1、Association of Corporate Counsel Pocket MBA,Professor Jim Nolen Department of Finance University of Texas at Austin McCombs School of Business September 19, 2013,Finance for Non-Financial Managers,Agenda,1:30-2:45 Overview of the role of finance in the organizationOperating DecisionsMeasuring Perfor
2、mance 2:453:00 Break3:00-4:15 Investing DecisionsTreasury ManagementWorking Capital ManagementCapital Budgeting4:15-4:30 Break4:30-5:30 Financing DecisionsCapital Structure/Dividend Policy Bankruptcy & restructuring5:30-6:30 Social Networking & Happy Hour,2,Learning Objectives,To improve the partici
3、pants financial acumen To gain a better understanding of finances role in the organization Making the Operating, Investing and Financing decisions of the firm Measuring performance and creating shareholder wealth Setting the financial strategies of the firm Setting financial policies and procedures
4、Establishing financial controls Managing the firms resources Treasury operations, including cash management Tax management Managing the operating and capital budgeting processes Setting capital structure policy and proper use of leverage, including dividend policy and stock repurchase plans Managing
5、 liquidity, including credit and collections Financial reporting and forecasting Working with investor relations to communicate with stakeholders Risk management, including hedging,3,Who is the Finance Department?,May have professional designations like Chartered Financial Analyst (CFA), Certified P
6、ublic Accountant (CPA), Certified Management Accountant (CMA) or Certified Treasury Professional Typical financial titles in firms (depending on size of firm): Chief Financial Officer (CFO) Vice-President of Finance Corporate Treasurer Chief Accounting Officer (CAO) Comptroller Cash Manager Credit M
7、anager Risk and Insurance Manager Manager of International Banking,4,Accountings Role,The role of the accounting function is to provide internal and external information about the past performance to company executives and investors This information is communicated in the financial statements Balanc
8、e Sheet Statement of Shareholders Equity Income Statement Statement of Cash FlowsAccountants are responsible for reporting, controlling and budgeting activities.,5,Finances Role,The role of the finance function is to analyze information about the past to make investment, financing and operating deci
9、sions that improve company performance in the future.Investment Decisions to maximize return and includes: make vs. buy decisions, working capital management, treasury operations and asset acquisitions and divestitures.Financing Decisions to minimize the cost of capital and includes: debt vs. equity
10、 financing, dividend policy, and stock buybacks. Operating Decisions that improve efficiencies and includes: pricing and product mix, purchasing and supply chain decisions, controlling expenses and risk management.,6,Analytical Processes,7,Financial Analytics,Examples: Product Profitability Customer
11、 Lifetime Value,Examples: Compensation Analysis Labor Utilization Analysis,Examples: Procurement Analysis Cash Flow Analysis,Financial Controls,Budgeting In all four types of centers a budget system can provide managers with incentives by Rewarding them for meeting or exceeding budget goals Punishin
12、g them for failing to meet budget goals Those goals are: Investment Center Return on Investment Profit Center - Dollars of Net Income or Profit Margin Revenue Center Dollars of Revenue, growth rate, or market share Cost Center Dollars of Cost, percent of revenues Agency Costs Auditing & incentives c
13、osts for fiduciary duty compliance Forecasting can be done top-down or bottom-up Top Down TAM, growth rate, market share Bottom-up sales by customer, territory, product then rolled-up,8,9,Return (ROE),Growth (g),Risk (r),Operating Decisions Customers Suppliers Products Pricing Marketing Distribution
14、 Controlling Expenses,Maximize Share Value,Efficiency,Leverage,Profitability,Financing Decisions Debt-Equity Mix Capital Structure Policy Dividend Policy,Investing Decisions Asset Mix Terms of Trade Liquidity, Cash Conversion Cycle Plant Utilization, Make or Buy,DuPont Analysis,Operating Decisions,M
15、easuring business performance and benchmarking are important roles of finance to insure goals and objectives are being achieved. Operating Decisions usually revolve around the Profit and Loss statement. Finance then benchmarks these results against budget/plan (variance analysis) and against peers.
16、Revenue Average Selling Price (ASP), pricing, unit volume, product mix, market share, CAGR of sales Cost of Sales Outsourcing decisions, tax advantaged manufacturing locations, supply chain management, labor productivity OPEX Selling, general and administrative expense control, headcount, lease vs.
