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AGL I0 - FIN. MGT. WORKING CAPITAL FOR MANAGERS - 2/3 DAYS OF INTENSIVE LEARNING IN GROUPS

COURSE DIARY ( RETAINED) ROUGH COPY ONLY MARCH 2006 FOR TYPING CONVERSION TO PROFESSIONAL STANDARD. DIARY, WORKPACK 1 & WORKPACK 2 PROVIDED HERE FOR REVIEW. KEY COURSE GUIDE WITH CASE SOLUTIONS AND QUIZ - AVAILABLE ON REQUEST. ENGLISH FRENCH GERMAN For further information: Dr. R.G.A. Boland Chemin de la Garenne

Prevessin-Moens 01280 France. [email protected] Copyright: RGAB 2017/1

DIARY

AUTOMATED GROUP LEARNING(AGL)

NO. 10 - FINANCIAL MANAGEMENT OF WORKING CAPITAL

COURSE DIARY(Retained)

NAME .................................................

Copyright: RGAB 2017/3

No copies of without written permission.

INDEX

Item Page No

1.Important note on the learning 3

2.Summary lecture - Part I 4

3.Summary lecture - Part II 11

4. Bill Brown - questions 19

5.Action plan for the future 22

6.Financial shorthand 23

7.Some ideas to think about 24

8.Local case series 25

Appendices:

A.Registration B.First Feedback SummaryC.Second Feedback SummaryD.Quiz Answer SheetsE.GlossaryF.Optional Quiz

1. - IMPORTANT NOTE ON THE LEARNING

1.AGL is specially designed as an intensive basic finance course in five parts, for the manager with relatively little or no formal financial training or experience. Some parts may be challenging even for the experienced financial director with some years of experience.

2.AGL creates a very special group learning environment that is new to the group members. It is a highly effective but challenging learning experience. Members should therefore try to keep an "open mind" on their reactions until the second day of the program.

3.Members can and do solve ALL the problems and answer ALL the questions, from the special materials provided and the experience of other members of the group.

4.The Organizer is not a teacher. The Organizer's job is to help members to:

a.Understand the AGL learning systemb.Use efficiently and effectively the special learning

materials and the group experiences.c.Resolve administrative problems

5.The Organizer does not usually respond directly to technical financial questions, since the learning is better when members help each other. The critical skill of the Organizer is to HELP the participants to WORK TOGETHER to resolve successfully, all questions arising. Thus by the end of the program EVERY QUESTION is resolved!

6.Since the same learning materials are used for both the two day and the three day versions of the course, the Organizer will occasionally outline differences in the timing of some parts of the work.

7.Members should not be disturbed by references to ECU since the AGL materials are used extensively in many different countries.

8.Since 1970 over 50,000 executives have successfully completed AGL programs throughout the world.

9.We hope you too will find AGL stimulating, efficient and effective for you!

2. - SUMMARY LECTURE - PART I

11.1FINANCIAL MANAGEMENT

(a)Deals with four major problems: 1.Size - what size should the firm be?

2.Growth - what rate of growth of sales, assets, profits. etc.?

3.Financing - how should the firm be financed, and at what risk?

4.Investment - what kind of assets should be acquired, and at what rate?

(b)Financial health of the business depends upon both its resources, the environment in which it operates and its financial policies. Financial management is dynamic and depends upon SUSTAINABLE flows of cash and funds not a static situation.

(c)Most important is ... CASH FLOW and SURVIVAL ... to increase the long term value of the business for ALL of the "stakeholders": customers, shareholders, employees, managers, suppliers, banks, communities, government, trade unions, environmental groups etc.

(d)To achieve EVA (Economic Value Added), then in each division of the company:

OP/NAE times 100% must exceed CoC

OP = Operating profit after taxNAE = Assets less current liabiltiesCoC = Cost of Capital

(e)With EVA, company management can achieve SVA (Share Value Added). In quoted companies, shareholders may be powerful pension funds, insurance companies and mutual funds, who are highly skilled in finance; they may require Company Management to provide both dividends and increased share value ... or move over ... thus in 2005, SVA (Share Value Added) is

becoming a key financial objective!

11.2OBJECTIVE. METHOD AND SKILLS

(a)Objective - increase the long term value of the business (EVA - Economic Value Added) and to achieve SVA (Share Value Added).

(b)Method - raise money and use it effectively to achieve standards of financial performance

(c)Skills - timing to balance risk and reward

11.3SHORT TERM/LONG TERM FINANCING

(a)Short term finance used for: cash, receivables, inventory. prepayments, etc.

(b)Sources of short term finance: payables, banks, factoring, leasing, or reduction of the need for cash, receivables and inventory.

(c)Long term financing deals with long term assets and the financing of those assets by proportions of equity and debt.

11.4FORECASTING

(a)Cash forecasting used to provide cash resources up to one year ahead; concentrate on the duration and peak need within: weekly, monthly, yearly, seasonal, etc. periods.

Distinguish:

1.CF - Cash Flow - net profit plus depreciation

2.EBIT - Earnings before interest and taxes

3.OCF - 0perating Cash Flow - cash flow plus interest, less working capital changes less capital expenditure. Often called "Free Cash Flow" because it is cash available for new profitable investment opportunities.

(b)Funds flow reveals the key financial decisions of past and future.

Sources of funds: profit, depreciation, new equity and long term loans.

Uses of funds: fixed assets, dividends, repayment of long term loans and working capital.

Net working capital is: current assets less current Liabilities.

(c)Forecasted income statements and balance sheets reveal future financial health.

(d)Materiality is the key!

11.5BANK RELATIONSHIPS

(a)Relationship with the banker is key to the management of working capital.

(b)Criteria for bank loans: person, purpose, profitability, payback, and then security.

(c)Many alternatives available to bank finance (they may cost more): factoring, deposits. loans, leasing. stretching creditors, other banks, etc.

(d)Old bank customers normally get better treatment than new ones Cultivate a relationship with your bank manager.

11.6FINANCIAL ANALYSIS

(a)LAPP system of financial analysis: liquidity (and gearing), activity, profitability, potential.

(b)Need to forecast cash and funds and provide adequate flows to finance assets acquired and required.

(c)Be creative in seeking and using financial alternatives.

(d)Avoid "emotional investment"

11.7CONTROL OF WORKING CAPITAL

(a)Frequent (monthly) reporting with reliable financial statements, to ALL managers (marketing, production, finance etc.) so that they all "own" the working capital. Dupont charts may help managers to recognize how they an impact financial management.

(b)Regular and effective forecasting of peak and duration of cash needs. Timely financial data. Forecast forward the income statements, balance sheets, cash and funds and then evaluate risk.

(c)Never go to the banker when you need money; go when you don't need money and arrange to have it available when you want it. ("I need 500,000. Can you handle it or should I deal directly with your general manager?")

11.8CONTROL OF RECEIVABLES

(a)Make frequent aging of receivables to identify slow payers and assess DOS (days of sales) performance.

(b)For external causes: visit selected customers to identify the reasons for delay which may include: invoice errors, order errors, late credit note claims, non-delivery, quality issues, incorrect documentation etc.

(c)For internal causes: investigate, slow invoicing, pricing complexities and errors, credit note delays, shipment errors, poor expediting, discount errors, failure to drop poor accounts etc.

(d)Benchmark with other companies, in collaboration with

marketing, production, quality, finance managers to jointly "own" the problem, set targets and monitor progress.

11.9CONTROL OF INVENTORY

(a)Make frequent aging of inventories to identify slow moving high value items and to assess DOP (days of purchases) and DOS (days of sales) performance.

