depend more on the opinion of the
lawyers ... than the accountants ... conversely to reduce
the profit this year ...
S220 3.6DETECTION OF CREATIVITY
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To detect creative accounting. study the notes to the
financial statements very carefully for inconsistencies in
accounting principles and watch for:
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(a) Deferred and intangible assets which cannot be justified.
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(b) Changes in inventory valuation and investment values.
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S221 3.6 DETECTION OF CREATIVITY
(continued)
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(c) Charges of profits or losses not to the income statement
but to reserves or accumulated profit.
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(d) Release of reserves into profit without specific disclosure.
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(e) Accruals noted but~not actually provided for.
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(f) Vague reserves which are not clearly equity or debt.
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(g) Investments in subsidiaries not consolidated. (Why?)
S222 3.6 DETECTION OF CREATIVITY
(continued)
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(h) Increased amount for "goodwill" in the balance sheet,
that is not written off within five years ....
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(i)
Forex profits and losses.
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(j)
Pension fund provisions.
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(k) ALWAYS ... RECONCILE THE PROFIT WITH IAS!!
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S223 3.6 DETECTION OF CREATIVITY
(continued)
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(l)
Search for extra-ordinary contingent liabilities for FOREX ,
derivatives, leasing, legal claims, environmental issues.
employee benefits etc. which may be "material" ... !!
Note: Try very hard to Ignore the "peanuts" ... and to
concentrate on the "coconuts" ...
S224 3.7 ROLE OF THE AUDITORS
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In theory the Auditor is employed by the shareholders
under the law to protect the interests of the shareholders;
in reality he is hired by the management to satisfy the law
and add credibility to published financial data; as an
"honest professional public accountant";.
He protects his own interests but "bends occasionally to
meet the reality of the situation" ... but is the first person to
be sued if the company goes bankrupt ....
S225 3.7 ROLE OF THE AUDITORS
(continued)
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Auditor charges an appropriate fee for making a report on
the financial statements; he merely tests the records and
does not guarantee their accuracy or the absence of fraud...
Professional standards of auditors in United States, Holland,
England, Australia, New Zealand, South Africa, Canada,
etc. are higher and sometimes quite different from (so
called) professional auditors in many other countries.
S226 3.7 ROLE OF THE AUDITORS
(continued)
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Note: Be a little careful with financial statements “audited “
in ... Suisse , France,, Germany, Italy, Spain, Africa, Middle
East, Asia etc ...
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unless audited by the ... “Big Five” ....
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and quoted on NYSE ... under SEC rules ...
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and reconciled with IAS ...
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S227 3.7 ROLE OF THE AUDITORS
(continued)
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Auditor who is not independent, not a professional public
accountant and has no public reputation cannot always
be expected to give an unbiased opinion.
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An Auditor not satisfied with financial reports must persuade
client to change financial statements by appropriate notes
or finally he must qualify his report.
S228 3.7 ROLE OF THE AUDITORS
(continued)
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Auditor is "flexible" to changes in accounting principles
when the tax law changes.
Particularly concerned with not overstating the financial
position but happy for it to be understated without comment.
In some countries financial statements are expected to be
very very conservative ... and thus ... not necessarily very
true or very fair e.g. Suisse!!
S229 3.7 ROLE OF THE AUDITORS
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Evaluate the auditor's work not by his professional
qualification alone ...
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but by his: name, reputation, fee, independence ...
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and the local financial norms ...
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you may be amazed to find that in some places 50% of the
business transactions do not get recorded in the books ...!
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S230 3.7 ROLE OF THE AUDITORS
(continued)
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A delay of more than 2 months in publishing professionally
audited financial statements must ALWAYS ... be a "financial
danger alarm bell" ...
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Alerting you to look carefully for signs of ... creativity ...
contingent liabilities ... off-balance sheet financing" ...
FOREX losses ... environmental claims ... or even missing
funds ... and the usual business failures ...
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Everywhere? ... Yes ... especially in developing countries ...
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S231 3.7 ROLE OF THE AUDITORS
(continued)
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Why?
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Because so often ... the "auditors" ... who appear to be
reliable ... may in reality ... NOT BE ... as professional ...
as independent ... as IAS oriented ... or as adequately
paid ... so be careful ... and put the audit credibility ...
into in your PFD ...
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S232 3.8 DECEPTIONS IN
FINANCIAL REPORTING
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Figures for a purely normal year may be reported by the
Chairman as "exceptionally good" by employing the
following devices:
(a) Quote the amounts of differences without indicating
the relative difference to the whole.
(b) Quote small difference amounts in terms of large
percentage changes.
S233 3.8 DECEPTIONS IN
FINANCIAL REPORTING (continued)
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(c) Quote aspects of transactions that are improving and
avoid the depressing aspects.
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(d) Choose a bad prior year as a standard of comparison
such that the present year appears to be a substantial
improvement (compared with the carefully selected
terrible prior year).
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(e) Attribute profit increases to good management.
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S234 3.8 DECEPTIONS IN
FINANCIAL REPORTING (continued)
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(f)
Attribute losses to "consolidation for the future, "unfair
competition", the "depressed economy" or "government
policy" (and the recently retired last CEO)!!
(g) Point out exceptional profits and losses only if they
support the case.
(h) Similarly conceal losses by charging capital reserve or
accumulated profit (not the income statement).
S235 3.8 DECEPTIONS IN
FINANCIAL REPORTING (continued)
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(i)
Improve capital reserve by revaluing certain
fixed assets and then charge off the losses to
capital reserve.
(j) Quote all figures but only compare certain of
them with prior performance.
(k) Show only those financial ratios that appear to
indicate improvement over the past years; ignore
others; choose a basis to compute the ratios that
suits the case.
S236 3.8 DECEPTIONS IN
FINANCIAL REPORTING (continued)
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(l)
Release secret reserves by changes in policy for
inventory and investment valuation, depreciation
and contingencies.
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(m) Quote profits before or after income tax as appropriate.
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(n) Quote employee numbers; increases result from
"expansion" decreases result from more efficient
operations".
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S237 3.8 DECEPTIONS IN
FINANCIAL REPORTING (continued)
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(o) Increase the volume of information in the annual report:
add more maps, graphs and pictures!
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(p) Consolidate or do not consolidate subsidiaries.
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(q) Continually point out that financial statements have
been prepared so as to avoid distortion of figures
which could mislead the shareholders (but never
discuss “poison pills”).
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(r) Make a restructuring charge and blame the retiring
CEO ... and announce a recovery for next year ...
S238 3.8 DECEPTIONS IN
FINANCIAL REPORTING (continued)
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Key Note:
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1. Profit at the front of the Annual Report may "disappear"
in the small print of the notes to financial statements.
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2. Always check the reconciliation of the net profit figure
with IAS you may be very surprised ...!!
S239 3.9 PRACTICAL APPROACH
TO ACCOUNTING PRINCIPLES
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(a) If current year's profit is adequate. be conservative and:
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1.
Charge off all losses to the income statement either as
operating or non operating costs, AND charge off all
R & D, advertising and deferred costs as soon as possible.
2.
Take all profits into the income statement either as