17、buy decisions Interest Expense amount of debt, type of debt and interest rate. Tax Management Earnings Per Share - number of shares outstanding,10,Corporate Counsels Role In Operating Decisions,Revenue recognition through the structuring of contracts. Cost of sales through the negotiation and struct
18、uring of purchase contracts and hedging contracts. Labor Costs through effective management of labor laws and negotiation with collective bargaining agreements Selling, General and Administration costs through rent negotiations, advertising contracts, compensation agreements and insurance contracts
19、Managing litigation in a cost effective manner Interest expense through negotiations on the terms and conditions of debt instruments. Tax expense though management of tax liabilities and negotiation of tax incentives Earnings per share through securities regulation and SEC compliance. Assist in Inte
20、rnal Audit and External Financial Reporting,11,Corporate Counsels Role In Investing Decisions,Assistance in collection of accounts receivable Negotiation of contracts for capital expenditures and real estate transactions Managing Acquisitions and Divestitures Monitoring Treasury Investments Managing
21、 IT risks and investments, including domain names and cybersecurity Protecting and licensing intellectual property,12,Corporate Counsels Role In Financing Decisions,Negotiating and structuring debt, mortgage and equity issuances Compliance with Security Regulations Monitoring dividend policies Manag
22、ing risks, including continuity planning Maintaining corporate governance and fiduciary duties,13,Measuring Performance,14,Future Performance Return on Equity Growth Risk,Past Performance Return on Equity Growth Risk,Market Value,Financial Statements,How can I improve the firms ROE and Value?,DuPont
23、 Analysis,Financial Manager,Filtered through:The EconomyThe IndustryThe Competition,Financial Ratios: Key Areas of Performance Measurement,Performance in several key areas must be considered when evaluating a firms prospects for the future Operational analysis Cost Analysis, Cycle Time, Customer Sat
24、isfaction, Quality Metrics Resource management Asset Turnover, Days Sales Outstanding, Inventory Turns Profitability and Productivity Profit Margins, Sales/Employee, Sales/Sq. Ft. Investment returns ROA, ROE, ROIC Market indicators Market Share, EPS, P/E Ratio, Price/Sales Risk MeasurementsLiquidity
25、, leverage, and debt service coverage,16,Source: Helfert, Erich A., “Techniques of Financial Analysis: A Guide to Value Creation,” 10th Edition, Irwin McGraw Hill, Burr Ridge IL, 2000.,Business Performance,17,Managers can increase the firms value and it return to shareholders: (Return on Assets and
26、Invested Capital can also be used)By increasing Revenue (Profitability/Growth)Increasing Average Selling Price (ASP) and/or Volume (Q) Organic growth vs. acquisition ; New Stores; New Products/Services; New Territories By decreasing Expenses (Profitability) Decrease Avg. Unit Cost (AUC) through Supp
27、ly Chain Management, Labor Productivity, OPEX control and Scaling Fixed Costs By decreasing Assets (Efficiency) Increasing Cash Conversion Cycle and Plant Utilization By increasing Liabilities (Leverage/Risk other peoples money) Higher returns come with higher financial risk if ROIC Cost of Debt,DuP
28、ont Analysis,18,Profitability on Sales,Financial Leverage,Asset Turnover (Efficiency),A simple dashboard that captures three of the five value drivers of a company (growth and risk and not fully measured).,DuPont Analysis,Three-Factor DuPont Analysis,19,Profitability on Sales,Asset Turnover (Efficie
29、ncy),Financial Leverage,Return on Assets (ROA),Note: The same factors affect ROIC,St. Jude Medical 12/31/11,20,Income Statement,Statement of Cash Flows,Balance Sheet,Revenue $5,612 COGS $1,455 Gross Profit $4,157 GPM 74.1%R&D Exp. $705 SG&A (OPEX) $1,979 Depr./Amort. $296 Op. Inc. $1,473 OPM 26.25%
30、Net Int. Exp. ($65) Other Exp. ($31) Taxable Inc. $1,377 Corp. Tax ($193) Post Tax Except. ($249) Net Income $826 NPM 14.7%EPS (fully diluted) $2.52Adjusted Net Inc. $1,074 Adjusted EPS $3.28,Net Income $826 +Deprec. & Amort $296 + Operating Exp Adj . $110 +/- Dec/(Inc) in NWC $56 Net Cash Operating
31、 Activities $1,288Net Cash Investing Activities ($337)Net Cash Financing Activities(1) ($465)Exchange Rate ($8)Net Change Cash $486Begin. Cash $500Ending Cash $986LT Debt Issue $325Debt Repaid ( $78)Issuance of Common Stk $303Repurchase of Stock ($809)Dividends ($205),Cash $986 Mkt. Sec. $37 Net Rec
32、eivables $1,366 Inventory $625 Other Cur. Assets $375 Total Current Assets $3,391Gross Fixed Assets $2,454 Accum Deprec. ($1,066) P,P&E, net $1,388 Goodwill & Intang. $4,226Total Assets $9,005Current Liab. $1,062 Long term Debt $2,713 Other L-T Liab $ 755 Total Liabilities $4,531S/H Equity $4,475Lia
33、bilities & Equity $9,005,In millions $,DuPont Analysis,St. Jude Medicals Return on Equity Over Time2006 2007 2008 2009 2010 2011 ROA 11.4% 11.3% 12.3% 12.6% 11.3% 9.5% ROE 18.7% 18.2% 11.5% 23.7% 23.6% 18.7%What happened in 2008 and 2011? Lets look at the DuPont decomposition.What has been the effec
