financial concepts for business management

Copyright 2021. All rights reserved.

Financial concepts for business management

เน้ือหาข้อมูลท่ีจะปรากฏต่อไปน้ี ถูกจัดให้มีขึ้นเพื่อวัตถุประสงค์ในการอบรมออนไลน์ e-Learning เท่าน้ัน และเป็นงานวรรณกรรมอันมีลิขสิทธิ์ของ [*] ซึ่งได้รับความคุ้มครองตามกฎหมายว่าด้วยลิขสิทธิ์ การน าไปใช้เพ่ือวัตถุประสงค์อื่นนอกจากท่ีระบุไว้ข้างต้น รวมถึงเพื่อวัตถุประสงค์ในทางการค้าหาก าไรจะกระท ามิได้

รศ. ดร.คณิสร์ แสงโชติ *ภาคการธนาคารและการเงิน คณะพาณิชยศาสตร์และการบัญชี จุฬาลงกรณ์มหาวิทยาลัย

2Copyright 2021. All rights reserved.

Course Outline

Economics of financial decisions

How to manage cash flow

How to measure business performance

Recap

อาจารย์ไผ่ รศ. ดร.คณิสร์ แสงโชติ

1

2

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Suggested pre-coursesACC1001: The Role of Accounting for Business ACC1002 : Accounting for Decision Making


Part 1

Economics of financial decisionsเศรษฐศาสตรก์บัการตดัสินใจทางการเงิน


The financial decisions of a business.

Accumulate

Financial Capital

(debt and equity)

Invest in

Productive Capital

Operate

Business

Allocate Profits

1. Investment evaluation

2. Fundraising

3. Performance evaluation

4. Financial risk

management

6. Further fundraising

Retained

earnings

Dividends

Business plan

5. Payout


What is the value of a bottled water?


Opportunity Cost (ค่าเสียโอกาส)

• Every opportunity is compared against the next best available opportunity.

• Rational decision makers choose what is best for themselves.• The value of each opportunity can be subjective and compared in terms of money.

7Copyright 2021 . All rights reserved.

People don’t like risk, so rewards are necessary to attract investment.


Economics can help us understand risk and reward.

• High risk investment opportunities require high returns.• People who are better at handling risk see high-risk investment as

opportunities.• As people become better at managing risk, competition increases, and as

competition increases, profitability decreases.

risk and return is dynamic, and competition affects profitability.Key takeaway :


FROM WHOM HOW

Two important questions in fundraising: from whom and how?

➢ Family➢ Friends➢ Fools (angels)➢ Financial system

(banks, capital markets)

Debt➢ Loans, promissory notes,

debentures➢ First claim, fixed claim

Equity➢ Preferred stock, common stock,

retained earnings➢ Residual claim


Information asymmetry makes fundraising a difficult task.

Source: Pixabay


Investor risk perception may not the same as yours.

• Banks will ask for business plan, track record (e.g. financial statements, credit history) and collateral.

• IPO listing requires good internal controls (e.g. reputable auditors, independent board members) and information disclosure.

• Early-stage fundraising requires founders to have significant ownership in the company and close working relationship.

trust can be increased by information disclosure and providing commitments.Key takeaway :


Part 2

How to manage cash flowการบริหารจดัการกระแสเงินสด


Cash is King

• Investment is cash expenditure required for future growth.• Cash flow can be used to repay investors, e.g. interest, loan repayment,

dividends. This is also known as “free cash flow”. When it is negative, it means you need to raise additional funds.

• Thorough cash flow forecasts can greatly help business planning.

Cash Flow = Profit – Investment= Revenue – Expenses – Investment


Source: Pixabay

Credit sales are also investments.


Cash 1,020,000 Accounts payable 0

Accounts receivable 0 Shareholders’ equity 1,000,000

Inventories 100,000 Retained earnings 120,000

Total 1,120,000 Total 1,120,000

Scenario 1: cash purchase, cash sales

Cash balance

Beginning cash 1,000,000

Inventory purchase (800,000) 200,000

Sales 1,000,000 1,200,000

SG&A (150,000) 1,050,000

Taxes (30,000) 1,020,000

Inventory AccountingPurchase: 800,000Sold: 700,000Remaining: 100,000

Example:• 0.8m purchase (at cost)• 1m sales• Start with 1m cash• SG&A all cashSales 1,000,000

COGS (700,000)

Gross profit 300,000

SG&A (150,000)

EBIT 150,000

Taxes (30,000)