operating or non operating income, AND don't change
accounting principles unless absolutely necessary.
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S240 3.9 PRACTICAL APPROACH TO
ACCOUNTING PRINCIPLES (continued)
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(b) If current year's profit is not adequate, be less
conservative:
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1. Defer costs or charge them to reserve
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2. Take profits on working process to date
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Note: Keep the "credibility gap" to the minimum but if
loss is "inevitable" .... then make a it a "big one" ...
add a bit more for “restructuring” ... and announce
a "recovery in the current year after re-structuring “....
S241 3.10 FINANCIAL POLICIES
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Need for financial policies to provide for EVA/SVA with
sustainable cash flows and profits with health and continuity
of the business.
Financial management doeso not avoid risk ... it balance risk
and return.
Financial statwments must occasionally be manipulated
( “window dressed “, “adjusted within the law”, “modified
in accoprdance with accounting princioples”, creative”,
“practical”, ” creative” etc.)
S242 3.11 FINANCIAL ETHICS
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Now please, answer the following questions aloud, and to
try to get some general agreement in the MG:
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(a) Should financial statements for shareholders
always be “true and fair” and disclose reality?
S243 3.11 FINANCIAL ETHICS (continued)
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(b) Even when (possible) disclosure of a dangerous
position could lead to a disaster which might
be avoidable?
S244 3.11 FINANCIAL ETHICS
(continued)
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(c) Can several alternative financial statements all be
equally “true and fair”?
S245 3.11 FINANCIAL ETHICS
(continued)
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(d) Would you legally "creative" in a financial statement to
gain time for your company's survival?
S246 3.11 FINANCIAL ETHICS
(continued)
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(e) Who knows best what to do with excess cash in the
company? Management or shareholders?
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(f)
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Who really should decide what profit is shown in each
year's financial statements?
Accountants ? Auditors? Lawyers? Bankers?
Major shareholders? Management?
S247 3.12 LEARNING PATTERNS - REVIEW
1. CREATIVE ACCOUNTING
• TAX LAWS
• COMPANY LAWS
• GAAP
• IAS
• AUDITING STANDARDS ... BUT STILL ... CA
S248 3.12 LEARNING PATTERNS - REVIEW
2.FINANCIAL POLICY
BALANCING RISK AND RETURN
TIMING IS THE KEY
• FOR EVA ... AND SVA
S249 3.12 LEARNING PATTERNS - REVIEW
3. CASH FLOW
•
CASH IS A FACT!
•
PROFIT IS JUST AN OPINION !!
S250 3.13 INSTRUCTIONS (10 minutes)
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(a) Reassemble in SG
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(b) Study the lecture carefully and record key points in
your notebook
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(c) Discuss outstanding questions
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(d) When the bell rings continue with the case study
which follows.
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S251 ASSIGNMENT 5.0 - LECTURE ELECTRONICS RESEARCH COMPANY (ERC)
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5.1 STORY OF THE CASE
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ERC is in research and manufacture of electronic
components for space and computer systems. Dissident
stockholders forced the Chairman to promise a
small profit for last year.
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The new R&D project will cost an extra ECU one million per
2Last year's initial profit ECU .4 (400,000) was computed
before expending special R&D and inventory losses,
and before possibly crediting profit on uncompleted
contracts.
S252 5.1 STORY OF THE CASE
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Many parties are interested in the financial statements,
including:
stock markets, tax authorities, existing and potential
shareholders, trade unions, management, bank ...
all the “stakeholders” ...etc.
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What profit or loss should the company report for last year?
S253 5.2 HEALTH OF THE COMPANY
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(a) Liquidity: quick, current and E:D ratios are all poor;
extensive borrowing from the bank; liquidity position
is critical.
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(b) Activity: sales are high, but inventory and asset turnover
poor; high inventory write down; a expanding company
has become increasingly inactive.
S254 5.2 HEALTH OF THE COMPANY
(continued)
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(c) Profitability: poor profitability due to the inventory write
down, government contracts, and high R & D costs;
poor management?
(d) Potential: R&D good, but little real evidence of profitable
opportunities in terms of marketing, production, finance,
etc.
(e) Overall: company unprofitable and under- capitalized
for further expansion.
S255 5.3 FINANCIAL STATEMENT OBJECTIVES
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Management must try to ensure the long-term survival
and increasing long-term value of the company.
Creative accounting ("Creative Accounting") within the
law and accounting principles may be justified if the
objectives are reasonably consistent with local business
practices!
S256 5.3 FINANCIAL STATEMENT OBJECTIVES
(continued)
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Provided management has confidence in the future of the
company, it must produce financial statements which do
not cause unnecessary loss to shareholders, creditors,
employees, etc.
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The extent of creative accounting employed depends on
the pressure to produce reasonable results to ensure the
opportunity for survival .
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Thus CA is only a short term solution.
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S257 5.4 PARTIES CONCERNED WITH
CREATIVE ACCOUNTING
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(a) Tax Authorities: require conformity with tax regulations
to allow company to minimize tax liability.
(b) Shareholders: concerned that profits should not cause
a fall in share price; this might motivate dissatisfied
shareholders to try for control.
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(c) Trade Unions: greater pressure for higher wages if the
statements show a profit.
S258 5.4 PARTIES CONCERNED WITH
CREATIVE ACCOUNTING (continued)
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(d) Banks: unhappy about large loans to company which
is losing money, with an uncertain future and liquidity
problems.
(e) Government - expects company to be profitable as
indicator for survival and thus a suitable party for
government contracts.
S259 5.4 PARTIES CONCERNED WITH
CREATIVE ACCOUNTING (continued)
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(f)
Press and financial analysts: who influence the
stock market price of the company's shares, and
thus the risk of take-over.
(g) Management and staff - expect profitable results for
survival and morale of all company staff without fear
of lay-offs.
S260 5.5 JUSTIFICATION FOR CA
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(a)
Management and staff and company survival.
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(b)
Recognition that cash is a fact but profit only a
matter of opinion.
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(c) Gain TIME to act, and avoid the danger of fraud
by deception, which sets the limits.
S261 5.6 RECOMMENDATIONS ON
DISPUTED ITEMS
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(a) R & D Expense: no justification for carrying forward the
normal R & D expensed in the past.
New special R & D could have special benefit for the
future and could be carried forward after deduction
of tax.
Not conservative accounting, but company ls not able
to take such a large loss this year.
S262 5.6 RECOMMENDATIONS ON
DISPUTED ITEMS (continued)
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(b) Inventory Loss: should be charged to last year,
regardless of when the inventory was made.
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Charge to accumulated profit gives a false impression
of last year's activities and results.
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However, some auditors may pass it either way.
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S263 5.6 RECOMMENDATIONS ON
DISPUTED ITEMS (continued)
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(c) Profit on uncompleted contracts - previous accounting
practice of deferred profit until projects completed is
very conservative.
All uncompleted contracts could be examined for a
reasonable figure of profit to date and to be included
in the last year's profit.
S264 5.6 RECOMMENDATIONS ON
DISPUTED ITEMS (continued)
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NOTE:
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The above suggestions are not unethical nor
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illegal creative accountings, but merely practical
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attempts to produce realistic figures which are
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useful to management and the parties interested
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in the company's future success.
S265 5.7 AUDITOR'S REACTIONS
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Auditors insist on fair accounts in accordance with "generally
accepted accounting principles" which tend to depend
upon the law and business practice of each country.
Currently pressure for all "quoted" companies to
adopt IAS!!
Particular ERC concern this year because of unhealthy
position is possible publicity from a liquidation or take over ...
RESULT? .... CEO GETS FIRED BUT THE AUDITORS GET SUED
FOR NEGLIGENCE ,,,, !
S266 5.7 AUDITOR'S REACTIONS
(continued)