34、t of the stock repurchase program?,21,DuPont Analysis,St. Jude MedicalFY 06 07 08 09 10 11 ROE 18.7% 18.2% 11.5% 23.7% 23.6% 18.7%Net Profit Margin 16.6% 14.2% 8.1% 16.6% 17.6% 14.7% Turnover 0.7 0.7 0.8 0.8 0.7 0.6 Leverage 1.7 1.82 1.77 1.93 1.96 2.0Revenue Growth 13.3% 14.4% 15.5% 7.3% 10.3% 8.7%
35、 Closing Stock Price $36.56 $40.64 $34.27 $36.78 $42.85 $34.48,22,DuPont Analysis,St. Jude Medical vs. Its Peers 2011FY 2011 STJ MDT BSX JNJ ROE 18.7% 20.2% 3.9% 17.0%Net Profit Margin (1) 13.8% 16.8% 6.1% 13.2%Turnover 0.6 0.5 0.4 0.6Leverage 2.0 1.9 1.9 2.0 (1) NormalizedRev. Growth Rate 8.7% 0.7%
36、 -2.4% 5.6%,23,STJ vs. Peers 3 Year Stock Price,24,BSX,JNJ,STJ,S&P 500,MDT,Financial Strategies & Value Creation,Financial Goals & Strategies,All companies have similar financial goals namely, to maximize shareholder wealth. Companies employ different strategies and tactics to achieve this goal. Som
37、e work off maximizing profit margins through differentiation or intellectual property (Software/ Pharmaceuticals) Some work off scale (Mass Merchandisers) lower margins but more volume and lower selling costs. Others work off scope by selling a broad range of offerings. Some work off efficient asset
38、 utilization (Airlines) covering fixed costs with “bottoms” in seats. Revenue passenger seat miles. Some work off leverage (Financial Services) high debt to equity ratios in banks and insurance companies. Combinations are possible,26,Financial Strategy,The financial goal (recognizing there are other
39、 stakeholders) is to maximize shareholder wealth. This is accomplished by investing in projects that exceed the firms cost of capital (Capital Budgeting) Cost of capital is a function of risk and opportunity costsFirms can create value by using its competitive advantage in: Costs (power over supplie
40、rs, business model, OPEX control) Pricing (power over customers) Asset Utilization Access and Cost of Capital Growth (branding, distribution channels, marcom) Risk Management (hedging, diversification, leverage),27,DuPont Analysis,Lets compare some public companies in different industries Lets look
41、at A Grocery Chain Whole Foods A general merchandiser Wal-Mart A software company Microsoft A computer company Apple A pharmaceutical (research) company Merck A financial institution Wells Fargo An insurance company Allstate What would you expect the return on equity to be for each of these companie
42、s given the risk of their industry to be able to attract capital? How do you think they generate their return? Through profit margins, asset efficiency or leverage,28,DuPont Analysis,Averages Last Five Years Whole Wal- Wells Foods Mart Microsoft Apple Merck Fargo Allstate ROE 11.52% 21.9% 35.73% 39.
43、24% 15.26% 10.71% 11.57%Profit Margin 2.81% 3.67% 27.84% 23.4% 17.98% 16.62% 9.54% Turnover 2.45 2.38 0.59 0.93 0.42 0.064 0.27 Leverage 1.67 2.51 2.39 1.80 2.02 10.07 4.49,Note the different financial strategies the different companies take to produce a risk adjusted return that allows they to attr
44、act capital. Whole Foods and Wal-Mart works off volume and efficient asset turnover while leveraging their suppliers, but have small profit margins. Microsoft, Apple and Merck have intellectual property that enables them to have higher profit margins, but they have relatively low asset turnover (MSF
45、T has $76 Billion and Apple has $137 Billion in cash). Financial Service companies like Allstate and Wells Fargo have huge asset bases and low turnover but work off other peoples money (leverage). Low investment returns, catastrophic losses, bad loans have affected ROE.,29,Investing Decisions,Invest
46、ing Decisions Involves the left side of the balance sheet.Treasury Management Working Capital Management Capital Budgeting,30,31,Asset Efficiency & Utilization,Asset Turnover,Return is increased when sales are increased relative to the investment in assets.Fixed Assets Higher utilization of property
47、, plant and equipment. Producing more sales with the same or fewer assets.Current Assets Faster turnover of working capital (accounts receivable and inventory) or a reduction in Days Sales Outstanding (DSO) and Days Sales Inventory (DSI). The risk of loss of sales from capacity constraints or too re
48、strictive working capital polity also increases as the company attempts to turnover the assets faster. We will take a closer look at the working capital as measured by the firms cash conversion cycle. Poor working capital management can create cash flow problems even in a profitable company.,32,Trea
49、sury Management,Managing short and medium term cash flow requirements Cash management and maintenance of liquidity Safety, liquidity and yield Handles foreign exchange and currency hedging Implementation of treasury management system Interfaces with banking platforms Operational use of derivatives Risk Management - Asset and liability management Commercial Finance activities E-banking solutions, banking arrangements & facilities/account structures.,