(b)For external causes: visit selected suppliers to identify the reasons for high inventory which may include: excess order quantities, long delivery lead times, poor standardization, lack of JIT systems etc.

(c)For internal causes: investigate delayed usage, excess storage, poor standardization, poor design specification, failure to control high value items daily, excess storage space/costs, lack of JIT systems, poor supplier selection etc.

(d)Benchmark with other companies, in collaboration with production, marketing, quality, finance managers to jointly "own" the problem, set targets and monitor progress.

11.10SIMPLIFIED - COST OF CAPITAL, EVA AND SVA

(a)These are all complex concepts. In very simple terms, the Cost of Capital (CoC) is the WEIGHTED (E:D) average after-tax cost of raising long term funds for the business.

(b)Such funds can be either from long term debt (liabilities) or equity. Normally debt (say 8%) costs less than equity (say 16%).

(c)Hence the E:D ratio set by Management (2:1 or 1:1 or 1:4) can affect the average Cost of Capital (say 13.3% or 12% or 9.3% - can you check these computations?).

(d)EVA (Economic Value Added) is produced when the net assets employed (A-CL) produce an OP (operating profit after tax, say 11%) which is greater than the Cost of Capital (say 9.3%).

(e)Valuation of a company or share, relates not to profits but to future cash flows. It may be simply computed as:

V= OCF/(r - g), where:

OCF= Operating Cash Flow (100)r = Cost of Capital (say 9.3%)g = Growth Rate (say 5.3%)V = 100/(0.03 - 0.53) = 250

(f)SVA (Share Value Added) is produced when the sustainable cash flows and dividends lead to increased short term and long term share value, as related to the share index by the Beta coefficient.

(g) Most companies control capital expenditure well but fail to

control investment in working capital, which is part of NVE (net assets employed) and therefore critical to achieving EVA and EVA.

11.11DIAGNOSIS AND DECISION

(a)Recognize that every industry and trade and country has a special tractional environment and standards of financial management.

(b)Knowledge, attitudes, and skills force the financial manager to be creative.

(c)Diagnosis helps the financial manager to distinguish short term from long term problems.

(d)Ensure that short term financial policies arc consistent with long term goals.

(e)Provide for both short term and long term financial health at appropriate risk levels.

(f)Manage the WC or it will manage itself - very badly!!

(g)Always seek the seven alternatives before making a financial commitment!

Note: Past attitudes may sometimes deter new financial policies for reducing assets or increasing sources of finance.

11.12LEARNING PATTERNS - REVIEW

1.FINANCIAL MANAGEMENT

S (size), G, F & I .... CASH FLOW .... EVA/SVA

2.COST OF CAPITAL

WEIGHTED AVERAGE COST OF EQUITY AND DEBT (LIABILITIES)

HURDLE RATE FOR EVA

3.OPERATING CASH FLOW

NET PROFIT PLUS DEPRECIATION PLUS INTEREST LESS CHANGES IN WORKING CAPITAL AND CAPITAL EXPENDITURE

PROVIDES CASH FOR: NEW PROFITABLE INVESTMENTS

INCREASED WC IS AN INVESTMENT!

4.EVA/SVA

OP/NAE TIMES 100% - MUST BE GREATER THAN CoC

VALUE = OCF/(r - g)r = Cost of Capitalg = Growth Rate

11.13INSTRUCTIONS (20 minutes)

(a)Reassemble in SG

(b)Review the Summary Lecture for Part I in the course diary and discuss questions arising

(c)To get the best out of Part II of the program, try to complete ALL of the following homework tonight:

1.Read the articles provided.

2.Review the text book.

3.Do the optional exercise in the course diary and check the answers

4.Review your notes for Part I of the course and list outstanding questions to be resolved in Part II

(d)Would you please return the workpack to the organizer now

NOTE OF APPRECIATION

Thank you for working so hard today.

We hope the AGL experience is "efficient" (doing things right) and

"effective" (doing the right things) and that it is rewarding for you.

From tomorrow ... it's downhill all the way ... !!

3. - SUMMARY LECTURE - PART II

12.1OBJECTIVES OF THE COURSE

(a)Understand accounting language and concepts of financial management.

(b)Recognize the need for financial forecasting of cash, funds, income statements and balance sheets. income statements

(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

12.2FINANCIAL MANAGEMENT NEEDS

Key objective is to increase the long term value of the business (the "Market Capitalization") with EVA and SVA.

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. Limited EI (emotional investment) so that all alternatives may be fairly evaluated.

12.3FINANCIAL STATEMENTS

Objective is to be useful and credible.

Follow 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 ...

12.4AUDITORS

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.

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 manipulation.

12.5ACCOUNTING 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.

With inflation of greater than 30% per annum, financial statements become unreliable and working capital management is critical to survival.

12.6FINANCIAL 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 the CoC (Cost of Capital). Check out the importance of receivables and inventory to the total assets employed; sometimes they are more than the fixed assets!!

(c)Evaluate past performance in relation to the industry averages; then forecast the future based upon assumptions.

(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.

(f)Ensure that solutions to immediate short term problems will not create even bigger long term problems in the future.

[g)Keep relationships and alternative sources of finance continually open as "Life-line" against possible disaster.

(h)Avoid unlimited rapid expansion which leads to excessive risk of failure ... recognize the stages to move from:

1. Maximizing sales2. Maximizing net profits3. Maximizing cash flow4. Maximizing SVA ...

12.7CONCLUSIONS

(a) Careful diagnosis must determine whether financial problems are short or long term, and how they relate to: OCF, CoC, EVA and SVA.

(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 alternatives available before developing financial policies at appropriate risk levels.

(d)Good relationships with banks, suppliers, customers, shareholders. etc. facilitate effective financial management.

(e)Manipulation of financial statements is relatively easy, despite accounting principles, auditing standards etc. Be particularly skeptical about deferred assets, contingencies, or profits and losses charged to reserves.

(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.

(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.

12.7CONCLUSIONS (continued)

(k)Financial management is essentially a creative activity involving knowledge, skills and above all appropriate attitudes.

(l)Recognize that short term financing is for normal operations, but long term financing problems may require outside specialist assistance.

(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 human relationships not merely technical analysis.

(o)Financial management language and concepts are particularly effective when combined with intuitive business skills.

(p)To avoid financial manipulation, 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.

(r)"Materiality" is the key concept of financial management .... ... worry about the big things ... the "coconuts" ... and not the "peanuts" ...!

(s)Watch out for unexpected contingent liabilities from: FOREX, legal claims, 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

leasing obligations as the cost of an improving the E:D ratio.

(u)Always do a "PFD" before actually implementing major decisions ...

12.7CONCLUSIONS (continued)

(v)Benchmark to set better WC standards - you may be surprised what other companies have accomplished.

(w)Recognize the key financial management objective of EVA/SVA of which working capital is one of seven drivers.

(x)Many companies control investment in fixed assets very rigorously but seem to regard increased investment in working capital a "natural result" of doing business, so manage the working capital or it will manage itself ... very badly.

(y)Appreciate that all financial data is an estimate and so avoid excessive pseudo-accuracy - concentrate on materiality (coconuts not peanuts!).

(z)Use Dupont charts to "decompose" ROA (Return on Assets) into its main components and help EVERY manager to "own" the problem of working capital management. For each manager OP/NAE must exceed CoC!!