Disclosure of all changes in accounting principles is vital;
auditors usually insist that the Chief Executive "certifies"
every change as being "reasonable and in the interests
of the company".
In reality, would probably NOT agree to the normal R&D
being carried forward, but would agree to alternative
treatment (after tax) of the disputed items.
All changes must be recorded as notes to the financial
statements with explanation of the effects on the profit figure.
S267 5.7 AUDITOR'S REACTIONS
(continued)






Auditors often believe that the public is "adequately
informed" if the data is somewhere in the financial
statements,
even though it might require highly skilled accountant to
find it!
It may sometimes be difficult to change auditors without
adverse publicity.
S268 5.7 AUDITOR'S REACTIONS
(continued)



Fees not relevant here. ERC could r place a "difficult" auditor
next year ... but NOT this year!!!
Alternatively, ERC could add another (international) auditor
this year as a "joint auditor", to influence the current auditor!!!





NOTE: The auditor may not be too unhappy with a long delay
in producing published financial statements. It would give
him more time to seeif the company will survive, and thus
reduce his risk of damage claims by the creditors!!
S269 5.8 DECISION AND JUSTIFICATION

(a) Discussion

Company is in very difficult position; it must incur extensive
R&D cost to survive and it can't afford to expense it, as
in the past.




Financial policy therefore must be realistic and figures
produced must be CREDIBLE to all parties concerned.
S270 5.8 DECISION AND JUSTIFICATION
(continued)




Management must first decide whether they firmly believe
that the company has a future as an independent operation
rather than as a part of a larger group of companies
i.e. take-over.

Doubtful whether existing equity base could finance the
WORKING CAPITAL EXPANSION, unless profits were extremely
high.

This seems unlikely.


S271 5.8 DECISION AND JUSTIFICATION
(continued)

(b) Decision

Suggest the adjusted profit for last year be ECU .6 millions
computed as follws:

Existing profit (ECU - millions)
Plus: profit on all uncompleted contracts

.4
.8




Total
Less: inventory losses
Adjusted profit (ECU - millions)
1.2
.6
.6
S272 5.8 DECISION AND JUSTIFICATION
(continued)

NOTES:

1. Full disclosure and justification of the changes in
accounting practices must be recorded in the "Notes to the
Financial Statements".








2. No possibility of issue of new shares unless last year's
profit is a perceived as a "break-through".
3. The new product will take three years to develop and
therefore management must seek alternative short term
and long term financing arrangements and probably even
the merger or sale of the company.
S273 5.8 DECISION AND JUSTIFICATION
(continued)

(c) Justification


Liquidity is critical; the scale of operations has become too
great for the equity base; shareholders are unhappy.

ERC can no longer afford to expense R&D as it did in the past.
S274 5.8 DECISION AND JUSTIFICATION
(continued)

The long term financial future of company is in doubt.





Creative accounting (creative accounting) may gain
TIME to arrange the sale or merger of the company.
Creative accounting is only an aid in financial management
where the long term future of the company can be assured.
S275 5.9 LEARNING POINTS










(a) Parties concerned with financial statements are:
tax authorities, shareholders, management and staff,
government, trade unions, banks and suppliers, financial
press and analysts etc.
(b) Tax regulations are not necessarily good accounting
principles although they may have to be followed to
minimize tax liability.
(c) Charges for R & D expense and inventory losses, and
profits on uncompleted contracts, are susceptible to
creative accounting.
S276 5.9 LEARNING POINTS (continued)


(d) Objective of financial management is to ensure
long term survival and increasing value of the company.

