(Lecture Notes, Kazakh EU University, winter 2014) ... Financial management in the new competitive business conditions is ... Reporting to state control bodies.
Corporate Finance focused on SMEs, Financial Modeling, Capital Investment Projects and Business Valuation to Make a Profit (Lecture Notes, Kazakh EU University, winter 2014) Milan Vemic 1 Financial management in the new competitive business conditions is significantly different from the former financial management. Structurally speaking, the characteristics of the differences may be portrayed in the following manner:
Table 1. Evolution of Financial Management TRADITIONAL FINANCIAL
NEW
MANAGEMENT
FINANCIAL MANAGEMENT
Strategic action
Strategic action
-Own funds
–Own and external sources
-Strive towards efficiency
–Financial innovation and creativity
Personnel
Personnel
–Homogenous talent
–Heterogenous talent from finance
–Egalitarianism
–Individuality
Organization of financial department
Organization of financial department
–Hijerarhical and tyipical
–Horizontalna i netipična
–Centralizied and rigid
–Decentralized
–Stabile and unchangeable
–Dynamic innovative structure
Serious obstacle to further growth could be in change of motivation and ambition management team, the lack of specific knowledge and experience for the expected growth in the field of entrepreneurship, management, finance and marketing, inadequate information and accounting systems, and the lack of building strategic networks for the future.
Doing nothing changes in these areas would lead to stagnation and decay of these companies. In addition to learning new skills and the use of modern information technology in their work businesses need to develop a network of relationships and the subsequent communication to achieve better financial results: 1
Associate Professor of Economics and Finance
MODERN NETWORK OF RELATIONS OF A FINANCIAL MANAGER COMPETITION, VARIOUS ORGANIZATIONS AND ASSOCIATIONS
BROKERS AND MARKET INTERMEDIARIES
CONSUMERS, SUPPLIERS
BANKERS, REPRESENTATIVES OF FUNDS AND OTHER FINANCING SOURCES
GOVERNMENT INSTITUTIONS, THE MEDIA AND PRESS
FINANCIAL MANAGER GENERAL MANAGER DIRECT STAFF AND ACCOUNTING
SHAREHOLDERS, COMPANY FOUNDER
STAFF ASSISTANT AND OTHER EMPLOYEES
Table 2. Functions of the Financial manager A. Planning: Long-term and short-term financial and corporate planning Budgeting current operations and capital expenditures Evaluation of performance (business results) Pricing policies and sales forecasting Analysis of the impact of economic factors Evaluation of other companies and disinvestment B. Acquisition of capital: Short-term sources; costs and arrangements Long-term sources; costs and arrangements Internally generated funds C. Administration of Funds: Management of cash Arrangements with banks Receiving, storage and distribution of the securities and obligations of company Loans and receivables management company Management special fund company (pensions, development, extra insurance) Management of the investment portfolio D. Accounting and Control: Establishing accounting policies Development and reporting of accounting data Cost Accounting Internal Audit Systems and procedures Reporting to state control bodies Reporting and interpreting the results of operations to top managers Comparison of performance with business plans and standards E. Protection of assets (property): Providing insurance policy Establishing sound internal control systems F. Administration of Tax Basing tax policy and procedures of company Preparation of tax reports tax Planning G. Relations with financial investors: Maintaining good relations with investment community Consultation with analysts on public financial information H. Evaluation and Consulting: Consultation and advice to other executives of the company business policies, business objectives and the degree of effectiveness of the achievement of these elements. I. Management of Information Systems: Development and use of computer technology Development and use of information systems for managers Development and use of systems and procedures
1. Characteristics and Factors of Working capital management The key factors that determine the policy and management of working capital are as follows: Pricing policy in contemporary means pricing that company customers can and are willing to pay. Procurement and inventories policies require rational allocation of scarce resources to those stockpiles that are optimal and necessary. In this way, the funds will not be unnecessarily blocked in purchasing. Liabilities payment policy should be well matched with the capabilities of the receivables. All those discount provided to suppliers should be obtained from customers as to adjust maturity of the obligations. In this way, the entire cash flow is optimal. Wage policy should treat employees as a resource in the true sense of the word, and it is based on indirect and stimulating wages instead of fixed remuneration, while taking into account the share of wages in costs remain within the planned framework.