12.8LEARNING PATTERNS

1.EVA/SVA

2.OPERATING CASH FLOW

3.COST OF CAPITAL

4.SEVEN & EI & PFD

FINAL NOTE

This ends our AGL program; one of a five part series:

AGL 1 - Finance for Non-Financial ManagersAGL 2 - Cost ControlAGL 3 - Planning and Budgetary ControlAGL 4 - Capital Investment AnalysisAGL 10 - Management of Working Capital

We hope it has inspired you to develop your skills by practical application.

Thank you for your interest and hard work. Keep the glossary handy as a daily reference for finance and accounting language.

We hope that you have much enjoyed the AGL experience and that it motivates you to read widely in finance and accounting and to continue your studies in the future. We suggest the WSJ (Wall Street Journal) every morning - as good as an MBA!!!

Be sure to reinforce your learning with the LRT (Learning Recall Tape) routine, as explained by the organizer, in the month following completion of the program. Please send us the Final Feedback Summary on day 28.

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.

RGAB7.6.05

4. - BILL BROWN - QUESTIONS

As Bill Brown, financial management consultant, please deal comprehensively with the problems brought to you by various clients: 1.ELIZA MANUFACTURING COMPANY

The 2005 financial forecasts indicate a doubling of sales but a stable inventory and a gross profit increasing from 32 to 37%. Is this a reasonable expectation? Why?

2.POTTER PRODUCTION

Financial director insists that he needs ECU 500,000 loan from the bank for working capital. What alternatives could be investigated?

3.BERTON INC.

CEO of the company is concerned with the increase in accounts receivable. List ten ideas for improvement.

4.SUTHERLAND COMPANY

Old established company has a problem with increased inventory investment. List ten ideas for improvement.

5.MARC COMPANY

Management insists that it must expand sales and can finance the expansion with low risk by moving the E:D ratio from 2:1 to 1:4 without changing the Cost of Capital significantly. Comment?

6. MERVILLE HOLDING

Marketing manager insists he can achieve increased sales WITHOUT increasing receivables and inventory substanitally. How could he do it?

7.PROFELD COMPANY

Company needs more credit from suppliers to provide substantial financing and requests guidelines as to how creditors may be "stretched".

8.ZONDI COMPANY

Company's profit is low this year and management seeks to manipulate it higher to avoid complaints from the shareholders. What methods could the company consider which are in accordance with accepted accounting principles?

9.OUALO COMPANY

Due to sale of an investment, the company suffered major loss this year which will upset shareholders and cause the share price to fall. No capital reserve available but company buildings are undervalued. What can be done to avoid showing a loss this year?

10.WILLIAMS BANK

Client with large loan sends monthly reports to its bank six to eight weeks late because "the auditors are in. and no information is available for two months". Reasonable?

11.HOLMES WATSON COMPANY

Auditor insists that no one in the company should use green ink and, further. that company must make 27 small adjustments each for under ECU 100 so that the books are "totally accurate". What can management do?

12.TIM TOM COMPANY

Profit will be well over budget and company wishes to reduce the profit disclosed this year, so as to keep "a little in hand for the future". Chief Executive suggests acquiring another company which is losing money and then consolidating the figures. Is this acceptable? What alternatives available?

13.GILLIE GOLF COMPANY

Bank requires company to submit financial forecasts to justify application for substantial bank loans. Company insists that the position is so uncertain that forecasts would not be useful. What is your opinion

14.LATE CHRISTOPHER COMPANY

Company owned by its executives seeks a small loan from the bank. Bank insists that in addition to normal company security. each executive should sign an unlimited indefinite personal "joint and several guarantee" to me bank for the loan. Is this reasonable? Should they agree?

15.REES DEVELOPMENT INC

A bank loan of ECU 100.000 was requested but the bank refused. Chief Executive suggests changing banks immediately! What difficulties and opportunities would this give my company?

16.GLADSTONE BAG COMPANY

Old established company has a policy of paying all suppliers before time and never borrowing anything from anyone. Management is convinced that this is the way to do business and good financial management. Do you agree?

17.DOUGLAS COMPANY

Banker with whom company had an account in credit balance for many years responds to request for a small loan by immediately demanding security. What to do? Why?

5. ACTION PLAN FOR THE FUTURE

1. WSJ?

2. Internet?

3. Publications?

4. Courses?

5. Library?

6.

7.

8.

9.

6. FINANCIAL SHORTHAND

ENGLISHOTHER LANGUAGE

A assetsAPaccounts payableARaccounts receivableBSbalance sheetCAcurrent assetsCA:CLcurrent assets:current liabilitiesCFcash flowCGScost of goods soldCGS/Icost of goods sold/inventoryCoCcost of capitalCOScost of salesCLcurrent liabilitiesDdebt (liabilities)EVAeconomic value addedEXexpensesEequity (owners equity)EBITearnings before interest and taxesFAfixed assetsGPgross profitIinventoryIASInternational accounting standardsISincome statementLliabilitiesLAPPliquidity, activity, profitability, potentialLTLlong term liabilitiesNPnet profitNWCnet working capitalOAother assetsOCAother current assets (except cash)OCFoperating cash flowOEowners equityQAquick assetsQA:QLquick assets:quick liabilitiesQLquick liabilitiesSsalesS/Asales/assetsSVAshare value addedWCworking capital

NOTE: Please note symbols are a shorthand for learning ...

7. SOME IDEAS TO THINK ABOUT

WRITE SOMETHING DOWN ON:

1.How do accounting concepts vary in different countries?

2.How reliable is a financial audit without IAS?

3.What is "creative accounting"?

4.What does a long delay in preparing financial statements indicate?

5.How to judge the reliability/creativity of a financial budget/forecast?

6.How relevant are FOREX and DERIVATIVES to working capital management? Are payables and debt useful hedges?

7.Where to get the current financial ratios for your particular industry?

8.How to judge the reliability of unaudited financial reports with such questions as: Who did it? Why? Who for? When? What assumptions? How validated? Checked by whom? Compared with what standard? What record of reliability in the past? Related to which industrial associations, banks, credit agencies?

9.How to get the best out of the Wall Street Journal?

10.How relevant are CoC and WC management to your personal business performance?

11.How to use the INTERNET (NETSCAPE, WWW, DOW, HARVARD etc.) for further study of finance?

AND THEN CHECK YOUR IDEAS WITH YOUR FINANCIAL COLLEAGUES ...

8. LOCAL CASE SERIES

Build up a record of practical WC issues that you have had to resolve:

1.

2.

3.

4.

5.

6.

APPENDIX A - REGISTRATION SHEET

PART IBasic data:

AGL:No. 10 Financial Management of WC

Date and location:

Name:

Title:

Organization:

Address, telephone, fax:

PART 2PREVIOUS BACKGROUND

Please write 1-4 lines on your relevant training and experience in the subject area of the program.

PART 3OBJECTIVES

Please complete the attached sheet: "Learner Objective Setting".

List below three objectives in your taking the program.

1.

2.

3.

PART 4QUIZ RESULTS

1. Quiz___2. Quiz___3. Quiz___4. Quiz___ 100 20 20 100

APPENDIX A - REGISTRATION SHEET

LEARNER OBJECTIVE SETTING

1.Briefly, what is your idea of a working knowledge of the subject area?

2.Briefly describe a situation you faced in the last six months which involved the subject area. How did it arise? What did you do? What was the result? What did you feel?

3.Can you now list (below) 20 technical words, relevant to the subject area, that you need to use frequently?

APPENDIX B - FIRST FEEDBACK SUMMARY

1.Basic data:

AGL: No. 10 Financial Management of WC

Date and location:

Name of member:

Title:

Organization:

Address, telephone, fax:

2.Previous background:

3.Quiz results:

1. Quiz___2.Quiz___3. Quiz___ 4. Quiz___ 100 20 20 100

4.To what extent did you achieve your personal objectives? Did anything surprise you?

