Critical Success Factors

1
Planning
Organizing
Critical Success Factors
Stakeholders
Marketing
Economic
Top Management
INTERNAL
Vision
Operations
Finance
EXTERNAL
Social
Political
Mission
Human Resources
Technological
Strategy
Middle Management
First-Line Management
Controlling
Directing
2
Finance Departments Responsiblities

• Determining financial resources required
• budgeting - cash budgeting
• Obtaining financial resources required
• financing - EBIT analysis
• Managing the financial resources effectively
• working capital management
• investing

3

• Decisions -- Balance Sheet
• Assets Equities Investing Financing
• short-term
• long-term

• working capital management
• liquidity
• working capital cycle
• cash budgeting

• capital budgeting
• amount and mix
• operating leverage
• - CVP

• capital structure
• stability
• EBIT analysis
• financial leverage
• Dividends

4
Budgeting / Financial Planning

• 3 steps
• forecasting financial needs
• developing budgets to meet those needs
• master budget
• establishing financial control

5

• Advantages of Budgeting
• compels managers to plan
• facilitates control
• source of motivation
• systems approach
• Negative Aspects of Budgeting - Abuses
• means to reward waste and penalize thrift
• individuals subjected to guidelines not consulted

6

• Cash Budget
• management of cash flows
• management of working capital cycle

Beginning Cash Balance Receipts Total Cash
Available - Disbursements Cash Excess /
(Deficiency) Minimum Cash Balance
Desired Borrowing Reqd / Surplus or Repayment
Ending Cash Balance


7

• Worksheet
• based on historical measures of volatility and
  stability of working capital cycle - time to
  collect and time to pay
• ex you need to prepare a cash budget for the
  months of June, July and August min. cash
  balance 6,000
• assume that sales are forecasted at 10,000,
  20,000, 30,000, 15,000, 25,000, and 20,000
  from April to September respectively
• assume also that you expect to collect 30 in
  month of sale, 60 in month following sale, and
  10 in the 2nd month after sale
• assume that purchases amount to 75 of the next
  months sales
• assume also that you pay for 20 of purchases in
  the month of purchase, and 80 in the month
  following

8

• Worksheet
• April May June July Aug. Sept.
• Net Sales
• Collections
• 30 month of sale
• 60 month follow
• 10 2nd month
• Total Receipts
• Net Purchases
• 75 next mth. sales
• Payments
• 20 month of purch.
• 80 month follow
• Total Disbursements for Purch.

9

• Cash Budget
• June, July, August, 20XX
• Beg. Cash Balance
• Add Receipts
• Total Cash Available
• Less Disb. for Purch.
• Selling Admin.
• Interest
• Dividends
• Capital Expenditures
• Taxes
• Total Disbursments
• Cash Excess / (Deficiency)
• Min. Cash Balance Desired
• Borrowing Required
• Surplus Cash
• Ending Cash Balance

June
July
August
10

• Keys
• 3 possibilities
• 1. Deficiency
• 2. Excess gt Minimum
• 3. Excess lt Minimum

11
Capital Structure

• determined by method of acquiring financial
  resources (borrow vs. sell ownership)
• Optimal structure - maximizes shareholder wealth
  (EPS)
• Compare impact on EPS through EBIT analysis
  (Earnings Before Interest and Taxes)
• Ensure risk is acceptable

12

• Debt financing - bonds and debentures
• interest is tax deductible
• fixed interest payment (legal obligation)
• principal repayment on maturity
• evaluate risk by calculating leverage and
  interest coverage ratio
• Equity financing - ownership
• dividends paid from after-tax income (no
  obligation)
• no repayment needed
• dilutes EPS

13

• EBIT Analysis

Earnings Before Interest and Taxes - EBIT -
Interest Earnings Before Taxes - EBT - Taxes Net
Income - EAT - Preferred Dividends Earnings
Available to Common Stockholder / shares of
Common Stock Earnings per Share - EPS
14

• ex ABC Company requires an additional 4
  million in external long-term financing
• earnings before interest and taxes are assumed to
  be 6 million next year, and ABCs tax rate is
  50
• the existing capital structure consists of
• 5,000,000 in 10 bonds
• 3,000,000 in 6 preferred stock
• 1,000,000 shares of common stock at 10/share
• 500,000 in Retained Earnings
• ABC has 2 alternatives with which to raise the
  money
• 3,000,000 in 11 bonds, and 1,000,000 in 7
  preferred stock
• 2,000,000 in 8 preferred stock, and 2,000,000
  in common stock at 10/share

15

• Need to know the effect that each element of the
  capital structure has on EPS
• debt -- interest debt x interest rate
• preferred stock -- preferred dividends
• preferred stock x dividend rate
• common stock -- shares common stock / price
• Existing
• 5,000,000 bonds x 10 500,000 interest
• 3,000,000 preferred stock x 6 180,000
  dividend
• 1,000,000 shares of common stock
• Alternative 1
• 3,000,000 bonds x 11 330,000 interest
• 1,000,000 preferred stock x 7 70,000
  dividend
• Alternative 2
• 2,000,000 preferred stock x 8 160,000
  dividend
• 2,000,000 common stock / 10 200,000 shares
  common

16

• ABC Company
• EBIT Analysis (000s)
• Existing Alternative
• Structure 1 2
• EBIT
• - Interest
• EBT
• - Taxes
• EAT
• - Pref. Dividends
• Earnings Avail. C/S
• / shares of C/S
• EPS

17

• choose the option which results in the highest
  EPS while realizing that there is always a
  tradeoff between risk and return
• think back to leverage what happens when you
  have more debt than equity in your capital
  structure?
• should be able to determine the degree of
  leverage
• 5,000,000 3,000,000
• 3,000,000 10,000,000 1,000,000 500,000
• 8,000,000 / 14,500,000 .551
• Calculate Interest Coverage Ratio
• 6,000,000 / 830,000 7.2x

18

• Practice Question
• XYZ needs an additional 8,000,000 in external
  long-term financing. Its EBT next year are
  projected to by 4,000,000, and its tax rate is
  50.
• XYZs existing financial structure consists of
• 15,000 in current liabilities
• 1,000,000 in 10 bonds
• 150,000 in preferred stock at a 5 dividend rate
• 2,100,000 in common stock at 15/share
• 750,000 in retained earnings
• XYZ has three alternatives with which to raise
  the financing
• 6,000,000 in 12 bonds 2,000,000 in pref.
  stock at 7
• 2,000,000 in 9 bonds 4,000,000 in pref.
  stock at 6 2,000,000 in common stock at
  20/share
• 5,000,000 in common stock at 16/share
  3,000,000 in 11 bonds
• choose alternative 1, leverage 1.41, int. cov.
  5x