(e) Some "creativity" (creative accounting) may be
inevitable when the survival of a company is in doubt;
but management must keep within generally accepted
accounting principles and IAS!!

(f)





All changes in accounting principles must be noted in
the financial statements and the effect on the current
year's profit explained and reconciled with IAS.
S277 5.9 LEARNING POINTS (continued)









(g) Financial statements should be credible to the parties
concerned.
(h) Auditors will normally agree to reasonably creative
figures provided they are within I.A.S., certified by
management and duly noted in the financial statements.
(i) Changes of auditors or higher audit fees are not practical
methods of dealing with financial management problems;
may we can always appoint "joint auditors" and thereby
apply pressure.
S278 5.9 LEARNING POINTS (continued)









(j)
Creative accounting may be inevitable and in certain
circumstances may benefit shareholders, employees,
management, government, banks, etc.
(k) It is poor financial policy to defer items that should bc
expensed or to charge accumulated (past) profit wit
current losses.
(l) No need to be excessively conservative in accounting all
the time but past conservatism may provide present and
future flexibility.
S279 5.10 LEARNING PATTERNS
1. PARTIES TO FINANCIAL
STATEMENTS
TAX MGT. BANKS OWNERS
STAFF SUPPLIERS GOVT . TU's
FINANCIAL PRESS MANAGEMENTS
AND ABOVE ALL ...CUSTOMERS
S280 5.10 LEARNING PATTERNS
2. CREATIVE ...
BUT NOT SO CREATIVE THAT ...
281 5.10 LEARNING PATTERNS
3. AUDITORS
HONEST, TRUE, FAIR, PROFESSIONAL, OPINION, NOTES
BUT IN LIQUIDATION ... FIRST CREDITOR REACTION ...
CAN WE SUE THEM?
S282 5.11 INSTRUCTIONS

(a) Re-assemble in CSG

(b) Study the lecture and discuss in CSG.

(c) Record significant points in your notebook

(d) Reassemble in MG when the bell rings
S283 ASSIGNMENT 6.0 - BILL BROWN (30 minutes)

6.1 INSTRUCTIONS

(a) Reassemble in SG

(b) Study the case and individually answer all the questions
(on the worksheet in the diary)





(c) Compare your answers in SG and when the bell rings,
stop for lunch!
(e) After lunch, check with the correct solutions and discuss
outstanding questions
S284 ASSIGNMENT 7.0 STUDY - FINANCIAL
MANAGEMENT (30 minutes)

7.1 INSTRUCTIONS

(a) Re-assemble in new SG


(b) Study the lecture and discuss in SG and record significant
points on the flip chart.

(c) Review the glossary for any difficulties with new words

(d) Record significant points in your notebook and
re-assemble in MG when the bell rings

S285 8.0 - LECTURE - FINANCIAL MANAGEMENT

8.1 FINANCIAL MANAGEMENT AND RISK

Financial management plans the sources and uses of funds to
achieve objectives.




Key objective is to increase the long term value of the
business. Share value depends upon earnings. investment.
gearing, growth and dividend policies and prospects.
S286 8.1 FINANCIAL MANAGEMENT AND RISK
(continued)

Financial management takes risk in a balanced way.


Risks include economic risk. marketing risk. production risk,
technological risk and, above all in international business.
political risk. All risks end up as financial risk.

Before making a financial decision. seek all available data.

Analyse to seek out all possible risks and measure the
extent of those risks.


S287 8.1 FINANCIAL MANAGEMENT AND RISK
(continued)

Seek all alternatives and avoid "emotional investment in
traditional financial practices".

Financial management is creative not defensive!

But don’t be so creative ... that you have to spend a
year or two inside ... rent free !!!


S289 8.2 TECHNIQUES OF FINANCIAL
MANAGEMENT



Financial techniques aid management but are no substitute
for business acumen and an intuitive feeling for business
problems.
S290 8.2 TECHNIQUES OF FINANCIAL
MANAGEMENT

Techniques include:

Ratio analysis (LAPP system)
Forecasting of funds flows and cash flows.
Forecasting of income statements and balance sheets
Capital investment analysis
EVA/SVA analysis
Earnings per share analysis (EPS)
Break-even analysis
Creative accounting (manipulation) concepts.
Benchmarking
Intuitive assessment of potential contingent liabilities
(leasing, legal, employee, environment etc.)










S291 8.2 TECHNIQUES OF FINANCIAL
MANAGEMENT (continuedf)

Note:

The key technique in financial analysis is simply to compare
the large amounts with past. budget and industry, by
amounts and ratios .




Check that they are "internally consistent" and fully
investigate reasons for differences.
S292 8.3 CONTROL

Control of a company is not merely 51% of the shares. but the
ability to influence the Board of Directors

May arise from as little as 8% of shares outstanding.

Control by influence in good times changes rapidly when
disaster strikes (unless the ‘poison pill” works)


S293 8.3 CONTROL








Effective financial management provides: cash flow,
earnings, growth plus dividends and increased share value .
“Poison Pills” are management schemes to prevent
“take-over” of a quoted company.
I n practice, they may deter a take-over in the short run
and give managememnt time to change its policies
from un profitable “expansnsion and diversification” to the
key priority for EVA/SVA.
S294 8.4 SHORT TERM FINANCING




Determine whether the financial need is really short term
rather than long term. i.e. that funds are adequately
available in the long term. Look for the peak and duration
of short term requirements.








Plan for “operating” cash flow that is adequate to cover
increased working capital and normal fixed asset
requirements and ... to provide cash for new profitable
investment opportunities.
Recognize the cash flow “drivers”: trading profit, sales
growth. WC management, fixed asset management and
taxation.
S295 8.4 SHORT TERM FINANCING (continued)



Make financial projections that look for "daylight ahead"
i.e. cash flow, profitability and financial health now and
in the future. Be creative in seeking sources of finance.







