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Management Accounting
Financial Statements (review & analysis)
Cost Management
Budgeting
Cash Management
HO III – Management Accounting
Stephan DEMAEGHT
Balance Sheet presentations• Europe / USA• Country legal presentation• Internal presentation
Stephan DEMAEGHT
Financial Statements
Income Statement presentations• Legal presentation• Contribution Margin presentation• USALI presentation
Stephan DEMAEGHT
USALI
+ Department Incomes- Cost of sales (Variable Direct Costs)= Department Gross Margin- Department Payroll (Specific Salary Cost)- Department other Direct Costs= Department Net Margin
Uniform System of Accounting for Lodging Industry
Stephan DEMAEGHT
USALI∑ Department Net Margins for Operating Dpts.- ∑ Department Net Margins for Non Operating Dpts.- Undistributed Salary Cost- Undistributed Goods & Services- Undistributed other operating costs= GOP (Gross Operating Profit)- Management Fes- Rent & Property expenses= EBITDA (or NOP)+/- Financial result (+financial incomes – financial costs)- Depreciation/Amortization= Gross Ordinary Profit+/- Outstanding result (+outstand. incomes – outst. costs)= Gross Profit- Revenue Tax= NI (Net Profit or Net Income)
Ratios
• Profitability ratios (BS & IS)• Liquidity ratios (BS or BS & IS)• Investors ratios (Result from IS & Other infos)• Solvency ratios (BS)• Department ratios (need a detailed IS + extra
information)
Stephan DEMAEGHT
Financial Statements
Direct & Indirect Cost
• Direct Cost: linked to ONE particular department/division/product.
• Indirect Cost: linked to more than one particular department/division/product
Stephan DEMAEGHT
Cost Management
The same cost can be direct or indirect in function of the company.
• Fast-food restaurant:– Only hamburger and cheeseburger: cheese is
a direct cost for the product “cheeseburger”– Hamburger + cheeseburger + special cheese:
cheese is an indirect cost (for 2 products).• Hotel:
– Most probably, the cheese will be a direct cost for the department “kitchen”.
Stephan DEMAEGHT
Cost Management
Fast Food• Hamburger: bread + meat +
ketchup + mustard• Cheese: bread + meat +
cheese + ketchup + mustard• Big Bacon: bread + big meat +
cheese + barbecue sauce + bacon
• King Fish: bread + fish + tartar sauce + cheese
• Chicken Burger : bread + chicken + salad + pepper sauce
• Bread• Meat 100 gr• Meat 200 gr• Fish stick• Chicken filet• Cheese• Bacon• Salad• Ketchup• Mustard• Tartar sauce• Pepper sauce
Stephan DEMAEGHT
Cost Management
Indirect costs splitting
• As a % of the sales (food cost, advertising,…)• Per m2 occupied (fire insurance, interests for
mortgage loan, building depreciation,…)• Estimating labor time (salaries, social security,
…)• …
Stephan DEMAEGHT
Cost Management
Fixed & Variable Cost
• Fixed cost: doesn't change with sales revenues fluctuation.
• Variable cost: change in direct proportion of the sales revenues.
• Semi Fixed or Semi Variable costs: not directly variable with revenues but not strictly fixed
Stephan DEMAEGHT
Cost Management
Fast Food• Meat, cheese, fish sticks, bread, salad, sauces,...(food cost)
• Restaurant Manager Salary.• Restaurant Assistants Manager salaries.• Crew salaries.• Restaurant rent.• Kitchen furniture's renting.• Electricity.• Phone invoices.• Administration furniture's.• Bags, boxes and packing papers.• Cleaning products.• Fire insurance.
Stephan DEMAEGHT
Cost Management
Formula
• Sales = Total Costs + Profit• Sales = Fixed C. + Variable C. + GP• Sales = FC + (VC% * Sales) + GP• Sales – (VC% * Sales) = FC + GP• Sales * (1 – VC%) = FC + GP• Sales = (FC + GP) / (1 – VC. %)
Stephan DEMAEGHT
Cost Management
Formula
Sales = (FC + GP) / (1 - VC%)
Where: 1-VC% = Contribution Margin
Stephan DEMAEGHT
Cost Management
Break-Even Point
• It’s the Sales Revenue Level necessary to cover all operating costs.
• Below the Break-Even Point, you are loosing money. Above the BEP, you are winning.