APPENDIX B - FIRST FEEDBACK SUMMARY

5.Do you have any suggestions for improving the program?

6.What other programs might be useful to your company?

7.At this time, what is your overall evaluation of the program. in terms of content, presentation, administration and usefulness?

Excel. Very Good Good Fair Poor

Content

Presentation

Administration

Usefulness

Note: Please score 1 (poor) to 5 (excellent)

8. - Other comments:

Signature ........................ date ................

APPENDIX C - SECOND FEEDBACK SUMMARY

1. Basic data:

AGL: No. 10 Financial Management of WC

Date and location:

Name of member:

Organization:

2.Did you complete the LRT routine exactly as scheduled the Organizer? Could you please explain your reactions and difficulties?


3.For learning research, could you please indicate your reactions to the total AGL experience (circle YES or NO):

A1Was enough guidance, briefing and helpprovided?YES NO

A2Did the program stimulate you?YES NO

A3Did you know the learning objectives beforeyou started?YES NO

A4Do you think you achieved the learningobjectives?YES NO

A5Would you choose to learn this way again?YES NO

A6Were the materials practical and relevantto you?YES NO

B1Were the technical difficulties and shorthanduseful in your learning?YES NO

B2Would an experienced teacher have improvedthe learning environment?YES NO

B3Did you find the materials too confusingat times?YES NO

B4Were you a little embarrassed during thelearning experience?YES NO

B5Did the constraints upset you?YES NO

B6Did something disturb your learning? What was it?YES NO


4.Have you actually used what you taught yourself in the AGL? Do you feel ready now for further training?

5.How "efficient" was the AGL learning (doing things right)? Please explain.

6.How "effective" was the AGL learning (doing the right things)? Please explain.

7.Do you have any other helpful comments?

8.Would you kindly return this final feedback summary to the organizer on the 28th day after completion of the AGL program.

APPENDIX D - QUIZ ANSWER SHEETS

Name: ...................................................

Mark each correct answer with a clear "X"

1 a b c d26 a b c d51 a b c d76 a b c d 2 a b c d27 a b c d52 a b c d77 a b c d 3 a b c d28 a b c d53 a b c d78 a b c d 4 a b c d29 a b c d54 a b c d79 a b c d 5 a b c d30 a b c d55 a b c d80 a b c d




21 a b c d46 a b c d71 a b c d96 a b c d 22 a b c d47 a b c d71 a b c d97 a b c d 23 a b c d48 a b c d72 a b c d98 a b c d 24 a b c d49 a b c d73 a b c d99 a b c d 25 a b c d50 a b c d74 a b c d100 a b c d Score: /100

Note of errors for correction later:

APPENDIX D - QUIZ ANSWER SHEETS

Name: ...................................................

Mark each correct answer with a clear "X"





21 a b c d46 a b c d71 a b c d96 a b c d 22 a b c d47 a b c d71 a b c d97 a b c d 23 a b c d48 a b c d72 a b c d98 a b c d 24 a b c d49 a b c d73 a b c d99 a b c d 25 a b c d50 a b c d74 a b c d100 a b c d Score: /100

APPENDIX E - GLOSSARY

ACCOUNTING PRINCIPLES - Generally accepted accounting principles set by public accounting institutes to facilitate"fair" financial statements. Not the same as tax or company laws. Accounting principles are usually confusing and contradictory so that manipulation of financial statements is possible. Principles include: cost, consistency, conservatism,accounting period, entity, going concern, profit realization,matching, and materiality. Key principle is materiality.Changes in the principles must be noted in the financial statements.

ACCUMULATED PROFIT - Retained earnings, revenue reserve, earned surplus, surplus retained in the business. Profit of previous years accumulated in the business and not yet distributed as dividends. Often used instead of current year's income statement to charge special losses (this is poor accounting practice!) Charges to accumulated profit are not reflected in earnings per share (EPS). Not capital surplus or capital reserve.

AGENCY THEORY - Concept that Management must make the shareholders "happy" (with SVA) or at least "happier" than some take-over management. For quoted companies major shareholders (pension funds, insurance companies, mutual funds etc.) may not be "passive" and may demand EVA and SVA performance to industry standards.

ALTERNATIVES - All financial problems have alternative solutions many of which are never considered because they do not comply with the personal attitudes and values of the parties concerned. Seek all alternatives before making financial decisions.

ASSET - Valuable things owned by a business must be reasonably valued in financial statements. Excessive under/over valuation distorts financial statements and makes all financial ratios misleading.

ASSUMPTIONS - Fundamental facts about the environment which underlay all financial forecasts. Need to be skeptical to seek out alternative assumptions, evaluate their reality and possible effects. Prepare alternative financial forecasts on different assumptions to test the sensitivity of the results.

AUDITORS - Appointed to give an opinion on the annual financial statements of a company. Usually professionally qualified public accountants. Appointment depends upon the law and company regulations. Should be independent, qualified and adequately paid for effective work to acceptable auditing standards.

Anglo-Saxon public accounting firms have high professional standards. Strongly influenced by the norms of the local business community. See Qualified Report.

AUDITING STANDARDS - Professional standards for testing accounting records before giving opinion as to their fairness. Related to company law but normally more stringent. Failure to comply with auditing standards leaves the auditor liable to be sued for damages

BANK - See Commercial Bank and Merchant Bank.

BANK FINANCE - Generally short term (overdraft) loans and in theory repayable on demand". In practice banks seldom require repayment unless the account is in jeopardy; many short term loans become semi-permanent working capital for the bank's clients.- Key factor is relationship of banker with client. Criteria for a loan include: personal reputation, purpose, payback, profitability, security. Bank finance may also be long term by special agreement including restrictions on capital expenditure, dividends, mortgages, etc. Commercial banks prefer short term financing but have associates who provide every sort of financial service.

BANK RELATIONSHIP - Key to bank financing is confidence of banker in his client. Visit the banker before the need for cash arises. Never make false statements to a banker but decide how much to tell him.

BANK SERVICES - Commercial banks provide an increasing range of services from receiving deposits, making advances, custody of important documents and assets, managing investments, commercial intelligence, exchange control, import export financing, and through associates all merchant banking activities. BETA FACTOR - Relationship between change in a share price and changes in the share market index. Beta of 1.0 indicates a consistent relationship. Use in the computation of share value. BRIDGING - Finance of long term needs by short term money until it is more convenient or less expensive to raise appropriate long term finance,

CAPITAL EXPENDITURE - Technical accounting term meaning new investment in long term fixed assets, equipment, investments, etc. CAPITALISE - Technical accounting term meaning to carry forward as an asset in the balance sheet rather than charge to expense.

CAPITAL RESERVE - Capital surplus; special reserve in the equity part of the balance sheet arising from share premium or revaluation of assets, Not available for dividend but often used to write off special losses and thus provide opportunities for manipulation.

CASH - Cash in hand but mainly in the bank. Cash forecasting and planning is essential for financial management; cash is more important than profit especially in difficult times. Need to continually plan well ahead to have cash available at right time and at right price. Cheapest cash is suppliers money (once discounts have been lost) then bank finance, factoring, etc.each

becoming more expensive. Cash forecasting and control is the key to business survival.

CASH FLOW - General term meaning cash "throw off" computed as net profit plus depreciation. Also used to mean cash forecast, Cash flow "drivers" are: trading profit, sales growth, WC management, fixed asset management and tax rates. Distinguish:

1.CF - Cash Flow - net profit plus depreciation

2.EBIT - Earnings before interest and taxes

3OCF - 0perational Cash Flow - cash flow plus interest, less working capital changes less capital expenditure. Often called "Free Cash Flow" because it is cash available for new profitable investment opportunities.