2. Characteristics and Factors of Financial management of cash
2.1. Cash payments of invoices of the company. 2.2. Actually the profits allow payment of future invoices and bills.
While some businesses may now have enough cash to cover current costs unless there is real profit that cash will evaporate quickly. So, the next key issue for every entrepreneur is "How much profit on every monetary unit of earned sales?" The theory says that almost every new business makes losses first six to eighteen months, and sometimes longer. A large number of entrepreneurial ventures fail just because the owners are spending too many resources on equipment and investment rather than a part of the store to cover losses. This means that for every new venture entrepreneur should have enough cash for six-month performance, and all business and personal expenses are covered without taking a single cent of the sales.
When you survive the first cash crisis with a start-up business on should expect the following relating to cash flow. Rapid increase in sales can create problems in cash. Problems arise in cash because the company advances payment of materials and equipment before they get paid for goods they sell.
3. Characteristics of Budgeting the Cash Flow
3.1. STRIDE 1: Design costs – can you find out how much cash is needed? The first step is to design the monthly cost for the first year. This can be displayed in a work table in Excel. If exact costs are not known then you should make the best estimate. At the end of each month to compare projected costs with actual and it provides a good illustration of how realistic planning cash flow is. This is a good way to improve the capacity and skills of entrepreneurs to save the necessary cash for a future time.
3.2 STRIDE 2: Understanding the operating cycle – can you discover when cash will be needed? In addition to the amount to be paid it is equally important to know when liabilities fall due for payment. So it is very important to understand the relationship between how much cash is needed and when invoices are due for payment. It's called "operating cycle". Operating cycle consists of four parts:
1. How much cash is available for use 2. What are the obligations in cash to suppliers 3. How much time it takes to sell SME own goods 4. How much time it takes to collect receivables from its customers
Operating cycle, which is also known as inventory turns and circular cash flow measures the number of days which is necessary to the available cash through inventory and production re-converted into cash. Negative operating cycle means that the invoice must be paid for before us our customers pay their obligations. And, conversely, a positive cycle means that our customers pay before we pay our suppliers.
3.3. STRIDE 3: Calculate the gross profit from sales – is it clear where does the cash come from and how it is generated?
In principle cash can be generated in three ways: Increase sales by attracting new customers, reduce costs, generate more cash through the sale of every available product. Increasing sales volume does not automatically mean that the observed business makes more money. What is more it can happen to incur losses.
Example:
Sales revenue = Fixed costs
2.113.500 USD
=
700.000
Direct costs = Gross profit
1.189.500 =
924.000 USD
(2.113.500 profit from sales – 1.189.500 direct costs) Net profit
=
224.000 USD
(924.000 gross profit – 700.000 fixed costs)
In this case, the entrepreneur needs to make 924,000 USD (gross profit) to cover the costs, and made a net profit of 224,000 USD. When we know the value of sales percentage is used to better project future cash flows: Solution: 924,000 USD gross profit / 2.1135 million USD revenue from sales = 0,437 In this example the Gross profit is 43,7% The above calculation shows that for every dollar sold this business achieved gross profit of 43.7 %. This figure should be calculated each week to ensure that the rate of profit remains the same. In some cases, the reduction in gross profit may allow you to improve sales and cash flow. Selling at lower prices can increase competitiveness and create more sales. Profit per unit of output may be lower but the higher overall sales increases overall profit. This approach requires lower cost which is not easy. Determining the best selling prices is a whole science. When price reduction leads to an increase in sales volume, but also entrepreneurs need to know that this can exacerbate the previously mentioned operational cycle. Selling multiple items, entrepreneurs must pay greater number of suppliers rather than what consumers pay for them. It requires more cash to expand the business. Ultimately, the choice of a decision on the sale price will depend on the financial and personal reasons. The real question that arises in this case is the following: if an entrepreneur or an enterprise
wants to work long hours and get the maximum profit or to work fewer hours and pulled out a small profit in order to spend more time completing private jobs and staying with your family? 3.4. Some of the possible ways to increase the inflow of enterprise cash •
Avoid unnecessary increase in inventories.