Net profit 120,000


Cash 20,000 Accounts payable 0

Accounts receivable 1,000,000 Shareholders’ equity 1,000,000


Total 1,120,000 Total 1,120,000

Scenario 2: cash purchase, credit sales

Sales 1,000,000

COGS (700,000)


SG&A (150,000)

EBIT 150,000

Taxes (30,000)

Net profit 120,000

Cash balance


Inventory purchase (800,000) 200,000

Sales 0 200,000

SG&A (150,000) 50,000

Taxes (30,000) 20,000


Example:• 0.8m purchase (at cost)• 1m sales• Start with 1m cash• SG&A all cash


Cash 1,820,000 Accounts payable 800,000



Total 1,920,000 Total 1,920,000

Scenario 3: credit purchase, cash sales

Sales 1,000,000

COGS (700,000)


SG&A (150,000)

EBIT 150,000

Taxes (30,000)

Net profit 120,000

Cash balance


Inventory purchase 0 1,000,000

Sales 1,000,000 2,000,000

SG&A (150,000) 1,850,000

Taxes (30,000) 1,820,000


Example:• 0.8m purchase (at cost)• 1m sales• Start with 1m cash• SG&A all cash


Current Assets- Cash and equivalents- Accounts receivable- Inventories

Non-Current Assets- Net fixed assets- Intangible assets

Current Liabilities- Accounts payable- Accruals- Overdraft- Current portion of

long-term loans

Long-term debt- Bank loans

Shareholders’ equity- Preferred stock- Common stock- Retained earnings

Net Working Capital- Adjusted CA minus

adjusted CL

Net Long-Term Capital- Net fixed assets- Intangible assets

Productive Capital Financial Capital

Accounting View Managerial View

Debt- Overdraft - Current portion of

long-term loans- Bank loans

Equity- Preferred stock- Common stock- Retained earnings


Cash 1,020,000 Accounts payable 0



Total 1,120,000 Total 1,120,000

Scenario 1: cash purchase, cash salesNWC = 1,020,000+100,000= 1,120,000

Cash 20,000 Accounts payable 0

Accounts receivable 1,000,000 Shareholders’ equity 1,000,000


Total 1,120,000 Total 1,120,000

Cash 1,820,000 Accounts payable 800,000



Total 1,920,000 Total 1,920,000

Scenario 2: cash purchase, credit salesNWC = 20,000+1,000,000+100,000= 1,120,000

Scenario 3: credit purchase, cash salesNWC = 1,820,000+100,000-800,000= 1,120,000


Basic working capital management

Cash Cycle = AIP + ACP - APP

Avg. Inventory Period (AIP) Avg. Collection Period (ACP)

Avg. Payment Period (APP)

• Working capital management is about optimizing short-term investment and cash on hand.

• Minimizing working capital is not always the best strategy as it can affect profitability of the business.→Tradeoff between cash and profit.More details at microlearning on Working Capital Management

Cash Cycle

Longer = slower cash inflow

Longer = slower cash outflow


Investment: outlay of time, money, efforts today for future benefits.

Source: FreeImagesLive


Most businesses will begin with negative cash flow as they invest.

Source: Corporate Finance Institute


Two perspectives of cash flow management strategies

1. Change timing of cash inflows and outflows• Cash cycle management (e.g. trade credit policy and inventory management)• Rent rather than buy (e.g. sharing economy, XaaS)• Good for cash-constrained businesses but can reduce profitability.

2. Reduce cash outflows in general• Rightsizing by choosing optimal scale of investment

(e.g. inventory management, real estate footprint).• Eliminate expenses by cutting out unnecessary items.• Good if they are unnecessary but may affect long-term growth potential.


But what is an expense and what is an investment?

Are R&D, advertising and customer acquisition costsexpenses or investments?

More details at ACC1001: The Role of Accounting for Business


Cash is King, but not always.

• Businesses have their life cycle. In the long-run, cash flow should be generated from profits.

• Optimize cash flow by cash flow timing and cash outflow reduction strategies and be aware of profit / cash flow tradeoff.

• Labelling of items as expense versus investment can affect the psychology of business decision-making.

Cash Flow = Revenue – Expenses – Investment


Part 3

How to measure business performanceวิธีวดัผลการด าเนินธรุกิจ


Common financial ratios to measure profitability.

More details at ACC1002 : Accounting for Decision Making

ROE

ROA

NPM

TAT

Return on equity

Return on assets

Net profit margin

Total assets turnover

Net incomeTotal equity

Net incomeTotal assets

Net incomeSales

SalesTotal assets

= =

= =

1

2

3

4


Common financial ratios to measure profitability.