CLEAN SURPLUS CONCEPT - Concept that all profit and losses, operating and non-operating, should be charged through the income statement of the year and not concealed by charging accumulated profit or reserves. Ensures that profit manipulation is minimized Not always followed by some major companies, but becoming compulsory in U.S.A. U.K., etc.

COMMERCIAL BANK - Normal bank taking deposits and lending shorter-term money. Not a merchant bank.

COMPANY LAW - Legal framework for companies including accounting records and disclosure in financial statements. Sets the minimum standards for disclosure in financial statements and in the long run follows accounting principles. Financial statements "in accordance with the law" may not be true nor fair. Excessive conservatism is often permitted by the law - this could be manipulation!

CONSOLIDATION - Technical accounting term for financial statements prepared for a holding company and its subsidiaries together showing all the assets. Vital to evaluate financial health of the "holding company".

CONTINGENT LIABILITIES - Possible liabilities not provided for in the financial statements e.g. financial obligations, environmental damage, legal claims etc. May be a material factor in assessing financial health of a company. See FINANCIAL INSTRUMENTS.

CONTROLS - Financial control depends upon timely and useful financial statements. Good audited statements are essential for dealings with outside parties. Difficult for the lender to control the borrower without continuous personal contact."Membership of the board" alone may not provide control.

COST OF CAPITAL - Complex concept. Simplified, the WEIGHT (E:D) average after tax cost, of financing from long term debt or equity. If debt costs say 6% after tax and equity say 12%, then with and E:D of 1:1, the average cost of capital would be say 9%. Thus for increasing EVA/SVA new investments must return more than say 9% after tax. Depends strongly upon the E:D ratio set by management. Cost of capital is the "hurdle rate" for new investment to ensure EVA; thus ALL managers should be able to relate CoC in all business activities.

COST OF DEBT - Complex concept. Simplified, the cost of debt is part of the Cost of Capital computation; it is the annual long term interest rate (after tax), weighted by the E:D ratio. See also NET DEBT TO EQUITY RATIO.

COST OF EQUITY - Complex concept. Simplified, the cost of equity is part of the Cost of Capital computation. Equity is not "free" because shareholders have expectations of dividends and SVA (added share value). Generally higher than the cost of debt. Various computation techniques available which involve the "Beta" coefficient and weighted by the E:D ratio. Most methods compute the cost of equity as: risk free rate plus a risk or growth rate.

COST OF GOODS SOLD/INVENTORY - Measure of activity. Times inventory is "turned over" in the cost of sales. Depends upon Industry norms. Excessive turnover is "over trading"; poor turnover is stagnation. CREATIVE ACCOUNTING - See MANIPULATION.

CURRENT RATIO - Ratio of current assets to current liabilities. Test of liquidity; normally strong 2:1, weak at 1:2, but depends upon the industry norms and averages in different countries. Less significant than the quack ratio or the ratio of equity: debt.

DAYS OF PAYABLES - Measure of activity and control. Number of days of purchases or cost of sales in the payables; computed as payables divided by cost of goods sold (or purchases) x 365 days. Compare with credit terms to determine if all available cash discounts are being taken; cash discounts lost are expensive money. Compare with days of receivables. Useful for forecasting.

DAYS OF RECEIVABLES - Measure of activity and control. Number of days sales in receivables; computed as receivables divided by sales x 365 days. Compare with credit terms to determine the effectiveness of credit control. Compare days allowed to receivables with days allowed by suppliers. Useful for

forecasting balance sheets and cash requirements.

DEBENTURES - Long term finance often secured on property. Debt not equity. En titled to interest not a share of the profit. Strictly a loan evidenced in writing with or without security. DEBT-CAPACITY - Ability of the company to borrow more debt because its E:D ratio is healthy. High debt-capacity encourages "take-over bids"; low debt capacity risks bankruptcy.

DECEPTION - Method of making one year's financial data appear to be "good" by choosing appropriate standards and comparing only parts of the data against standard.

dDEBT - Term used to mean liabilities. More often applied to long term liabilities. See Equity:Debt Ratio.

DEFERRED ASSET - Cost carried forward in the balance sheet as asset, justified by "matching cost to future profits'. Enables costs to be carried forward and expensed against future profits. Examples include: research and development,advertising, pre-production costs, etc. More conservative accounting treatment is to expense immediately but such costs may be carried forward when profits are low provided the costs do have a definite "future benefit". Often used to manipulate. Auditors require certification by management before they agree to deferred assets.

DERIVATIVE - Complex financial instrument to reduce risk and avoid loss. See HEDGING. DISCLOSURE - Must be adequate for financial statements to be fair, Changes in accounting principles or exceptional transactions must be disclosed. Auditor must be satisfied that adequate disclosure has taken place otherwise he "qualifies" his report.

EBIT - Earnings before interest and taxes; used to measure the reward of long term financing from equity and debt.

ECONOMIC VALUE ADDED - See EVA.

EFFECT OF EXPANSION - Sales expansion generally involves expansion of assets employed. Receivables and inventory usually increase faster than sales. Suppliers may be "stretched" to provide necessary increase in working capital. In the long term retained profits or new equity are required to finance the higher level of activity Dividends must not use up all the profits at times of expansion thus causing a cash shortage.

EMOTIONAL INVESTMENT - Biased prejudice in favor of one particular solution,project or approach to business problems. Makes more information and rational argument irrelevant. Seek alternatives early to avoid it! Highly emotional. Not objective. Do a PFD to try to avoid it.

EQUITY: DEBT RATIO - Test of liquidity and financial health. Indicates the extent to which assets are financed by owners equity or debt(liabilities). There are various way of computing the E:D ratio. A simple computation relates Equity to Total Liabilities. An alternative ratio is to relate Equity to only Long Term Liabilities.

In simple computation an E : D of 2:1 is always very 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.

Depends upon the industry averages and norms. Measures debt capacity 1. e. the ability of a company to raise more cash by debt; is a more significant measure of immediate liquidity than the quick or current ratio. Equity base is the cushion to protect the creditors against loss.

EQUITY BASE - Equity of a company including capital and reserves; "cushion" for creditors against loss. A low equity base is a high risk (high leverage), high profitability situation; a high equity base leads to a lower return on owners equity.

EVA - Economic Value Added. Financial technique for measuring performance not merely by increased profits, but by increased market value (market capitalization) of the company. The value of the business is the PV (Present Value) at the Cost of Capital (CoC) rate (%), of all future sustainable cash flows.

Value may be simply computed as:

V = OCF/(r-g), where:

OCF = Operating Cash Flow (100)r = Cost of Capital (say 9.3%)g = Growth Rate (say 5.3%)V = 100/(0.03-0.53) = 250

Economic Value Added is achieved by each division of a business, when it's: Operating Profit after tax (say 11m)/Net Assets Employed (A-CL) (say 160m-60m) times 100%, produces a return (say 11%) which is greater than the Cost of Capital (say 9.3%).

Economic Value Added is also achieved when the Operating Cash Flow (OCF) of the business is positive. OCF may be simply computed as: Net profit plus depreciation plus interest less working capital changes less "normal" capital expenditure. OCF

is often called "Free Cash Flow" because it is cash available for new profitable investment opportunities.

EVA "drivers" include: cash flow, sales growth, operatingprofit margin, tax rate, working capital, fixed assets, costof capital, growth etc.

