Financial Management for Non-Financial Managers PDF
Preview Financial Management for Non-Financial Managers
i S T R A T E G I C S U C C E S S S E R I E S FInAnCIAl MAnAGEMEnT FoR non-FInAnCIAl MAnAGERS ClIvE MARSh ii Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and author cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refrain ing from action, as a result of the material in this publication can be accepted by the editor, the publisher or the author. First published in Great Britain and the United States in 2012 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this pub lication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road 1518 Walnut Street, Suite 1100 4737/23 Ansari Road London N1 9JN Philadelphia PA 19102 Daryaganj United Kingdom USA New Delhi 110002 www.koganpage.com India © Clive Marsh, 2012 The right of Clive Marsh to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 6467 7 EISBN 978 0 7494 6468 4 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Marsh, Clive (Clive Mark Heath) Financial management for nonfinancial managers / Clive Marsh. p. cm. Includes bibliographical references and index. ISBN 9780749464677 – ISBN 9780749464684 (ebook) 1. Business enterprises–Finance. 2. Corporations–Finance. I. Title. HG4026.M3647 2012 658.15–dc23 2011043164 Typeset by Graphicraft Limited, Hong Kong Printed and bound in India by Replika Press Pvt Ltd Contents Contents iii Online resources ix Introduction 1 The purpose of this book 1 The author 2 iii Types of business structure and their finance 4 Sole proprietors 5 Partnerships: general and limited liability 6 Corporations 8 A company limited by shares 8 Limited companies 8 Public limited companies 9 Summary 9 ConTEnTS The role of the accounting and finance department 11 Financial accounting, payroll, budgeting, management accounting, taxation, treasury 11 Accounting and finance department relationships 17 Summary 18 Accounting and financial statements 19 Double entry system and ledgers 19 Trial balance 24 Profit-and-loss account 25 Balance sheet 25 Classification of assets and liabilities 26 Source and application of funds statements 27 Principles: matching, accruals, deferrals, consistency, conservatism, accounting periods, materiality, going-concern concept, form and substance, full disclosure and clarity 29 Accounting and the environment 33 Neuroscience and accounting 33 Summary 34 Online resources ix Analysis and financial ratios 35 Ratio analysis 36 Gross profit percentage 38 Net profit percentage 38 Current ratio 39 Liquidity ratio 40 Introduction 1 SDteobctko-rtsu’ rdnaoyvse r ratio 4401 Fixed assets turnover ratio 42 Gearing ratio 43 Return on capital employed ratio 43 Return on equity: earnings per share 44 The price–earnings ratio (PER) 45 Earnings–yield 45 1 Types of business structure and Dividend cover 45 Dividend yield 46 Summary 46 their finance 4 PTlhaen pnlianngn ainndg banudd gbeutidngge t4in8g process 49 Departmental budgets and variance analysis 51 Key budgets: sales, production, materials, labour, overheads, capital 51 Sole proprietors 5 STohme dei kreecyt d mepaaterrtmialesn btuald bguedt gets 5559 Capital budgets 64 Capital rationing 67 Partnerships: general and limited liability 6 Summary 69 Product and service costing and pricing 70 Types of cost: fixed, variable, semi-variable 70 Corporations 8 Total cost and unit costs 72 Contribution, break-even point and marginal costing 73 Absorption costing – standard costing 78 A company limited by shares 8 ASecltliivnigty p-briacseesd a cnods ttihneg s (aAleBsC m) ix 8834 Summary 88 Limited companies 8 SPeritctiinngg ssetrlalitnegg ipersi ces and9 m2arketing strategies 89 Summary 96 Investment appraisal 98 Public limited companies 9 Relevant cash flow 98 Pay-back period 100 Return on capital 101 Summary 9 Accounting rate of return (ARR) 102 Discounted-cash-flow and net present value 103 The internal rate of return (IRR) 106 Capital rationing 108 Summary 110 Finance, funding and working capital 111 2 The role of the accounting and FShinoarnt-ctee ramnd f uwnodrsk:i onvge cradpraitfatsl , short-term loans1,1 i1nvoice finance, trade credit, managing stocks 112 Leases: short term – long term 118 Term funding and long-term finance: optimal gearing, equity funds, ordinary shares, preference shares, debentures, bonds, convertibles, notes, subordi- finance department 11 nExapteodr td fiebnta,n Ecuer:o bbiollns dosf, e cxocmhamnegrec, ilaelt tmerosr togfa cgreesd, ivt,e enxtuporer tc carpeidtaitl ,g duearriavnattieveess 112303 Using retained earnings as a source of funds 131 Bank relationships 132 Financial accounting, payroll, budgeting, management Covenants 135 Financing entrepreneurial thinking and venture capitalists 136 Interest-rate risk 138 accounting, taxation, treasury 11 FSuinmanmcaiaryl markets 114401 International transactions and currency risk 142 Accounting and finance department relationships 17 BFouryeiinggn o erx scehlalinngge f roirsekisg n1 c4u4rrency 142 Foreign currency accounts 146 Forward exchange contracts 147 Summary 18 Hedging using the money market 148 Currency futures 148 Currency options 150 Currency swaps 151 Invoicing in domestic currency 153 Advance payment 153 3 Accounting and financial statements 19 MInatrtac-hgirnogu