Business Strategy: Understanding Business Finances PDF

Fourth BUSINESS Edition Strategy Development Application Chapter 9 Understanding Businesses Finances Gary Bissonette © 2024 McGraw Hill Limited ...

Fourth BUSINESS Edition Strategy Development Application Chapter 9 Understanding Businesses Finances Gary Bissonette © 2024 McGraw Hill Limited  BUSINESS Fourth Edition Strategy Development Application Learning Objectives 1. An understanding of the five fundamental components of financial analysis 2. Knowledge of the key components associated with the revenue model 3. An understanding of cost-base analysis and the ability to calculate an organization’s breakeven point (BEP) 4. Exposure to the concept of margin management 5. An overview of the various source of funds available in supporting an organizations cash needs © 2024 McGraw Hill Limited 9-2  BUSINESS Fourth Edition Strategy Development Application Five Key Areas of Financial Analysis © 2024 McGraw Hill Limited 9-3  BUSINESS Fourth Edition Strategy Development Application The Revenue Model, 1 How does the organization generate sales? Sales Revenue = Per Unit Selling Price x Quantity Sold Managers need to analyze the underlying trends impacting the revenue model. © 2024 McGraw Hill Limited 9-4  BUSINESS Fourth Edition Strategy Development Application The Revenue Model, 2 Use of charts to analyze revenue streams generated by multiple products Helps recognize the overall revenue contribution each product makes to total sales generated Revenue is just one component of the overall financial assessment process Revenue is not profit Business IN ACTION – Apple: Where Does Its Revenue Come From? © 2024 McGraw Hill Limited 9-5  BUSINESS Fourth Edition Strategy Development Application Cost Structure and Cost Drivers, 1 Organization’s cost base - made up of the total costs associated with delivering the organization’s products/services to the marketplace Includes: manufacturing, distribution, marketing, and selling Costs can be directly involved in the production process (direct or variable costs) or can be operational support costs (indirect, fixed, or semi-fixed costs) that are not directly tied to the creation of the product © 2024 McGraw Hill Limited 9-6  BUSINESS Fourth Edition Strategy Development Application Cost Structure and Cost Drivers, 2 Cost Base: XYZ Sensor Organization © 2024 McGraw Hill Limited 9-7  BUSINESS Fourth Edition Strategy Development Application Cost Structure and Cost Drivers, 3 Computing the Total Cost Base © 2024 McGraw Hill Limited 9-8  BUSINESS Fourth Edition Strategy Development Application Variable versus Fixed Costs, 1 Variable or Direct Costs Fixed or Indirect Costs Committed Costs Determining the cost composition is essential to determining the required pricing strategy that will be utilized in marketing the product © 2024 McGraw Hill Limited 9-9  BUSINESS Fourth Edition Strategy Development Application Variable versus Fixed Costs, 2 Computing the Indirect Cost Base of an Organization © 2024 McGraw Hill Limited 9-10  BUSINESS Fourth Edition Strategy Development Application Variable versus Fixed Costs, 3 Cost Ladder © 2024 McGraw Hill Limited 9-11  BUSINESS Fourth Edition Strategy Development Application Variable versus Fixed Costs, 4 Cost Ladder—XYZ Corporation, Product C © 2024 McGraw Hill Limited 9-12  BUSINESS Fourth Edition Strategy Development Application Total Cost-Base Composition © 2024 McGraw Hill Limited 9-13  BUSINESS Fourth Edition Strategy Development Application Breakeven Point (BEP) Analysis, 1 © 2024 McGraw Hill Limited 9-14  BUSINESS Fourth Edition Strategy Development Application Breakeven Point (BEP) Analysis, 2 Computing BEP is a two-step process: Step 1: Estimate an organization’s costs and determine if these costs are fixed or variable Step 2: Take this cost analysis and incorporate it into the BEP formula © 2024 McGraw Hill Limited 9-15  BUSINESS Fourth Edition Strategy Development Application Breakeven Point (BEP)Analysis, 3 © 2024 McGraw Hill Limited Total Cost-Base Composition 9-16  BUSINESS Fourth Edition Strategy Development Application Breakeven Point (BEP) © 2024 McGraw Hill Limited 9-17  BUSINESS Fourth Edition Strategy Development Application Calculating BEP in Units, 1 The BEP (units) formula is: BEP (units) = Total Fixed Costs (Selling Price per Unit – Variable Costs per Unit) Once the BEP (in units) is determined, the BEP in dollars can be calculated by multiplying the BEP (units) by the selling price © 2024 McGraw Hill Limited 9-18  BUSINESS Fourth Edition Strategy Development Application Calculating BEP in Units, 2 © 2024 McGraw Hill Limited XYZ Corporation: BEP (Units) 9-19  BUSINESS Fourth Edition Strategy Development Application Corporation – BEP Comparison © 2024 McGraw Hill Limited 9-20  BUSINESS Fourth Edition Strategy Development Application Calculating BEP in Dollars ($$$) In some situations, companies provide such a wide variety of products/services that it is unrealistic to compute BEP on a per unit basis The BEP (dollars) formula is: BEP ($$$) = Fixed Costs (1 – VC © 2024 McGraw Hill Limited %) 9-21  BUSINESS Fourth Edition Strategy Development Application Margin Requirements Margin - relates to the relationship between revenue and costs Represents the portion of an organization’s revenue which is