• At the Break-Even Point: Fixed Costs + Variable Costs = Sales
Stephan DEMAEGHT
Cost Management
From CVP to BEP
Sales = (FC + GP) / (1-VC%)
at BEP, GP = 0
Sales = FC / (1-VC%)
Stephan DEMAEGHT
Cost Management
Forecasting Incomes Required
Profit Wanted = GP
Sales = (FC + GP) / (1- VC%)
Sales = (150.000 + 50.000) / 0,63
Sales = 317.460 euros
Stephan DEMAEGHT
Cost Management
By how much Room Sales Revenue increase to cover a
new fixed cost?
New Sales Revenue= (original FC + additional FC + GP)
/ (1 – VC%)
Cost Management
Stephan DEMAEGHT
By how much Room Sales revenue increase to cover a
new investment?
New Sales Revenue= (FC + Investment Depreciation + GP)
/ (1 – VC%)
Cost Management
Stephan DEMAEGHT
How much Room Sales revenue increase to get a new GP?
New Sales Revenue= (FC + New GP) / (1 – VC%)
Or = (FC + original GP + additional GP)
/ (1- VC%)
Cost Management
Stephan DEMAEGHT
What about replace a Fixed Cost by a Variable Cost?
New Sales Revenue= (original FC + variation FC + GP)
/ (1 – (VC% + variation VC%)
Cost Management
Stephan DEMAEGHT
Income Statement Sales- Variable Costs
= Gross Margin- Fixed Costs
= Gross Profit- Revenue Tax
= Net Income
Cost Management
Stephan DEMAEGHT
Taxes effect
Net Income = GP – Tax
GP = NI + Tax
CVP Formula:
Sales = (FC + GP) / (1-VC%)
Sales = (FC + Net Income + Tax) / (1-VC%)
Cost Management
Stephan DEMAEGHT
Taxes rate
GP = NI + Tax (where Tax = GP * TR)
GP = NI + (GP * Tr)
GP – (GP * Tr) = NI
GP (1 – Tr) = NI
GP = NI / (1- Tr)
CVP Formula:
Sales = (FC + GP) / (1-VC%)
Sales = FC + (NI / (1 – Tr)) / (1-VC%)
Cost Management
Stephan DEMAEGHT
FC ∆ FC + ∆ GOP ∆ NI
BEP u = -------- ∆ SALES = ------------------- ∆ GOP = ----------
CMu 1 – VC% 1 - TR
FC FC + GOP NI
BEP = ------------- SALES = --------------- GOP = ---------
1 – VC% 1 – VC% 1 – TR
CM = 1 – VC% SALES
VC = VC% * Sales -VC
= GM
VC% = VC / Sales - FC
= GOP
Taxes = Tr * GOP -Taxes
= NI
Tr = Taxes/GOP
Stephan DEMAEGHT
Cost Management
Stephan DEMAEGHT
Cost Management
∆FC
∆FC + ∆GP ∆GP1-VC% ∆NI
New Sales Orig. Sales 1-Tr- Orig. Sales + ∆S ∆NI
= ∆S = New SalesFC + GP1-VC% NI
NI1-Tr
VC GP Rev. TaxSales GP
∆GP =
GP =
∆NI = New NI - Orig. NI
∆GP = New GP - Orig. GP
Tr =
∆S
Sales =S
VC%=
∆Sales =
Types of Budgets• Operating (sales & expenses analyze) or Pre-
Opening (Operating before opening) Budget.• Long Term (1 to 5 years) & Short Term (<1 year)
Budget.• Fixed (based on a certain activity level ) or Flexible
(including several activity levels) Budget.• Department Budget (limited to a specific dpt.) • Capital Budget (plan on several years to analyze a
new investment).• Master Budget (Sum of various previous budgets).
Budgeting
Stephan DEMAEGHT
Goals & Objectives establishment.
• Prudence and realism.• Real limiting factors:
– Number of rooms in a hotel.– Number of seats in a restaurant.– Staff productivity and quality.– Link between wage conditions and available
staff (you have the staff quality you pay for).– Customer demand and competition.
Budgeting
Stephan DEMAEGHT
Plan to achieve objectives.
• Meeting and stimulate the staff.• Order food, beverage and goods (quality
and quantity) to achieve sales forecasting.• Financial plans to achieve budget.