Set financial strategies that reflect management's attitude
towards risk. E:D of 1:3 may be acceptable ... if it
discourages take-over bids ...
Personal relationships in the financial community are
the real key to financial success ...
Not what you know but who you know (and who will
lend you the cash when you really need it.
S296 8.4 SHORT TERM FINANCING (continued)






Be skillful in financial forecasting but be skeptical about the
results.
Question the underlying assumptions and make alternative
computations.
Search out the possible disasters and meet them as part of
the normal planning process.s
S297 8.5 APPROACH TO
WORKING CAPITAL MANAGEMENT

May involve:


Getting ALL managers to “OWN” the WC problem ...
Investment and management of cash. receivables and
inventory

Persuading suppliers to hold inventories and nvoice later

Researching customers and suppliers with on site visits

Continually controlling

S298 8.5 APPROACH TO
WORKING CAPITAL MANAGEMENT (continued)

Sources of funds:








Stretch the suppliers
Bank loans and leasing
Factoring and field warehousing
Grey market operations (borrowing the financial
markets but not through the banks!).
Note: "Get a favorable "track record" of borrowing and
repayment as a financial lifeline for the future".
S299 8.6 BANK AND BORROWER OBJECTIVES



Objectives are not the same.
Bank tries to be reasonably conservative in selecting
alternative uses for its limited money.



Borrower seeks to take risk by using borrowing (debt) as
financial leverage and thus increase profitability of his equity.



Banks do more for old clients than for new ones because risk
seems to be lower.
S300 8.6 BANK AND BORROWER OBJECTIVES
(continued)







Banks prefer borrowers to have only one source of funds (the
lender) whereas borrowers prefer to have multiple sources.
Non bank lenders often make substantial loans if they get not
only interest but a piece of the action" (some equity
participation).
Note: Always set up an good alternative ... BEFORE
negotiating with the bank manager ... do it from strength !!
S301 8.7 LIQUIDATION







Default on borrowing makes a company liable to liquidation
(as one of the seven alternatives ...).
Liquidation values are low because trade buyers normally
"step back and wait for values to fall".
Generally compared with book values, fixed assets (except
real estate) produce about 40%, inventory about 25%
receivables about 60%,thus leading to substantial losses.
S302 8.7 LIQUIDATION (continued)







For this reason many lenders avoid actually liquidating a
defaulter.
Secured creditors get paid first and unsecured creditors may
get little on liquidation.
The "easy" alternative of continuing the business may be
costly since overheads continue and losses often increase
very substantially before recovery.
S303 8.7 LIQUIDATION (continued)


If a bank sells a defaulting business, it can often offer special
financing to a strong buyer and thereby get a good price.

"Company doctors" succeed in reviving poor businesses not
merely by financial skills but also by the reputation and the
debt capacity they bring with them.

Assessed tax losses may be an "asset" of the business.


S304 8.8 EQUITY AND DEBT

a . The equity : debt relationship of a company, is a measure
of risk, debt capacity, leverage and ability to borrow.

b. There are various wasy of computing the E:D ratio:


1. A simple computation relates Equity to Total Liabilities.

2. An alternative ratio relates Equity to Long Term Debt.

3. Another alterrnatived ratio is to relate Equity to
“Net Long Term Debt “(debt less cash and marketable
securities).


S305 8.8 EQUITY AND DEBT (continued)







c. An E : D of 2 : 1 is always strong but attracts “cash
hungry” take-over bids.
A ratio of 1 : 1 is reasonable but some industries or
companies accept an E : D of 1 : 4 quite happily.
It depends upon norms of the industry, the financial
community nd the country! (and also upon wheter the
banks and other creditors are also shareholders)!!!
S306 8.8 EQUITY AND DEBT (continued)









d. Attitudes towards profit and risk depend upon the
personal values and experience of the Chief Executive.
The timing of the risk-taking seriously affects its success or
failure. Timing is the key!
e. A company may take a higher risk with E:D of 1 to
finance expansion; the smaller equity base is a lower
cushion to protect creditors.
A temporary poor E:D ratio enables "bridging" until longer
term finance is available , to reduce the a risk of failure.
S307 8.8 EQUITY AND DEBT (continued)










f. Long term assets should normally be financed with long
term money.
But they may be "bridged" from short term funds if long
term financing is more easily available later or if equity or
retained profits become available later.
g. Leasing of long term assets saves cash but may
(depending on the type of lease) distort the financial
statements, since assets and liabilities may not always
haveto be t shown on the balance sheet Thus then E:D
looks better ... but is NOT!!!
S308 8.8 EQUITY AND DEBT (continued)








h. This "OFF BALANCE SHEET FINANCING" may have to be
revealed by capitalising the lease as an asset and a
liability, as well as a note to financial statements. It may
be a "Material" contingent liability!! And it is usually very
expensive!!!
i. Similarly refinancing long term liabilities with “derivatives”
to reduce interest rates has become a normal financial
technique, which requires careful investigation.
S309 8.9 THE FINANCIAL MANAGER







a. The financial manager needs not only knowledge and
skills in accounting and financial forecasting, but also the
"right" attitudes towards risk-taking.
Timing is the key!
b. Understand the effect of increased activity on assets
required and the importance of planning cash
flows.
S310 8.9 THE FINANCIAL MANAGER (continued)





c. Seek all "seven" alternatives before making any major
financial decision.
Do a PFD (provision for disaster) brain-storming just to be
sure that you have considered everything that could go
wrong ...
S311 8.9 THE FINANCIAL MANAGER (continued)








d. Always useful to check that the underlaying assumption
will be valid for the future ... especially in developing
countries ...!!
e. Financial risk in the 1990's may come more from politics
and technological change than from "normal" marketing
and production operations.
f. Need to develop changing financial polices that
anticipate change ... not merely react to it ...
312 8.9 THE FINANCIAL MANAGER (continued)

Notes:

Remember : FOREX and inflation are normal, and thus
"debt" may be a hedge against risk and an opportunity
to ... benefit ... from it.






