ADKN

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ADKN
Best Practice Marketing for Communities in
Mountainous and/or Drug-Crop Producing Regions
Final Project Workshop
The Alternative Development Knowledge Network
Project Output 6 Financial Management for
Development Oriented Rural Enterprises
Workshop Presentation
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DOCUMENT OVERVIEW
INTRODUCTION COSTS AND REVENUES CASH FLOW
WORKING CAPITAL RETURN ON INVESTED CAPITAL NET
PRESENT VALUE GROUP WORK
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INTRODUCTION
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INTRODUCTION II

• Being aware of the financial impact of
  operational decisions
• Using financial measures to get a picture of the
  health of your business
• Being able to balance strategic and operational
  needs with financial ones

What is financial management?

• Track the key financial measures (like net
  profit)
• Understand what drives them
• Recognize when action is called for

How do you do it?

• A business with good economics is sustainable
• Financial indicators anticipate operational
  problems
• Profit benefits the organization and its
  beneficiaries

Why is it important?
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THE FINANCIAL MANAGEMENT CYCLE
Forecast profit, sales, costs, etc, using
managers estimates, targets and external
benchmarks
Record the actual values of profit, sales, costs,
and so on
Compare the forecast with the actuals, and
explain the difference, e.g. unexpected salary
increases, loss of customers
Make a plan for any needed action, e.g. to
control salaries, reduce marketing costs or
increase asset utilization
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DOCUMENT OVERVIEW
INTRODUCTION COSTS AND REVENUES CASH FLOW
WORKING CAPITAL RETURN ON INVESTED CAPITAL NET
PRESENT VALUE GROUP WORK
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REVENUES
Item
What to look for
What to ask if things go wrong

• Sales of units (kilos, crates, quintalles, etc),
  if possible by
• Customer
• Product type

• Is overall demand good?
• Could volumes be increased if the customer
  relationship was better?
• Are our sales staff good?
• Is our overall marketing good- are we producing
  what they want?
• Are we investing in the right products and
  customers?

Volumes

• Sale price for each product line
• Product type
• Discounting done (discount amount and amount of
  stock discounted)

• Is overall demand good?
• Is the price right given the competition?
• Could we improve our price if we had better
  sales or customer relationships?
• Could we improve our price if our marketing was
  better?
• Would we do better if we changed the balance of
  investment between our products and/or customers?

Prices
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COSTS I
Item
What to look for
What to ask if things go wrong

• Amount paid to farmers to purchase their crops
• Total
• Volume
• Price per unit

• Does the price paid give the beneficiaries a
  fair share of the value we are creating?
• Is the price paid competitive with what private
  traders are offering?
• Could we change the balance between price and
  other benefits offered?

Cost of Goods Sold

• Investment in fixed assets, e.g.
• Vehicles
• Processing equipment
• Processing and collection facilities
• IT and telecoms

• Are we getting the right balance between
  under-use and not having enough capacity?
• Do we have a plan to grow our assets in line
  with our sales?
• Are there any ways we can use our assets more
  efficiently?

Fixed Asset Investment
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COSTS II
Item
What to look for
What to ask if things go wrong

• Wages, salaries, pensions and payroll taxes paid
• Total
• By type of staff
• Average per staff
• Number of staff

• Are our salaries growing in line with our
  revenues?
• Are our salaries appropriate given the market
  and our target for staff retention
• Can we change the mix between financial reward
  and other kinds of rewards
• Are the differentials between different kinds of
  staff reasonable, and unproblematic?

Wages and Salaries

• Costs for operating vehicles and machinery, e.g.
  
• Oil
• Water
• Electricity

• Are these costs rising in line with our revenues
• Are there more efficient ways to use vehicles
  and machinery that wont impair operations
• Are there alternative suppliers for our fuel and
  utilities

Fuel and Utilities
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COSTS III
Item
What to look for
What to ask if things go wrong

• Other costs
• License charges
• Professional fees
• Catering and hospitality
• Per diems and allowances
• Anything else

• Are these costs growing in line with our
  revenues?
• Can these costs be reduced?
• Are strategic investments that show up in this
  area (like hiring consultants) good value for
  money?