Budgeting
Stephan DEMAEGHT
Analyze & comparison
• Analyze differences between budget and actual results, explain, comment and assign responsibilities.
• Use the Comparative Horizontal Analysis.
Budgeting
Stephan DEMAEGHT
Variances
Budgeting
Stephan DEMAEGHT
ActualBudget
Pb
VrVb
Pr Price Variance: (Pr-Pb) * Vr
VolumeVariance = (Vr-Vb)* Pb
Variance Analysis• Price Variance:
– Real Average Check – Budget Av. Ch.• Sales Volume Variance:
– Sold Units – Sales Quantities Budgeted• Percentage Variance:
– Variance / Budgeted Figure• Cost Variance:
– Same as Price & Sales Volume variances but for the costs.
Budgeting
Stephan DEMAEGHT
Corrective actions• Changes to reach the budget (staff
motivation, advertising, improve communication, staff changes,…)
• Forecasting changes (change the prices, modify goals or objectives,…) to modify the budget
• !!!When you change one element of a structure, you change the whole structure!!
Budgeting
Stephan DEMAEGHT
Improve the budget
• Information provided from past budgeting cycles will help you to budget the future.
• Never forget we work with people, not only with numbers.
• Action – Reaction (you never finish).
Budgeting
Stephan DEMAEGHT
Advantages of Budgeting• Anticipation.• Communication & motivation involving
department staff.• Brain storming.• Open to alternative ideas.• Evaluation possibilities comparing budget
to reality after budget period.• Budget cycle management.
Budgeting
Stephan DEMAEGHT
Disadvantages of Budgeting• Time & cost to prepare budgets.• Many unknown factors.• Could oblige to give confidential
information before requirement.• Tendency to spend to the budget (in big
structures) or to overspend with the objective to increase expenses forecasting in next budget.
Budgeting
Stephan DEMAEGHT
Read & learn Advantages and disadvantages of Budgeting in
the book pages 372 & 373.
Budgeting
Stephan DEMAEGHT
Importance of Cash Management
• Difference between Net Income and Cash Flows (inflows – outflows)
• To be able to pay what you have to.• Cash forecasting.
Cash Management
Stephan DEMAEGHT
Total Cash Flow
Total Cash Flow
= Net Cash Flow from Operating Activities
+ Net Cash Flow from Investing Activities
+ Net Cash Flow from Financing Activities
Cash Management
Stephan DEMAEGHT
Cash Flow from Operating Act.Net CF from Op activities= NI + not paid charges – not received sales
Net Cash Flow from Operating Activities= Net Income+ Current Assets Decreases- Current Assets Increases+ Current Liabilities Increases- Current Liabilities Decreases+ Depreciation / Amortization Expenses
Cash Management
Stephan DEMAEGHT
Cash Flow from Investing Act.
Net Cash Flow from Investing Activities
= Sales of Fixed Assets
- Purchase of Fixed Assets
Cash Management
Stephan DEMAEGHT
Cash Flow from Financing Act.
Net Cash Flow from Financing Activities
= Long Term Liabilities Increases- Long Term Liabilities Decreases- Dividends Paid
+ Equity Capital Increases
- Equity Capital Decreases
Cash Management
Stephan DEMAEGHT
Exercises
• Book pages 452 – 461• E.10.1 to E.10.3• P.10.1 to P.10.2• P.10.4 • P.10.7
Cash Management
Stephan DEMAEGHT
Working Capital
Working Capital
= Current assets – Current Liabilities.
Statement of Changes in Working Capital is very similar to the Statement of Cash Flow.
Cash Management
Stephan DEMAEGHT
Statement of Changes in Working Capital• Changes = Inflows – Outflows• Inflows = Income from operations (NI)
+ Depreciation+ Fixed Assets Decreasing+ LT Liabilities Increasing+ Equity Capital Increasing
• Outflows = Loss from operations (Negative NI)+ Fixed Assets Increasing+ LT Liabilities Decreasing+ Equity Capital Decreasing+ Dividends payment
Cash Management
Stephan DEMAEGHT
Preparing Cash BudgetCash Receipts= Current month cash sales revenue+ Current month credit card receivable collections+ Previous month credit card receivable collections+ Previous month accounts receivable collectionsCash Disbursements= Current month cash purchases+ Previous month account payableNet Cash = Cash Receipts – Cash Disbursements
Cash Management
Stephan DEMAEGHT