EVA (continued) - EVA is maintained when new capital expenditures (including increase in working capital) MUST produce a return exceeding the Cost of Capital (CoC). Thus CoC is not merely a tool for finance managers; it is the "hurdle rate" for justifying investment or disinvestment of business assets, which must be known and used by ALL managers of the business (production, marketing, finance etc.) if they are to achieve EVA. See Cost of Capital.

FACTORING - Short term financing of receivables whereby factor pays the amount due from the customer immediately, and collects on trade terms from the customer May involve a range of credit and billing services. Normally more expensive money than bank finance. Justified if margins are good because increase in sales requires little increase in receivables. Not always considered financially respectable, but becoming more so!

FINANCIAL ANALYSIS - Technique for evaluating the health of accompany using forecasts of cash, funds, income statements,balance sheets and the LAPP system of financial analysis. FINANCIAL DISASTER - Need for financial planning to forecast possible disasters including: death or illness of managers,market decline, product obsolescence, technological obsolescence, economic decline, labor disputes, accounting control failures, etc. Provide for possible failure by planning to avoid excessive risk. Always do a PFD (Provision for Disaster) brain-storming to identify EI and invalid assumptions, before implementing key financial management decisions.

FINANCIAL FLOOR PLAN - Bank financing of inventory on the floor of a dealer whereby the bank loan repaid as the inventory is sold.

Financial HEALTH - Evaluation of the health of a company- in financial terms including: liquidity & gearing, activity, profitability and potential. Company should be both profitable and financially healthy. Excessive risk is not consistent with health.

FINANCIAL INSTRUMENTS - Various techniques for "hedging"(providing for) risk of loss on FOREX and interest on long term debt, including: options, futures, forward transactions, derivatives etc. May sometimes involve high risk. See CONTINGENT LIABILITIES, REFINANCING and FOREX.

FORECASTED FINANCIAL STATEMENTS - Forecast of income statements and balance sheets using: estimated sales, ratios and estimates of dividends and capital expenditure. Several years ahead may be forecast relatively easily with simple assumptions. Alternative forecasts are necessary where assumptions are doubtful. FORECASTING OF CASH - Estimates of future cash receipts and payments to determine the peak and duration of cash requirements. Often done weekly or monthly in detail for 12 months ahead to ensure cash available when required. Depends upon underlying assumptions which must be justified. May be necessary to prepare high, middle, low level estimates. Cash planning is vital for financial management.

FORECASTING OF FUNDS - Future funds flow indicating the major sources and uses of funds. Sources are normally: profit, depreciation, new long term loans and capital, sale of fixed assets. Uses are normally fixed assets, dividends, repayment of long term loans and working capital. Normally five years ahead to indicate longer term planning of finance and the management decisions. See Funds Flow.

FORECASTS - Financial estimates based upon assumptions. Includes forecasts of income statements, balance sheets, cash flows or funds flows. Vital for financial planning. If assumptions poor, need to do alternative forecasts. Key assumption is sales,

FOREX - Management of foreign exchange risk in international business transactions. May involve high risk if not controlled. Very complex instruments now available not always fully understood by non-professionals. See FINANCIAL INSTRUMENTS.

FUNDS FLOW - Source AND use of funds either past or future.

GOODWILL - Asset of a business. Excess of purchase price of a business over value of assets actually acquired. Valuation doubtful. Better written off to income statements over five years, but sometimes written off over forty years! Useful for creative accounting.

GREY MARKET - Borrowing of mainly short term financing through intercompany lending rather than the banking system. Funds often raised by lenders through bills of exchange which are discounted

on the financial markets. Grey Market borrowings tend to be "turned over" (renewed) regularly thus providing longer term finance.

GROSS PROFIT TO SALES - Ratio of gross profit to sales computed as Gross Profit/Sales x 100%. May be compared with budget, the past or industry averages to determine the causes of good or poor performance. Possible causes of poor gross profit include: inventory losses, poor purchasing, poor pricing, failure to take discounts pilferage, etc.

GUARANTEE - Undertaking by one party to pay the debt of another, if the debtor fails to pay. Banks lending to owner-operated businesses often require personal guarantees from the owners (who should attempt to limit the guarantee both in time and amount and possibly "donate" assets to wives or other parties to avoid total loss, subject to divorce). Banks use guarantors to put "pressure" on the original debtors to pay up or at least to agree to settlement terms.

HEDGING - Using financial instruments to reduce the risk of loss on FOREX and interest payments etc. Instruments include a wide variety of: options, forward transactions, futures, derivatives etc. See FOREX. I.A.S. - See International Accounting Standards.

INCOME STATEMENT - Common international name for a profit and loss account. Earnings statement.

INDUSTRY AVERAGES - Ratios indicating "normal" health in terms of: liquidity, activity and profitability for the industry. Separate figures often provided for small, medium and large sized businesses; measure of efficiency; may be misleading unless related to the actual size and type of business.

INTERNATIONAL ACCOUNTING STANDARDS - I.A.S. Accounting principles specially defined which have international acceptance as evidence of good accounting practice. Similar to GAAP. Always insist that the net profit according to national law and practice, be reconciled with I.A.S. which is more reliable measure of profitability.

INVENTORY MANAGEMENT - Control of inventory investment by getting suppliers to hold inventory, or reducing sales to reduce inventory requirements, or standardization of inventory, or stretching of payables, or Operations Research methods, etc.

LAPP - System of financial analysis including:

Liquidity & Gearing -measured by: quick ratio, current ratio, equity:debt ratio.

Activity -measured by: sales/assets, cost of goods sold/ Inventory, days of payables, days of receivables.

Profitability -measured by: gross profit/sales, net

profit/sales, net profit/owners equity.

Potential - in terms of product, market, facilities, finance and management.

LEASING - Renting of assets as an alternative to purchase. Difficult to quantify because of complex contracts and DCF computations. Major benefit is reduction of cash requirement. Some leases must be "capitalised" as asset and liability in the balance sheet; others can merely be noted. Extensive leasing may make the balance sheet misleading. All leases should be explained in the notes to financial statements. Cost of leasing is not always relevant because companies may HAVE to lease when cash is not available. DCF analysis must use loan rates rather CoC.

LEVERAGE - Extent to which long term finance includes debt rather than equity. Judge risk in relation to industry and national averages Equity:debt of 2: 1 is strong financial position and poor leverage, low risk, low profitability. Equity:debt of 1: 4 is weak financial position, higher leverage, higher risk, higher profitability.

LIQUIDATION VALUES - Value of assets when sold quickly on winding up of a business. Often less than 25% of book value since buyers tend to wait for values to fall Not related to normal trading values.

LONG TERM FINANCE - Finance by equity or debt for normally more than one year. Used to finance long term assets and also part of working capital. Need to plan long term finance by funds flow for five years ahead to determine whether the need is really short term or long term. Profits can provide an increased equity base if not withdrawn in dividend. Analysis techniques include: funds flow, and forecasted income statements and balance sheets.

MANIPULATION - Creative Accounting. Techniques for adjusting the profit of a company to achieve objectives of various parties. Methods include: deferred expense, capitalised expense, change in depreciation rates, losses charged to reserve or accumulated profit, timing special profits or losses, acquisition of profit-making or loss subsidiaries, consolidation adjustments, accruals or contingent liabilities etc. Must be in accordance with accounting principles acceptable to the auditor; conservative manipulation is often regarded as reasonable practice. Often noted in financial statements,

MERCHANT BANK - Specialist bank, often associated with a commercial bank. Provides special advice on all financial problems including long term financing arrangements. Does not normally provide overdrafts but will arrange short term finance. May take equity participation in its clients.