Remember : rethink carefully the continuing validity ...
(or not) ... of the assumptions underlying your ... (or not not
of the assumptions ... (very reasonable) ... financial policies
and forecasts ... they may be 80% wrong!!
S313 8.9 THE FINANCIAL MANAGER (continued)







Remember : every financial community and country has its
own "norms" of what is ... "financial health" ... what are ...
"financial ethics" ... and they may differ very widely indeed ...
and the “LAW“ may take no action at all!
Remember : a basic familiarity with company and tax law
may enable the financial manager to make more effective
use of so called ... "expert financial advice “...
S314 8.10 LEARNING PATTERNS - REVIEW
S315 8.10 LEARNING PATTERNS - REVIEW
1. LIQUIDATION VALUES
LOW ... LOWER ... LOWEST
TIMING IS THE KEY
S316 8.10 LEARNING PATTERNS - REVIEW
2.
EQUITY : DEBT
SIMPLE APPROACH
- EQUITY : TOTAL LIABILITIES
COMPLEX APPROACH
- EQUITY : LONG TERM LIABILITIES
- EQUITY : NET LONG TERM LIABILITIES
S317 8.10 LEARNING PATTERNS - REVIEW
3. FINANCIAL ETHICS
TIME?
PLACE?
LOCAL LAW?
INTERNATIONAL LAW?
CULTURE?
CUSTOM?
ECONOMY?
PEOPLE v PRESSURE?
S318 8.11
INSTRUCTIONS (10 minutes)

(a) Reassemble in SG


(b) Study the lecture carefully and record key points in your
notebook

(c) Discuss outstanding questions

(d) When the bell rings continue with the case study which
follows.

S319 ASSIGNMENT 10.0 LECTURE LUMSDEN (B)

10.1 STORY OF THE CASE

Company expanded in response to customers orders and
planned to finance plant and working capital from bank
loans.




Expansion program doubled and bank forced to provide
more finance.
S320 10.1STORY OF THE CASE
(continued)

Management failed to appreciate the difficulties of running
a larger plant in economic down-turn conditions so that
company sustained losses and defaulted upon bank
loan repayments.

Company now in critical condition as defaulter to the bank.



S321 10.2 HEALTH OF THE COMPANY

(a) Liquidity

Quick ratio and current ratios poor E:D very weak with little
hope of improvement Default on outstanding loans indicates
liquidity crisis.


S322 10.2 HEALTH OF THE COMPANY
(continued)

(b) Activity

Low inventory and receivables because the whole activity of
the company at well below capacity .


Little prospect of increased sales which would require more
working capital.
S323 10.2 HEALTH OF THE COMPANY
(continued)





(c) Profitability
No details but losses sustained and little prospect of future
profit.
Any continuity of the business will probably involve increasing
monthly losses for some time,
S324 10.2 HEALTH OF THE COMPANY
(continued)

(d) Potential


Market depressed, productive capacity over-specialized,
financial crisis, reputation lost with customers and suppliers,

Management troubles .

Poor prospects for the future in the face of an immediate
threat by the bank.

S325 10.3 CAUSES OF FINANCIAL DIFFICULTIES

Expansion of long term assets with only short term financing.

Failure to increase equity base when the company was still
strong.

False assumptions of orders and profitability

Failure to recognize the risk that orders could be canceled
as Lumsden was only a "marginal supplier".

S326 10.3 CAUSES OF FINANCIAL DIFFICULTIES
(continued)

Trade union difficulties.

Management unable to run a larger operation especially
in a general economic recession.



Poor financial policies at too high risk, destroyed the financial
health of the company.
S327 10.4 DIVERSIFICATION

Diversification involves not only production but
marketing channels; company too specialized and
does not have distribution channels for other
products.

No immediate need for WC due to low activity.

However improvement of activity will lead to need for
more inventory and receivables and therefore more
WC finance; bank unlikely to allow further loans in
view of the risk.






S328 10.4 DIVERSIFICATION
(continued)

Difficult suppliers will not extend much credit now!






Myth that diversification into an unfamiliar new activity
appears to be easier than the existing known business.
Extensive loss due to overheads inevitable, pending
INEVITABLE DELAY in the possible success of
diversification.
S329 10.5 AMOUNT DUE TO THE BANK







Bank loans ECU 400,000 long term, ECU 160,000 short term
less balance on hand ECU 43,000 ,gives net liability
ECU 517,000.
Bank would immediately offset the current account against
the loan and stop all futures cheques.
Bank may pay off small outside creditors to get freedom
to delay or sell the company.
S340 10.5 AMOUNT DUE TO THE BANK
(continued)




Bank does help old clients but not bad business, because
that would attract other bad business.
Possible liquidation of Lumsden depends upon other
alternatives available.
S341 10.6


POSSIBLE LOSS ON LIQUIDATION
If the assets were sold rapidly, trade competitors
would "stand back to let the prices fall".
S342 10.6 POSSIBLE LOSS ON LIQUIDATION






Cash
Receivables
Inventory
Plant




Less: small creditors
Less: mortgage (secured)
Net assets
Book
Value
43
10
101
854
1,008
(71)
(48)
889
Liquidation
Value
5
50%
25
25%
472
50%
502
(71)
(48)
383



Less bank loans (560-43 above)
Possible loss to the bank
517
134
net
S343 10.7 LUMSDEN ALTERNATIVES
AND FINANCIAL POLICY

(a) Alternatives:

1, Do nothing but wait for the banks to take action.

2, Sell the business to a customer (assessed tax loss is a
saleable asset).



3. Convince the bank to allow more time for business to
recover.
S344 10.7 LUMSDEN ALTERNATIVES
AND FINANCIAL POLICY (continued)

(a) Alternatives:

4, Get more equity base and make a deal with the bank.

5. Get a merchant bank or other partner or organization
interested in taking some financial interest in the business.



6, Sell the plant to another supplier, thereby providing cash
to repay the bank substantially.
S345 10.7 LUMSDEN ALTERNATIVES
AND FINANCIAL POLICY (continued)

NOTE: With a general economic recession it is difficult for
Lumsden to do much in the future except try to defer the
bank for a month until he can combine or sell the business.

His "bridging" finance has been stretched too far!


S346 10.8 BANK ALTERNATIVES
AND FINANCIAL POLICY

(a) Alternatives:

1. Do nothing for a month or two to give Lumsden time to
recover or do a deal.



2. Get Lumsden to put up new security for the loan.

3, Foreclose on the loans and insist upon repayment
immediately and then put in receiver to manage the
business.


S347 10.8 BANK ALTERNATIVES
AND FINANCIAL POLICY (continued)



4. Negotiate with Lumsden to take over the business "by
consent" and by paying off the small creditors; continue
the
business until it can be sold.



