1. Cost Classification 3. Breakeven Analysis Breakeven with Multi-product Firms Where Weighted Average Price =Risk Assessment Tools Segment Reporting
Investment: one-time (Selling Price, Product 1) × Business Segments include:
Cost: recurring 1. (Expected% of units, Product 1) + B/E as % of Market Departments, Outlets, Product lines and Business
Variable cost: varies with activity level WACMR = (CMR, Product (Selling Price, Product 2) × Divisions
Fixed cost: does not vary with activity levelCash Breakeven (Expected% of units, Product 2) + Management wants to know how each segment is
2. Contribution Analysis 1)*(Expected % Rev, Product 1) + (Selling Price, Product 3) × ... Return on Investment performing such that:
Unit contribution = Selling price – Variable (CMR, Product 2)*(Expected% Rev, and Weighted Average Variable • Managers can be evaluated
cost Product 2)+… Cost = • Budgets can be set
Measured as %age & compared to the hurdle rate
Contribution margin rate Target Profit Breakeven Or (Variable Cost, Product 1) specific to company • Business strategy can be formulated
Contribution analysis assists in: 2. ×(Expected% of units, Product 1) + Payback
(Variable Cost, Product 2) ×
Pricing, sub-unit evaluation & sensitivity (Expected% of units, Product 2) +
analysis (Variable Cost, Product 3) ... Measured as # of years needed for return to pay
back the investment
Evaluation of Sub-Unit PerformanceSegment Direct Costs Fully Allocated Segment Costs Marketing Overview Strategic Positioning Marketing Tactics(The 4 Ps) Corporate Capabilities
• Consider those costs associated with• Include only those costs that • Allocate all business costs to the various segments using Marketing is broad: Target Market Product/Service(specs) Human Resources
the running of the segment can be traced directly to the some fair and logical method - Involves identifying and Value Proposition Price Production Objectives
• Compare those costs to budget or to segment (i.e., escapable costs) • Used for long-term decisions and measuring relative understanding potential Competitive Differentiation Promotion(include advertise) Financing & Experience
segment revenues. • Segment direct costs may be performance customers Push VS Pull Strategy Placement (Distribution, sale) Environmental Analysis
Evaluation Problem fixed or variable REMEMBER: A business that is UNPROFITABLE can - Then creating, Push strategy focuses on the Consumer Analysis Political, Economic,
• Which costs should be considered in • Use for short-term decisions SURVIVE but INSOLVENCY (i.e., insufficient cash to pay communicating, and DISTRIBUTION CHANNEL Who? What? Where? Social &
the evaluation of the segment? debts) could mean BUSINESS FAILURE. delivering value to customersPull strategy focuses on the END USER When? Why? How? Technological
Competitive Analysis Why is it important? Methodology of the Cash Budget 3. Subtract outflows from inflows to Questions that Might be 4. If negative cash flow, what is the main cause? 1. Operations- How much cash
Who? -Companies can predict possible 1.Identify nature and timing of all cash get net cash flow for the period asked Following a Cash Is it a long-term or short-term problem? did we generate from regular
Relative Size/Power cash shortages and correct them inflows: (either a surplus or deficit). Budget What is the best type of financing to alleviate the problem?operations?
(Market Share, $) -Companies may find large sums of- Inflows from financing – usually one time4. Add (subtract) cash flow for the 1. Max Cash Requirement? Statement of Cash Flows STEPS
Pluses and Minuses cash sitting idle basis period to the ending balance in In what month is it needed? -used to provide info on enterprise activities and how they.Record net income
Target Market/ Strategy Disregard accounting principles:-Investment income collections. Sporadic cash from the previous period to Can we secure this much are financed. 2.Add back all non-cash
Industry Statistics - Rather than matching -Collection from sale. May involve sales get new ending balance. financing? Answers the questions expenses
Cash Budget EXPENSES & REVENUE, match forecast Schedule timing of cash flows to:2. Overall Cash flow + or -? Where did our money come from? 3. Add back losses and subtract
-A forecasting tool that Cash INFLOW and Cash 2. Identify nature and timing of all cash • Make efficient use of cash If it is negative, what can be Where did we use it? gains. Negate all effect on items
tracks all cash receipts and OUTFLOW outflows: • Analyze solvency done? Look for the following in the Statement of Cash flows: that do not relate to normal
disbursements - All cash items, regardless of -Cash operating expense • Forecast financial requirements 3. Which variables have the Operations, Major Sources/Uses, and Matching of business activities.