MORTGAGE: - Long term loan normally secured on property or other

assets.

NET DEBT TO EQUITY RATIO - Alternative method of computing the E:D ratio. Instead of measuring equity against total liabilities, or against long term debt, it measures equity against "Net long term debt"; this is defined as long term debt less available cash and near-cash (marketable securities). Only significant when the company holds large cash or near-cash funds in hand.

NET PROFIT/OWNERS EQUITY - Ratio of net profit to owners equity in the balance sheet. Compare with the budget, the past, industry averages to measure return on investment. Question the valuation of the assets If assets are substantially undervalued, then the ratio appears to be much better than it really is.

NET PROFIT/SALES - Ratio of net profit to sales for comparison with past, budget and industry averages Determine the cause of any difference against the standard. Pay particular attention to operating as apart from non-operating profits and losses.

NOTES TO FINANCIAL STATEMENT - The balance sheet and income statement frequently don't provide enough information on the underlying accounting concepts that were used. Full disclosure is made of relevant information in "notes to financial statements" including: depreciation, changes in reserves,goodwill, exceptional profits and losses, consolidation adjustments, capital expenditure commitments, contingent liabilities, etc. The notes are part of the financial statements

OFF-BALANCE SHEET FINANCING - Techniques for selling off the assets for immediate cash, and leasing them back for annual rental. Contingent liability may be "material" (significant). Improves E:D ratio but increases the risk of failure.

OR - OPERATIONS RESEARCH - Technique applying scientific method to business problems and planning.

OPERATING CASH FLOW - OCF. See CASH FLOW.

PFD - See PROVISION FOR DISASTER.

PROFESSIONAL ACCOUNTING BODY - Public accountants association which sets professional standards of auditing and accounting principles. Vital for fair financial reports. PROVIDE FOR - Technical accounting term meaning to accrue liability for an expense or a loss.

PROVISION FOR DISASTER - PFD. Brainstorming technique to discover all possible disasters that could result from a key financial decision. Identifies EI and false assumptions. Allows time to modify the financial plans to avoid such disasters.

QUALIFIED REPORT - Auditor normally reports that financial statements are in accordance with accounting concepts, etc. i.e. "true and fair". When he is not satisfied he "qualifies" his report to indicate exactly why the financial statements are unacceptable. Qualified reports are rare since auditors normally argue the company into adequate disclosure of vital information

in the notes to the financial statements.

QUICK RATIO - Ratio of quick assets (normally cash, receivables and marketable securities) to quick liabilities (normally payables due within a month) indicating the immediate liquidity. Shows whether company can pay its bills this month. Rough measure is 12: 1 but the norm depends upon the industry averages and the cash flow of the company. For example, supermarkets often have a high cash flow during the month and a difficult cash position at the end of the month. Excess quick ratio indicates too much funds in the business.

RECEIVABLES MANAGEMENT - Investment in receivables may be managed by: credit control, discount policy, market selection, billing, expediting, factoring, etc.

REFINANCING - Techniques for "hedging" (providing for) risk of interest rate or FOREX changes. Debt may be re-financed at lower rates. See CONTINGENT LIABILITIES. SALES/ASSETS - Measure of activity; times the assets are "turned" over in the sales. Compare with the past, the budget and the industry average. Big companies normally turn over assets 1 to 1 1/2 times depending upon the industry. Smaller companies may turn over the assets two or three times.Excessive turnover is over trading; less than once per annum is probably stagnation.

SECURITY - Property or investments or even the "reputation of the borrowers" necessary to raise any finance. Liquidation value of the security often very doubtful. Lender acquires it as a safeguard but actually hopes never to use it. SHARE VALUE ADDED - See SVA.

SHARE BUY-BACK - Repurchase of shares by the company as an investment to achieve better SVA. Better to buy-back shares when excess cash cannot be invested to return more than the CoC.

SHORT TERM FINANCE - Finance of working capital normally for up to one year. Net working capital is current assets less current liabilities. Normal sources of short term finance include:suppliers, banks, short term loans, factoring of receivables etc. Plan short term finance by cash forecasting. Risky to use short term finance for long term assets except for a "bridging" operation.

SIGNALING THEORY - Concept that Management public announcements may be re-interpreted by the share market as signals to hidden assets and potential e.g. a news bulletin indicating increased R & D may tend to increase the share price.

STRETCHING SUPPLIERS - Technique for obtaining extra finance from suppliers. Methods include: paying little and often, promising big orders, quoting competitive better terms, taking discounts, complicating the accounts so that expediting becomes difficult

SVA - Share Value Added. Complex concept, Simplified, SVA is a key financial objective. SVA is produced when the sustainable cash flows and dividends lead to increased short term and long term share value, as related to the share index by the Beta coefficient. Directly related to EVA. TAX LAW - Regulations for computing the tax due by a business. Not necessarily good accounting principles but often followed in many countries. Sets the rules for computing profit in terms of taxable income and allowable deductions. Companies comply with tax regulations to minimize the tax liabilities. Not the same as generally accepted accounting principles. Some companies adopt tax regulations in the books and thus produce distorted financial statements. Not necessary to follow tax rules into the company records ! ! Keep separate records for tax purposes.

VALUE - Vague term meaning either: book value, sales value, liquidation value or opportunity value. Real value of an asset only known when it sold.

WORKING CAPITAL - Current assets minus current liabilities is net working capital. Normally cash, receivables and inventory financed by suppliers and banks. Working capital expands with sales. Normally working capital needs to be managed because it manages itself rather badly!

WRITE OFF - Technical accounting term meaning to charge to expense or to the income statement, or to reserve, or to accumulated profit.

APPENDIX F - OPTIONAL QUIZ ON FINANCIAL ARITHMETIC

PROBLEMS

Some skills in basic financial arithmetic may be developed from this short quiz (answers given at the end).

Cost of capital - compute the rough weighted CoC from the data provided using the following example:

Equity212%24Debt1 8% 8

Weights332CoC10.6%

1. Cost of Capital


Weights220 CoC %

2. Cost of Capital

Equity112%Debt2 8%

Weights3CoC %

3.Cost of Capital

Equity116Debt4 10

Weights5CoC %

PROBLEMS 4.Cash flow - from the following date compute cash flow, EBIT

and OCF for years 2-3:Year 1Year 2Year 3 000 000 000

Sales 100 100 100Cost of goods sold 80 50 40

Gross profit 20 50 60

Operating expenses 10 20 40

PBT 10 30 20

Tax 4 12 8

Net profit 6 18 12

Notes:Depreciation charged 40 40 30Interest charged 5 10 8Working capital changes +5 +10 +15Normal capital expenditure 10 20 10

CF 46 58 EBIT 15 40 OCF 36

PROBLEMS 5.Cash flow - from the following data complete the cash forecast

and compute the cash balance at March 31:

JanFebMar000000000

Receipts 20 (Dec)

Payments:

Purchases 10 (Nov) Other 25 (Jan)

Difference(15)

Opening balance 10 (5)

Closing balance (5)

Data:Sales (net 30 days)Dec 20Jan 40Feb 60Purchases (net 60)Nov 10Dec 20Jan 15Expenses (net cash)Jan 25Feb 15Mar 25

6.EVA - from the following data compute the EVA:

OCF100200300

CoC12%16%16%Growth 8%10%12%

EVA: OCF/(CoC-G) = ECU 250

PROBLEMS

7.Forecasting - from the following data forecast the income statement and balance sheet for year 2:

Year 1Year 2Assumptions 000 000Sales 200 300 estimateCost of goods sold 100 differenceGross profit 100 40% salesOperating profit 40 20% salesNet profit 60

Assets: Cash 10 differenceReceivables 50 25% salesInventory 60 30% salesFixed assets 100 plus 10

220

Liabilities 40 40% CGSOwners' equity 180 balance + NP

220

PROBLEMS

8.Earnings per share - from the following data compute for years 2 and 3:

(a) Earnings per ordinary (common) share

(b) Dividends per ordinary (common) share

(c) Dividend cover

(d) Cash flow per ordinary (common) share Year 1Year 2Year 3 000 000 000Net profit 80 120 170Preferred dividend 10 20 20Ordinary (common) divided 20 40 50Number of ordinary (common) share 100 100 200Depreciation charged 30 50 100

Earnings per ordinary (common) share .70

Dividends per ordinary share .20

Dividend cover times3 1/2

Cash flow per ordinary share1.00

PROBLEMS

9.Earnings per share - from the following data what would be the effect on EPS and Dividend Cover of issuing 20,000 more ordinary (common) share?