•
Convert dead inventory into cash (sell goods at a price that can be achieved).
•
Search delayed payment from suppliers.
•
Restrict lending to customers.
•
Seek alternative investment opportunities available funding
4. Main Characteristics of Managing receivables
Like cash assets are also located on the left side of the balance sheet as the following key categories of assets of the company. Receivables are more important for small businesses than for large and arises from repeatedly emphasized fact that the sources of funding of SMEs are scarce, rare and expensive. Unlike small companies corporation may easier borrow or issue new shares and are less dependent on receivables. This does not mean that the receivables of large companies are irrelevant, they are much higher than for small firms, but there are alternative solutions to cover the cash gap. For these reasons, small businesses, especially in the embryonic stage of development should pay special attention to the timely and full repayment of receivables in order to avoid insolvency or cash plunged into a financial crisis that may be the cause of the fall and eventually death of small businesses. Managing Accounts Receivable includes some of the following key issues: 1 Definition of the credit policy of payment methods, credit limits and collateral. 2 Defined policy to collect receivables with reliance on agencies for debt collection, insured loans and given appropriate discount for early payment.
Topical Information: Can Your Enterprise Make a Profit? Table 3. Review of Different Types of Costs & the Sum of Total Expenses A) DETAILED OPERATING COSTS
COST
TOTAL A USD
B) DETAILED CAPITAL COSTS
INITIAL PRICE
TOTAL B
C) TOTAL EXPENSES A+B
DEPRECIATION COSTS
Table 4. The Basic Step Process of Calculating Your Enterprise Profit
SALE PRICE PER UNIT PRODUCT=
UNITS SOLD =
D) SALES = Market Price X Units Sold
SALES (D) – EXPENSES (C) = PROFIT
PROFIT FOR 1 DAY = SALES (D) – EXPENSES (C)
PROFIT FOR 1 WEEK = # OF DAYS X (SALES (D) – EXPENSES (C))
PROFIT FOR 1 MONTH =
PROFIT FOR 1 YEAR =
Table 5. The Cash Flow Review of Your Enterprise MONTHS RECEIPTS Cash In
TOTAL CASH IN (A) DISBURSEMENTS Cash Out
TOTAL CASH OUT (B) SUMMARY CASH SURPLUS /DEFICIT (A-B) OPENING CASH BALANCE (C) CLOSING CASH BALANCE (D) (Line D Is Actually Carried Forward To Line C)
1
2
3
4
5
6
7
8
9
10
11
12
Table 6. Making Use of a Simple Form to Research Suppliers of Your Enterprise Most enterprises have some or many strategic relationships that are performing below optimum. Some of the causes involve poor quality service, poor quality performance and poor business relationships, insufficient quantity. The effect of poor supplier management very often involves loss of revenue because of high risk of supply failure, poor quality or service performance, and often a lot of wasted time which could be allocated for other management issues.
Description of the Supplier’s Key Item:___________________________________________ Supplier
Responsible manager 1:
Address:
Tel/fax: e-mail: Responsible manager 2:
Address:
Tel/fax: e-mail: Responsible manager 2:
Address:
Tel/fax: e-mail:
Evaluation of Any Important Quality/Quantity or Capacity Issues with Supplier
Evaluation of Any Major Price Issues with Supplier
Table 7. Risk Analysis and Management KEY RISK ITEMS
Uncertainty about demand (sales)
Uncertainty about supply (purchases)
Uncertainty about output prices
Uncertainty about costs
Products and services, other types of liability
Operating leverage
ANALYSIS
PROBABILITY
(Why would this particular risk occur in your enterprise?)
(What is the probability that risk will occur in your enterprise?)
POTENTIAL CONSEQUENCE (The impact risk would have on your enterprise.)
PREVENTION
EVENTUALITY
(What can your enterprise do to prevent risk from occurring and manage it?
(What does your enterprise plan if this risk actually becomes reality?)