-Done on a shorter time classification, are accounted for in -Capital expenditures • Prioritize and plan payments of biggest impact on cash flow? Uses/Sources in SCF
frame than outer statements a cash budget. Non-cash items, -Financial Commitments outstanding accounts What happens if these variables
never appear -Equity Reductions change (sensitivity)?
Item Effects on Cash Effects on Profit 2. Financing 2. Reconstruct the Retained Earnings account (or 3. Investing Activities
Fixed Assets Paid yr. of purchase Depreciation How much cash was generated through financing Owner's Equity account) to determine the level of dividends How much cash was used (generated) from investments (or divestments)?
Credit Sales ―Age‖ of A/R Revenue recognized when activities (debt or equity financing)? (or drawings). STEPS
service is earned STEPS 3. Subtract dividends/drawings. 1. Focus on the balance sheets and consider the effects on cash of all the
Purchase(Credit) Supplier repay policy Matches with Revenues 1. Look at balance sheets for any increase or decrease Steps 1 to 3 provide: NET SOURCES OF CASH FROM changes in the level of investment for NON-CURRENT assets (e.g., land,
Intangibles Payment Terms Amortize over life in the level of loans, stock, personal investment. FINANCING equipment), excluding marketable securities.
2. Reconstruct any depreciable asset accounts considering amortization
Calculating Ending Cash STEPS 2. This total should reconcile with the ending cash balance foand any losses or gains on disposals in order to determine the CASH
Did the company have a positive or negative cash flow? What was 1. ADD net Cash Flow from Operations, Cash Flow from THIS fiscal year.
the impact on the company’s ending cash balance? Financing and Cash Flow from Investments to the opening impact of fixed asset transactions.
cash balance for the year (i.e., LAST year’s E/B from B/S)
Vertical Analysis Return on Investment
Higher is better, but too high may show a lack Higher is better but too high may indicate insufficient assets; may be
for amount of demand forgoing opportunities.
Higher returns on investments are Liquidity Liquidity- Continued Retained Earnings/SE
typically what the owner wants. Higher is better but too high may be a sign that (2:1) Age of Inventory = (E/B Inv.)/Avg Daily COGS Given O/B (Last year FY)
assets are old and need replacing Age of Payables= (A/P)/(Avg. Daily COGS) Add Net Income(this year)
Allows us to find where large (1:1) - Key for analysis of Cash flow problems Dividends/Drawings PLUG
differences occur over the FY. Working Capital = Current Assets - Current Liab. Given E/B-from Balance Sheet
Age of Receivables = A/R / Avg. Daily Sales
Growth Conceptual Framework 2. Size up the firm: 4. Draw conclusions Projected Statements Information Sources Net Fixed Assets
Profit Growth = (Year2- Year1)/Year1 1. Identify important ratios-Past performance Consider: 1.Forecsst cash needs 1. Historical financial performance—ratios, O/B Given or Calculated
Sales Growth =(Year2- Year1)/Year1 Consider: Result from -Industry Trends -The "fit" between your qualitative 2. Provide information for creditors old statements From I/S Amortization(this year)
Assets Growth= (Year2- Year1)/Year1 Statement of Cash Flow -Level or urgency/merit and quantitative analysis 3.View the future in dollars and perhaps alter 2. Management policies and estimates From I/S Loss(this year)
All growth ratios should be relatively And your role in the case.3. Do the numbers -Corrective action operating policies so that goals may be 3. Environmental factors Gain (this year) From I/S
proportional. Avoid redundant/useless #s -The reasons behind a misfit reached 4. ―Gut feel‖
4. Budget accordingly Net Purchases PLUG-could be Credit too