Other overhead
Interest and financial charges

• Payments and receipts from financial sources
• Loan repayments
• Bank overdraft charges
• Lease payments
• Bank interest
• Investment income
• Rental property potfolio income

• Is the net interest charge an affordable
  proportion of profits?
• Is there a more efficient way to finance
  borrowing?
• Is there a way to get more interest income from
  investments?

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COSTS III
Item
What to look for
What to ask if things go wrong

• Local and government taxes
• Total amount
• Amount payable in near-term

• Are these legal ways to reduce taxes?
• Are there special tax benefits available, e.g.
  for investment or for development-related
  organizations?

Taxation
Amount paid to shareholders

• Does the amount strike the right balance between
  rewarding the owners/beneficiaries, and retaining
  money for investment?
• Would the beneficiaries prefer to change the
  balance between receiving benefits from purchase
  price, agricultural extension, and dividends?

Dividends
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PROFIT AND LOSS/INCOME STATEMENT
NOTE 2 COST OF GOODS SOLD
There should be a detailed break down of each
item in the notes
NOTE 1 ANALYSIS OF SALES
INCOME STATEMENT FOR FAMCO LTD.
ALL FIGURES IN USm (UNLESS OTHERWISE STATED)
Money left after buying stock from farmers is
shown here
Salaries, fuel and all of the overhead is shown
here
The amount of money left to re-invest or pay
shareholders
The amount of money that is kept for re-investment
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DOCUMENT OVERVIEW
INTRODUCTION COSTS AND REVENUES CASH FLOW
WORKING CAPITAL RETURN ON INVESTED CAPITAL NET
PRESENT VALUE GROUP WORK
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INTRODUCTION TO CASH FLOW

• Cash flow is changes in the funds that you have
  available for use in the business
• Cash flow includes working capital- funds that
  you have so that you can buy crops from farmers
  without having to get advance payment from your
  own customers

What is cash flow?

• Cash flow is NOT the same as profit, because
• If you sell to a supplier, you make a profit
  right away but you get the cash a bit later
• If your customers start paying in advance, your
  cash flow improves but your profitability stays
  the same
• The full cost of investment doesnt usually
  appear in statements of profit, but does appear
  in statements of cash flow (not that were going
  to talk about it this side)

Why is cash flow not the same as profit?
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THE THREE RULES OF CASH FLOW
1. ITS IMPORTANT
Cash is what you use to run your business- profit
is a number at the end of the year
2. ITS IMPORTANT
You need cash to buy stock from farmers. If your
cash flow stops, you cant buy and you have no
business.
3. ITS IMPORTANT
You need to increase your cash flow to grow. If
you get big orders but you dont have the cash to
buy the stock, youlll be small forever.
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WORKING CAPITAL MANAGEMENT
Item
What to look for
What to ask if things go wrong

• Average value of produce paid for but not yet
  delivered to the collection centre
• Outstanding agricultural credit

• Can we pay farmers on delivery, or even a little
  after delivery, without causing hardship or
  risking them selling to our competitors?
• Can we reduce our supply of credit, e.g. by
  helping them to set up their own revolving funds?

Creditors

• Average value of produce delivered to customers
  but not yet paid for

• Can we use ask our customers to pay quicker
  without antagonizing them and making them look
  for other suppliers?
• Are there attractive customers who will pay on
  delivery or even in advance?

Debtors

• Average amount of produce in stock

• Can we move produce through the distribution and
  transformation process more quickly? Are we
  fulfilling customers orders as quickly as we
  could?
• Can we meet customers orders with a lower total
  stock level?
• Can we forecast demand more accurately and use
  that to plan our stock levels without negatively
  effecting our suppliers?

Stocks
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DOCUMENT OVERVIEW
INTRODUCTION COSTS AND REVENUES CASH FLOW
WORKING CAPITAL RETURN ON INVESTED CAPITAL NET
PRESENT VALUE GROUP WORK
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RETURN ON INVESTED CAPITAL
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RETURN ON INVESTED CAPITAL FORMULA

• And we can say that 20 for a DORE would be very
  good.