5. Take over the business by arrangement keep the business
"on ice" to cut overhead until a buyer is found later.

6. Sell the business to a customer or supplier (assessed tax
loss is a saleable asset).

7. Get a new manager to run the business profitably.

S348 10.8 BANK ALTERNATIVES
AND FINANCIAL POLICY (continued)








NOTE: Continuing the business may involve high overheads
and even greater losses.
Forced sale involves substantial losses, because competitors
will not offer much at this time.
By keeping the business "on ice" for some months the bank
could probably sell it for a good price in the future, by
offering to provide substantial fFINANCIAL support to
a strong buyer - and that is what they decided to do!!.
S349 10.9 LEARNING POINTS



(a) Poor management of working capital may not become
apparent for a year or two when a sudden financial crisis
arises.





(b) A business presently sustaining losses may well sustain
even greater losses very soon.
(c) Liquidation values in a business are extremely low
because competitors hold back until the prices fall.
S350 10.9 LEARNING POINTS





(g) Major creditors may find it useful to pay off the other
creditors and get complete control.
(h) Bank's reputation is only one factor in its decision making;
also concerned with keeping losses to the minimum both
now and in the future.
S351 10.9 LEARNING POINTS

(i)
Keeping a loss company going at a modest level
involves losses and overheads and even more finance!
(j)
Sale of a company by a bank is easier when bank offers
to finance the purchaser.







(k) Rapid expansion of a business changes its nature and
changes management's job; existing management must
be flexible enough to adopt a new style for the
larger scale of operations.R
S352 10.9 LEARNING POINTS




(l)
An experienced successful older manager of a small
company may be unable to manage a large
organization because his knowledge, skills and attitudes
are inappropriate.

(m) Business managers must understand finance to avoid
financial disaster.

(n) Production efficiency is not enough for business survival.

S353 10.9 LEARNING POINTS









(o) Attractive sales orders outstanding should be viewed
skeptically, because they may be canceled without
compensation.
(p) At times of low activity, receivables, inventory, sales and
profits arc all low; however to RECOVER AND FIND
SUCCESS with sales and profits, we shall need cash to
finance increased inventories and receivables.
(q) "PFD" is vital to avoid excessive "EI" (emotional
investment)!!
S354 10.10 LEARNING PATTERNS
1. BANK ALTERNATIVES
SEVEN ...
S355 10.10 LEARNING PATTERNS
2. COMPANY ALTERNATIVES
SEVEN ..
.
S356 10.10 LEARNING PATTERNS
3. TIMING
IS THE KEY TO EVA/SVA ...
S357 10.11 INSTRUCTIONS

(a) Re-assemble in CSG

(b) Study the lecture and discuss in CSG.


(c) Record significant points in your notebook

(d) Reassemble in MG when the bell rings
S358 ASSIGNMENT 11.0 - QUIZ (45 minutes)

11.1 INSTRUCTIONS

(a) Reassemble in SG, and do the quiz of 100 questions
on the answer sheet in the diary



(c) Check your answer with the organizer and resolve
outstanding questions

(d) Complete the first feedback form in the course diary
and give it to the organizer.

(e) Reassemble in MG when the bell rings

S359 12.0 ASSIGNMENT - SUMMARY LECTURE FOR
PART II (30 minutes)






12.1 OBJECTIVES OF THE COURSE
(a) Understand accounting language and the concepts of
financial management.
(b) Recognize the need for financial forecasting of cash,
funds, income statements and balance sheets. income
statements
S360 12.1 OBJECTIVES OF THE COURSE
(continued)


(c) Develop practical skills in using financial data to
manage working capital effectively.

(d) Recognize "creative accounting" in financial reporting,
despite IAS (International Accounting Standards).

(e) Motivate further study in the future

S361 12.2 FINANCIAL MANAGEMENT NEEDS










Knowledge, skills and appropriate attitudes for creativity in
solving financial problems.
Good audited, timely (4 days monthly/40 days annually)
financial data of the current financial position (treat "delay"
with great suspicion).
Reliable alternative forecasts of the future: cash flow. funds
flow, income statements, balance sheets. etc.
Benchmarking and EVA/SVA data, and limited emotional
investment so that all seven alternatives may be fairly
evaluated.
S362 12.3 FINANCIAL STATEMENTS









Objective is to be useful and credible, by following general
accepted accounting principles and only be "creative" if
absolutely necessary.
Accounting principles, company law and tax law, affect the
way companies present financial statements.
The Chief Executive and not the auditor determines the profit
disclosed each year.
Creativity may achieve higher profit this year but lower profit
figure next year ... but let's get there first ...
S363







12.4
AUDITORS
Auditor is a professional "honest man" (with professional
standards).
Auditor’s OPINION is based on random tests, not detailed
checking of all transactions.
Auditor's reputation is vital to his business! Check auditor's
name. fee and independence to evaluate the quality of his
audit and reliability of the financial statements.
S364 12.4 AUDITORS (continued)





Most auditors will "bend", if pushed hard enough; small
auditing firms often "bend" more easily than big international
public accountants.
Conservatism is NOT usually regarded as creative
accounting. (especially in Germany and Suisse)
S365 12.5 ACCOUNTING VALUES




The valuation of assets in the books, affects all financial ratios
and the total validity of the financial statements.
When assets are substantially under or over valued then
adjust the ratios accordingly.

Asset values at: cost, selling price. or liquidation are all
different. Value changes over time; “true and fair” values are
impossible ... seek “useful” values ....

Usefulness within credible standards is reasonable.


S366 12.6 FINANCIAL MANAGEMENT OF
WORKING CAPITAL










(a) Determine whether a business has a short term or long
term financial need.
(b) Recognize that increased investment in WC must bring
a return above thr CoC (Cost of Capital). Check the
“materialioty” of the iINVESTMENT in receivables and
inventory in relation to total assets; sometimes they are
more than fixed assets - and who is in control?
(c) Evaluate past performance in relation to the industry
averages; then forecast the future based upon
assumptions.
S367 12.6 FINANCIAL MANAGEMENT OF
WORKING CAPITAL


(d) Check the validity of assumptions underlying the
forecasts.