left over after paying for an identified level of costs A key indicator of operating efficiency of an organization Business IN ACTION: Dollar Stores - Rise of the Ultra-Low-Cost Player © 2024 McGraw Hill Limited 9-22  BUSINESS Fourth Edition Strategy Development Application Cash Operating Cycle, 1 © 2024 McGraw Hill Limited 9-23  BUSINESS Fourth Edition Strategy Development Application Cash Operating Cycle, 2 To calculate an organization’s cash operating cycle: 1. Take the number of days a product spends in production and in inventory (days inventory outstanding, DIO) 2. Add the number of days it takes to receive money from the customer (days sales outstanding, DSO) 3. Subtract from this total the number of days you take to pay your suppliers (days payable CashOperating Cycle(COC)=DIO+DSO −DPO outstanding, DPO) © 2024 McGraw Hill Limited 9-24  BUSINESS Fourth Edition Strategy Capitalization Development Application Requirements: Funding the Organization Review the organization’s capital structure Make decisions on how to finance operations Determine the mixture of the different sources of funds available – Funds derived from operations – Funds obtained via credit facilities (debt) – Funds obtained via equity financing © 2024 McGraw Hill Limited 9-25  BUSINESS Fourth Edition Strategy Development Application Funds Derived from Operations Funds derived from operations refers to two internal sources: 1. Current-year operating profits 2. Retained earnings It is important to understand that the operation itself represents a viable source of cash. The cash position of the company (seen in the balance sheet) reveals the capacity of the organization to draw on its cash reserves to fund its current and future needs. © 2024 McGraw Hill Limited 9-26  BUSINESS Fourth Edition Strategy Development Application Credit Facilities (Debt Financing) Credit facilities are a type of debt financing. Two categories: 1. Short-term credit facilities 2. Long-term credit facilities © 2024 McGraw Hill Limited 9-27  BUSINESS Fourth Edition Strategy Development Application Short-Term Credit Facilities 1. Trade Credit 2. Accounts Payable 3. Accounts Receivable 4. Line of Credit 5. Collateral © 2024 McGraw Hill Limited 9-28  BUSINESS Fourth Edition Strategy Development Application Long-Term Credit Facilities Long-Term Credit Mortgages Facilities Long-Term Note Cost of Borrowing Lease Obligations Bonds Interest expense paid by the organization on its credit facilities is a business expense. © 2024 McGraw Hill Limited 9-29  BUSINESS Fourth Edition Strategy Development Application Equity Financi ng Option s © 2024 McGraw Hill Limited 9-30  BUSINESS Fourth Edition Strategy Development Application Public Equity A company receives money from the sale of stock only at its initial sale; the organization must determine if the conditions and price point are right for an IPO or APO (secondary offering) In developing an APO, managers must consider its potential impact on the current share value of the organization’s stock Price Dilution Market Capitalization Value © 2024 McGraw Hill Limited 9-31  BUSINESS Fourth Edition Strategy Development Application Public Equity Offering: Cash F © 2024 McGraw Hill Limited 9-32  BUSINESS Fourth Edition Strategy Development Application Putting It All Together Managers usually use all three funding sources Decisions relating to funds from internal operations will focus on how much of current profit should be used today and how much should be put away for the future (retained earnings) Managers will have the tendency to look first toward internal funds, then towards debt financing McGraw © 2024In most cases, organizations will resort to Hill Limited 9-33  BUSINESS Fourth Edition Strategy Development Application A Note Pertaining to Not- for-Profits One of the key differences between not-for-profit (NFP) and for-profit organizations lies in their capital structure NFPs cannot use equity financing Many NFPs do not generate revenue but rely on funding totally from outside sources such as government NFPs can fundraise Achieving its social mission drives its management team’s decision-making focus © 2024 McGraw Hill Limited 9-34  BUSINESS Fourth Edition Strategy Development Application NFP Sources of Capital © 2024 McGraw Hill Limited 9-35  BUSINESS Fourth Edition Strategy Development Application Management Reflection: The Need for Capital Capital can come from three sources the trick is to know which source to tap in order to maximize the benefit of that source of capital in a way that builds the long-term health of the organization. The process requires a full analysis of the organization’s cash operating cycle and an assessment of its future long-term financial needs. © 2024 McGraw Hill Limited 9-36  BUSINESS Fourth Edition Strategy Development Application Chapter Summary, 1 The Fundamentals of Financial Analysis The Revenue Model Cost Structure and Cost Drivers Variable versus Fixed Costs Breakeven Point Analysis Margin Requirements Cash Operating Cycle © 2024 McGraw Hill Limited 9-37  BUSINESS Fourth Edition Strategy Development Application Chapter Summary, 2 Capitalization Requirements Sources of Funds Putting It All Together A Note Pertaining to Not-for-Profits Management Reflection - The Need for Capital © 2024 McGraw Hill Limited 9-38