Source- Marcuss memory
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RETURN ON INVESTED CAPITAL FORMULA II
(It was called cancellation of cross-terms)
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RETURN ON INVESTED CAPITAL MANAGEMENT
Item
What to look for
What to ask if things go wrong

• of revenue left over as profit, given by
• All types of costs
• Revenue

• Are any of our costs increasing faster than our
  revenues?
• Is there scope to reduce any of our costs
  without harming revenues?

Profit Margin
Dollar value of sales for every dollar of capital
invested in the business

• Can we use any of our fixed assets (trucks,
  processing equipment) more efficiently?
• Is there a way to grow sales faster than we are
  investing- e.g. could we serve more customers
  with the same distribution facilities?
• Can we reduce our working capital without
  harming our business- e.g. could we keep lower
  stocks or ask our customers to pay quicker?

Capital Productivity
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DOCUMENT OVERVIEW
INTRODUCTION COSTS AND REVENUES CASH FLOW
WORKING CAPITAL RETURN ON INVESTED CAPITAL NET
PRESENT VALUE GROUP WORK
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CONCEPT OF NET PRESENT VALUE I
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CONCEPT OF NET PRESENT VALUE II
Interest rate 5 p.a.
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CONCEPT OF NET PRESENT VALUE III
Interest rate 5 p.a.
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CONCEPT OF NET PRESENT VALUE IV

• What is the present value of 100 dollar received
  in one years time, 150 dollar received in two
  years time and 200 dollar received in three
  years time?

Question

• 100 dollars in one years time is 100/1.05
• 150 dollars in 2 years time is 150/(1.052)
• 200 dollars in three years time is 200/(1.053)
• The total is 95.2 90.7 86.4 272.3 dollar

Answer

• Present value allows you to compare the value of
  all streams of cash flow, even if some come in
  many small parts over time, and some come all at
  once

Conclusion
Interest rate 5 p.a.
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CONCEPT OF NET PRESENT VALUE V
A nice, simple way to do this calculation
The Net Present Value of the Income- their true
value- goes here
Interest rate 5 p.a.
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NET PRESENT VALUE FOR BUSINESSES
This is where we summarize the value of the
business after the forecast period. This is
complicated.
Depreciation is a fiction created by Evil
Accountants. We always add it back in.
Interest rate 15 p.a.
The interest rate we use reflects the businesss
risk level. This is complicated.
This is the value of the cash created by the
business- its true value!
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MANAGING FOR NPV MAXIMIZATION
Item
What to look for
What to ask if things go wrong

• Revenues
• All types of costs

• Can we grow our revenues faster?
• Can we reduce our cost base or work it more
  efficiently?

Costs and Revenues

• Fixed Asset Investment
• Working Capital Investment

• Can we reduce our fixed asset investment, or
  work it more efficiently?
• Can we reduce our stocks, decrease our supplier
  payment time and increase our customer payment
  time without messing things up?

Cash Flow

• Period in which major revenues, costs and
  investments are incurred

• Can we bring major revenues forward?
• Can we postpone major costs and investments to
  the future- e.g. can we pay a major tax bill or
  open a factory next year instead of this year?

Time

• Volatility and predictability of cash flow

• Can we make our cash flow more stable over time?
• Are there ways to make our cash flows more
  predictable and visible (to people like bankers)?
  E.g. can we make long term sales agreements?
• Can we reduce our operational risks?

Riskiness
Already covered in cost and ROIC management
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DOCUMENT OVERVIEW
INTRODUCTION COSTS AND REVENUES CASH FLOW
WORKING CAPITAL RETURN ON INVESTED CAPITAL NET
PRESENT VALUE GROUP WORK
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BREAKOUT GROUP ACTIVITY

• Your breakout groups will each be given a
  different aspect of financial management to
  analyze
• GROUP ONE Cost Management
• GROUP TWO Capital Productivity
• GROUP THREE Working Capital
• GROUP FOUR Risk
• Each group must identify practical management
  strategies for their area
• Use the worksheets and the task description given
  in the group work pack
• Use the manual and the content of this
  presentation if helpful

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BREAKOUT GROUP SAMPLE ACTIVITY
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Thank you