(e) Manage cash, receivables, inventories and payables.
Seek all alternatives and determine appropriate risk
levels before decision making, and determine
appropriate risk levels before decision making.

(f)





Ensure that solutions to immediate short term problems
will not create even bigger long term problems in the
future.
S368 12.6 FINANCIAL MANAGEMENT OF
WORKING CAPITAL









[g) Keep relationships and alternative sources of finance
continually open as "Life lines" against possible disaster.
(h) Avoid unlimited rapid expansion which leads to
excessive risk of failure ... recognize the stages to
move from:
1.
2.
3.
4.
Maximising sales
Maximising net profits
Maximising cash flow
Maximising SVA ...
S369 12.7 CONCLUSIONS








(a) Careful diagnosis must determine whether financial
problems are short or long term.
(b) Use the past for diagnosis but insist also on future
forecasts of cash and funds, income statements and
balance sheets; but always check the underlying
assumptions.
(c) Seek all seven alternatives available before developing
financial policies at appropriate risk levels.
S370 12.7 CONCLUSIONS
(continued)







(d) Good relationships with banks, suppliers, customers,
shareholders. etc. facilitate effective financial
management.
(e) Creative accounting of financial statements is easy
despite auditing standards etc. Be particularly skeptical
about deferred assets, contingent laibilities, or profits
and losses charged to reserves.
S371 12.7 CONCLUSIONS
(continued)




(f)
Different financial statements are prepared for different
purposes bank, tax and management.
(g) Consolidated accounts are vital to evaluate companies
with major investments in subsidiaries.
S372 12.7 CONCLUSIONS
(continued)

(h) Financial management seeks not merely profit but an
increase in the long term value and (continuing)
financial health of the business.

(i)
Audited statements are neither true nor fair, but they
should be useful.
(i
Appreciate that all financial data is an estimate and so
avoid excessive pseudo-accuracy concentrate on
materiality (... “coconuts: ,,,)






S373 12.7 CONCLUSIONS
(continued)



(k) Financial management is essentially a creative
activity involving knowledge, skills and above all
appropriate attitudes.




(1) Recognize that short term financing is for
normal operations, but long term financing
problems may require outside specialist assistance.
S374 12.7 CONCLUSIONS (continued)







(m) Manage the cash effectively; make it move quickly;
don't let it lie idle earning nothing; control the timing of
the cash flows; no business ever failed because of too
little inventory!
(n) ApprecIate that all financial problems are essentially
problems of timing and human relationships not merely
technical analysis.
S375 12.7 CONCLUSIONS Continued)








(o) Financial management language and concepts are
particularly effective when combined with intuitive
business skills..
(p) To avoid financial creative accounting, set clear
financial policies as to how accounting principles
may be used and may not be abused.
(q) Only ONE large financial mistake is needed to ruin
years of good financial management
S376 12.7 CONCLUSIONS
(continued)



(r) "Materiality" is the key concept of financial
management .... worry about the big things ... the
coconuts" ... leave the "peanuts" ...!

(s) Watch out for unexpected contingent liabilities from:
FOREX, legal and environmental issues etc. Be careful
with "derivatives" unless you ... fully understand them ...
and are lucky too ...

(t)





Watch out for "off-balance sheet financing" with
extensive special leasing obligations as the cost of
improving the E:D ratio.
S377 12.7 CONCLUSIONS
(continued)







(u) Always do a "PFD" before actually implementing major
decisions ...
(v) Benchmark to set better WC mnanagement standards you may be amazed by what some other companies
have accomplished so, eaily ...
(w) Recognize the key financial management objective of
EVA/SVA for which WC is one of the key “drivers”.
S378 12.7 CONCLUSIONS
(continued)








(x) Many companuies control investment in fixed assets
very rigorously but seed to regard increased investment
in working capital as a “natural result of doing business”
... s o ... MANAGE the WC or it will manage itself ...
very badly ....
(y) Appreciate that all financial data is an estimate and
so avoid excessive “pseudo-accuracy “ - concentrate
on materialty (coconuts not peanuts)
S379 12.7 CONCLUSIONS
(continued)







(z) Use Dupont charts to “decompose” ROA (Return on
Assets) into its m,ain components ... and help EVERY
MANAGER to “OWN” the Working Capital Management
problem ... and ... finally ... research the INTERNET and
read the daily ... WSJ ...
Wall Street Journal - to keep up with new ideas and
developments ... in financial managment ...
S380 12.8 LEARNING PATTERNS
1. EVA
SVA
S381 12.8 LEARNING PATTERNS (continued)
2. CASH FLOW
OPERATING CASH
FLOW
S382 12.8 LEARNING PATTERNS (continued)
3. SEVEN
EI
PFD
S383 FINAL NOTES

This ends our AGL program; one of a five part series.:
•
•
•
•
•




AGL 1
AGL 2
AGL 3
AGL 4
AGL 10
-
Accounting Reports
Cost Control
Planning and Budgetary Control
Capital Investment Analysis
Management of Working Capital
Some of the programs are now available in several EEC
languages. Similar AGL programs in Business Policy and in
Inter-cultural Communication are being used by major
international companies.as
S384 FINAL NOTES (continued)








We hope ithe AGL experience has inspired you to
develope your skills by practical application.
Thank you for your interest and hard work. Keep ASS
glossary handy as a reference for accounting language.
and read the WSJ (Wall Street Journal) every day ...
We hope that you have enjoyed the AGL experience and
that it motivates you to read widely in finance and
accounting and to continue your studies in the future.
S385 FINAL NOTES (continued)









Now reinforce your learning from the program by following
the LRT (Learning Recall Tape) routine, as explained by the
organizer, during the days following completion of the
AGL program.
Then please send the Final Feedback Summary on day 28,
by fax to the Organizer, or to Dr. R.G.A. Boland at:
33 50 49 89 82 , who responds to all AGL questions
and who can suppply the latest versions of learning
materials in various languages.
S386 FINAL NOTES (continued)


We trust that you have found AGL to be both "efficient"
(doing things right) and "effective" (doing the right things).


Thank you for being a member of the program.
AGL