ROAReturn on assets

Net incomeTotal assets

= x

DuPont Analysis

SalesSales

Net incomeTotal assets= x Sales

Sales

= xNPM TATNet profit margin Total assets turnover


Sales 1,000 100.0%COGS (650) -65.0%Gross profit 350 35.0%SG&A (150) -15.0%EBIT 200 20.0%Interest 0 0.0%Taxes (40) -4.0%Net profit 160 16.0%

Cash 50 Accounts payable 140Accounts receivable 150 Bank loan 0Inventories 200Shareholders’ equity 1,700Net fixed assets 1600 Retained earnings 160Total assets 2,000 Total L&E 2,000

Sales 1,000 100.0%COGS (650) -65.0%Gross profit 350 35.0%SG&A (150) -15.0%EBIT 200 20.0%Interest (100) 0.0%Taxes (20) -2.0%Net profit 80 8.0%

Cash 50 Accounts payable 140Accounts receivable 150 Bank loan 1,250Inventories 200Shareholders’ equity 530Net fixed assets 1600 Retained earnings 80Total assets 2,000 Total L&E 2,000

ROE = 160 / (1,700+160) = 8.6%ROA = 160 / 2,000 = 8%NPM = 160 / 1,000= 16% TAT = 1,000/2,000= 0.50x

Case 1: no debt Case 2: uses debtROE = 80 / (530+80) = 13.1%ROA = 80 / 2,000 = 4%NPM = 80 / 1,000= 8% TAT = 1,000/2,000= 0.50x




NOPAT = 200 – 20%x200= 160

Case 1: no debt Case 2: uses debt(but assume no debt)

Step 1: NOPAT (net operating profit after tax) measures operating profitability.

NOPAT = 200 – 20%x200= 160


Cash 50 Accounts payable 140Accounts receivable 150 Bank loan 0Inventories 200Shareholders’ equity 1,700Net fixed assets 1600 Retained earnings 160Total assets 2,000 Total L&E 2,000

Cash 50 Accounts payable 140Accounts receivable 150 Bank loan 1,250Inventories 200Shareholders’ equity 530Net fixed assets 1600 Retained earnings 80Total assets 2,000 Total L&E 2,000

Case 1: no debt Case 2: uses debt

Step 2: Managerial view reflects capital required and the sources.

Net working capital 260 Debt 0Net long-term capital 1600 Equity 1,860Invested capital 1,860 Total D&E 1,860

Net working capital 260 Debt 1,250Net long-term capital 1600 Equity 610Invested capital 1,860 Total D&E 1,860

Productive capital Financial capital Productive capital Financial capital




ROIC = NOPAT / capital= 160 / 1,860= 8.60%

Case 1: no debt Case 2: uses debt

Step 3: combine for alternative measure of profitability.

Net working capital 260 Debt 0Net long-term capital 1600 Equity 1,860Invested capital 1,860 Total D&E 1,860

Net working capital 260 Debt 1,250Net long-term capital 1600 Equity 610Invested capital 1,860 Total D&E 1,860

Productive capital Financial capital Productive capital Financial capital

ROIC = return on invested capitalROC = return on capitalROI = return on investment

ROIC = NOPAT / capital= 160 / 1,860= 8.60%


ROICNOPAT/Capital

Profit MarginNOPAT/Sales

Capital Efficiency

Sales/Capital

Revenue

Cost

Net Working Capital

Net Long-Term Capital

ลงทุนนอ้ย...เมื่อเทียบกับรายได้

ก าไรดี...หลังหักรายจ่าย

มีอนาคต...ตลาดมีขนาดใหญ่

8.6%16%

0.54x

Sales enhancementPricing optimization

Procurement cost reductionProcess optimizationOverhead cost reductionFixed / variable cost optimization

Utilization managementScale optimization

Net working capital management


How much profits is good enough?

• Setting too high expectation means you miss out on profitable investments, and too low expectation means you are better off investing in something else.

• Opportunity cost of capital should measure what is “fair”.• Investor risk perception may not the same as yours. What is fair for you may not

be the same for other people.• Greater ability and willingness to take on risk reduces expectation and hence

profitability.→ ความเสี่ยงเหมาะสม


Recap

Financial concepts for businessmanagement


Recap

• Economics of financial decisions: opportunity cost and decision-making, risk and reward, competition and profitability, information asymmetry and trust

• Cash flow = profit – investment :cash flow / profit tradeoff, expense / investment classification

• Profitability equation : ลงทุนน้อย ก าไรดี มีอนาคต ความเสี่ยงเหมาะสม


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