The Financial Perspective

1. The Financial Perspective Overview • The Financial Perspective is … • Profitability • Stability • Capital • Gearing • Liquidity • Matching Terms • Asset Utilisation • Practice

2. The Financial Perspective Is a systematic way of using the information in the financial statements to focus on key performance goals. ❶Profitability ❷Stability (Cash and Capital) ❸Asset utilisation

3. Profitability Our first accounting equation Sales – Expenses = Profit Brings us neatly to the first principle of financial strategy Sales Price Volume Marketing Design +++ (unlimited tactics) Management Negotiation +++ (unlimited tactics) Expenses Cost Price Utilisation p81 in workbook

4. Stability Maintaining Stability is about making sure that the business has enough money to pay debts when due and take advantages of opportunities for growth Right first time! Enough money to get the business up and running Raising Capital Gearing “Long to long” Generating profits Controlling spending Credit control Planning cash flow Staying on track Maintaining liquidity

5. Stability 2 – Gearing Gearing refers to the mix of Owners’ Funds and debt used to fund the business. Debt< Owner’ Funds is Low Gearing Debt ≥ Owners Funds’ is High Gearing Current Liabilities Current Liabilities Long Term Liabilities Long Term Liabilities Owners’ Funds Owners’ Funds A highly geared company would be exposed to more risk and would find further borrowing difficult: but in high profit low interest rates situations might be seen to be making better use of capital and more return to shareholders Covered in detail in “Ratios”

6. Owners Funds Share Capital Retained Profits Long Term Loans Current Liabilities Creditors Overdraft Fixed Assets Buildings Machinery Vehicles Current Assets Stocks Debtors Stability 3 - Matching terms There are a few prudent guidelines in funding a business

7. Asset Utilisation Assets cost money and demand capital The principle is to keep the level of assets as low as possible without damaging target customer service levels Fixed assets Consider hiring rather than buying Be realistic about capacity against likely sales Stock control Credit control Current assets Covered in detail in “Ratios” p81 in workbook

8. Exercise 3 Exercise 3 – The Business Model • Build the simple but realistic business model described in • on FaBLinker and study the answers and practical explanations of the relevant business and financial concepts. • It sets a series of challenges to introduce and explore all the financial issues managers are likely to face in the three generic key results areas: • Profit • Stability • Asset Utilisation • The exercise prepares managers for the directed and self-selected smart-practice routines that will embed the financial perspective as part of their core skillset.

9. Practice 8 – Exploring sensitivity analysis Practice 8 Selling price = €10 Purchase price = €5 Buy on credit = 20 units Buy for cash = 130 units Sell on credit = 20 Sell for cash = 80 units Fixed overheads = €100 Overheads paid = 100% Introduce new share capital = €500 Draw down a new loan = €300 Acquire new assets = €200 Practice 3 and complete the Sensitivity Analysis table below What happens to Net profit if you improve One of the items by 10% leaving the others unchanged? Answers on p88 of the workbook Old Profit = €400

10. Practice 9 – Testing a business model Practice 9 Build a business model in FaBLinker. Test and reinforce your skills by exploring the effect which changing each of the following has on the three Key Results Areas. See if you can predict the impacts before you make each change. Selling Price Cost price Sales Volume Stock policy (buying volumes compared to sales volumes) Overhead expenses Collection times for credit sales Payment times for credit purchases Percentage of overheads paid New share capital New Loans Changes in loan interest Buy a new fixed asset Sell a fixed asset Write off a fixed asset quicker or slower (Vary depreciation charges)