Before After

Net profit150,000 170,000Number of ordinary share 40,000Preference dividend 70,000Ordinary dividend per share 0.50 0.80

EPS

Dividend cover times

10.Cover - from the following data determine how the "cover" of debenture interest and preference dividends has changed from Year 1 to Year 2:

Year 1Year 2

000 000

Profit before interest 100 200Debenture interest 40 60 60 140Taxation 30 70 30 70Preference dividend 20 50

Interest cover (times) 2.5

Preference dividend cover (times) 1.5

PROBLEMS

11.Financial analysis - from the balance sheet and income statement which follow, answer the following questions:

(a) Net working capital is:

(b) Owners equity is:

(c) Net book value of fixed assets is:

(d) Assets financed by creditors are:

(e) Par value of one ordinary (common) share is:

(f) Book value of one ordinary (common) share is:

(g) Gross profit % to sales is:

(h) Net profit % to sales is:

(i) Net profit % to owners equity is:

(j) Market value of one ordinary share is:

(k) Ratio of CA : CL is about:

(l) Ratio of QA : QL is about:

(m) Ratio of E : D is about:

(n) Number of days sales in receivables:

(o) Number of days purchases in payables:

Score: /11Review of errors:

PROBLEMS

BALANCE SHEET AT DECEMBER 31

Current AssetsCash 7,600Debtors (receivables)36,000Inventory at cost or lower marketvalue16,50060,100 Fixed AssetsLand 8,000Buildings 27,000Equipment 2,100 37,100Less accumulated depreciation 10,50026,600 86,700

Current LiabilitiesCreditors (payables) 18,000Bank loan 20,000Income tax due 2,30040,300

Long term LiabilitiesMortgage Loan21,400

Owners' EquityCapital stock (15,000 shares) 15,000Retained earnings 10,00025,000 86,700

Note: Dividends paid 1,500

INCOME STATEMENT - YEAR ENDED DECEMBER 31

Sales50,000Cost of goods sold35,000 GROSS PROFIT15,000Selling & administrative expense 9,300 OPERATING PROFIT 5,700Non-operating expenses 700 PROFIT BEFORE TAXES 5,000Income Tax 2,000NET PROFIT 3,000

APPENDIX F - OPTIONAL QUIZ ON FINANCIAL ARITHMETIC

ANSWERS

Cost of capital - compute the rough weighted CoC from the data provided using the following example:


Weights332CoC10.6%

1. Cost of Capital


Weights220CoC10%

2. Cost of Capital

Equity112%12Debt2 8%16

Weights328CoC 9.3%

3.Cost of Capital

Equity11616Debt4 832

Weights548CoC 9.6%

ANSWERS 4.Cash flow - from the following date compute cash flow, EBIT

and OCF for years 2-3:Year 1Year 2Year 3 000 000 000

Sales 100 100 100Cost of goods sold 80 50 40

Gross profit 20 50 60

Operating expenses 10 20 40

PBT 10 30 20

Tax 4 12 8

Net profit 6 18 12

Notes:Depreciation charged 40 40 30Interest charged 5 10 8Working capital changes +5 +10 +15Normal capital expenditure 10 20 10

CF 46 58 42EBIT 15 40 28OCF 36 38 25

ANSWERS5.Cash Flow

JanFebMar 000000000Receipts 20 40 60 Payments:

Purchases 10 20 15Other 25 15 25

Difference(15) 5 20

Opening Balance 10 (5) 0

Closing Balance (5) 0 20

Note: Balance March 31: 20

ANSWERS

6.Cash Flow

000000Opening cash balance210 Receipts:Debtors 80Mortgage100180 300Payments:Creditors240Fixed assets 55Dividends 25320

Cash balance at end of Year 1 70

7.Forecasting

Year 1Year 2Assumptions 000 000 Sales 200 300 providedCost of goods sold 100 180difference

Gross profit 100 120 40% salesOperating expense 40 6020% sales

Net profit 60 60

Assets:Cash 10 37difference

Receivables 50 7525% salesInventory 60 0030% salesFixed Assets 100 110plus 10

Total assets financed 220 312

Liabilities: 40 7240% CGS

Owners' Equity: 180 240balance + NP

Total finance available 220 312

ANSWERS

8. Earnings per share:

Year 1Year 2Year 3 000 000 000 Net profit 80120170

Preferred dividend 10 20 20

Ordinary (common) dividend 20 40 50

No. of ord. (common) shares100100200

Depreciation charged 30 50100

(a) Earnings per ordinary 70100150 share100=.70100=1.0200=.75

(b) Dividends per ordinary 20 40 50 share100=.20100=.40200=.25

(c) Dividend cover (times) 70100 75 20=3.5 40=2.5200=3.0

(d) Cash flow per ordinary100 150250 share100=1.0 100=1.5200=1.25

ANSWERS

9.Earnings per share:BeforeAfter

Net profit150,000170,000Number of ordinary shares 40,000 60,000Preferred dividend 70,000 70,000Ordinary (common) dividend per share 0.50 0.80 EPS 80,000100,000 40,000 60,000 2.0 1.7 Cover times 4.0 2.0

10. Cover: Year 1Year 2

000 000

Profit before interest 100 200Debenture interest 40 60 60 140

Taxes 30 70

Net profit 30 70

Preference dividend 20 50

Cover: Interest (times)100/40200/50= 2.5= 4.0 Preference dividend (times)30/2070/50= 1.5 = 1.4

ANSWERS

11.Financial Analysis:

(a) Net working capital is: 60,100 - 40,300 = 19,800

(b) Owners equity is: 25,000

(c) Net book value of fixed assets is: 26,000

(d) Assets financed by crs. are: 40,300 + 21,400 = 61,700

(e) Par value of one ordinary (common) share is: 1.00

(f) Book value of one ord. (common) share is: 25,000/15,000 = 1.6

(g) Gross profit % to sales is: 15,000/50,000 = 30%

(h) Net profit % to sales is: 3,000/50,000 = 6%

(i) Net profit % to owners' equity is: 3,000/25,000 = 12%

(j) Market value of one ord. (common) share is: not known

(k) Ratio of CA : CL is 60,100:40,300 = 1 1/2 : 1

(l) Ratio of QA : QL is 43,000:40,300 = 1 : 1

(m) Ratio of E : D is 25,000:61,700 = 1 : 2

(n) Number of days sales in receivables: 36,000/50,000 x 360 = 260 days

(o) Number of days purchases in payables: 18,000/35,000 x 360 = 185 days

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