p trading 115534 Export invoice finance 154 Single Euro Payments Area Direct Debit Scheme 154 Double entry system and ledgers 19 SCuommmpaanryy taxation and fin15a5ncial management 156 Direct and indirect taxation 157 Trial balance 24 TVaAxTe asn odn G cSoTm panies and 1c6o0rporations 159 Taxes on the earnings of employees 162 Global tax planning 163 Profit-and-loss account 25 Double-taxation relief 164 Transfer pricing 164 Bringing taxation into the decision-making process 165 Balance sheet 25 Taxation and the economy: future trends in tax collection 166 Summary 168 The value of a business 169 Classification of assets and liabilities 26 BMueitlhdoindgs voafl vuael uing a bus1i6n9ess 171 Summary 179 Source and application of funds statements 27 FEilnemanecniatsl ostfr aa tfiengya ncial st1r8a0tegy 181 Strategic financial management 182 Summary 189 Principles: matching, accruals, deferrals, consistency, The cost of capital 191 The weighted average cost of capital (WACC) 192 The marginal cost of capital 192 conservatism, accounting periods, materiality, going-concern The cost of ordinary share capital 192 Dividend growth model 195 Capital-asset-pricing model (CAPM) 195 concept, form and substance, full disclosure and clarity 29 SDuivmidmenardy p olicy 119967 Influences in dividend policy 198 Dividend policy theories 199 Ways of paying dividends 200 Summary 202 Case studies 203 Case 1: Misuse of short-term funds with disastrous consequences 205 Case 2: Foreign exchange hedging v speculation 207 Case 3: Stock valuations and profits 209 Case 4: Bank loans and covenants 211 Case 5: Separating money transmission from a lending bank 213 Case 6: Credit ratings and fundamental analysis 215 Case 7: Advantages and disadvantages of internal charging 217 Case 8: Marginal costing v full absorption costing 220 Case 9: Overtrading: profits but no cash 221 Case 10: Integrating the planning and budgeting process, leading to outsourcing 223 Case 11: Government deficits and cost cutting 227 Case 12: A 5 per cent increase in sales is generally worth more than a 5 per cent reduction in costs 229 Case 13: Large capital projects and cost control: critical path analysis and integration with mainstream accounts 231 Case 14: A mass of figures just makes life more complicated 233 Case 15: High levels of fixed costs when income is variable can cause failure 234 Case 16: Interest rates and inflation 236 Appendix 1 239 Appendix 2 240 index 241 iv ConTEnTS ConTEnTS Accounting and the environment 33 Neuroscience and accounting 33 Summary 34 4 Analysis and financial ratios 35 Ratio analysis 36 Gross profit percentage 38 Net profit percentage 38 Current ratio 39 Liquidity ratio 40 Stock-turnover ratio 40 Debtors’ days 41 Fixed assets turnover ratio 42 Gearing ratio 43 Return on capital employed ratio 43 Return on equity: earnings per share 44 The price–earnings ratio (PER) 45 Earnings–yield 45 Dividend cover 45 Dividend yield 46 Summary 46 5 Planning and budgeting 48 The planning and budgeting process 49 Departmental budgets and variance analysis 51 Key budgets: sales, production, materials, labour, overheads, capital 51 Some key departmental budgets 55 The direct materials budget 59 Capital budgets 64 Capital rationing 67 Summary 69 6 Product and service costing and pricing 70 Types of cost: fixed, variable, semi-variable 70 Total cost and unit costs 72 Contribution, break-even point and marginal costing 73 Absorption costing – standard costing 78 ConTEnTS v Activity-based costing (ABC) 83 Selling prices and the sales mix 84 Summary 88 7 Setting selling prices and marketing strategies 89 Pricing strategies 92 Summary 96 8 Investment appraisal 98 Relevant cash flow 98 Pay-back period 100 Return on capital 101 Accounting rate of return (ARR) 102 Discounted-cash-flow and net present value 103 The internal rate of return (IRR) 106 Capital rationing 108 Summary 110 9 Finance, funding and working capital 111 Finance and working capital 111 Short-term funds: overdrafts, short-term loans, invoice finance, trade credit, managing stocks 112 Leases: short term – long term 118 Term funding and long-term finance: optimal gearing, equity funds, ordinary shares, preference shares, debentures, bonds, convertibles, notes, subordinated debt, Eurobonds, commercial mortgages, venture capital, derivatives 123 Export finance: bills of exchange, letters of credit, export credit guarantees 130 Using retained earnings as a source of funds 131 Bank relationships 132 Covenants 135 Financing entrepreneurial thinking and venture capitalists 136 Interest-rate risk 138 Financial markets 140 Summary 141 vi ConTEnTS ConTEnTS 10 International transactions and currency risk 142 Buying or selling foreign currency 142 Foreign exchange risks 144 Foreign currency accounts 146 Forward exchange contracts 147 Hedging using the money market 148 Currency futures 148 Currency options 150 Currency swaps 151 Invoicing in domestic currency 153 Advance payment 153 Matching 153 Intra-group trading 154 Export invoice finance 154 Single Euro Payments Area Direct Debit Scheme 154 Summary 155 11 Company taxation and financial management 156 Direct and indirect taxation 157 Taxes on companies and corporations 159 VAT and GST 160 Taxes on the earnings of employees 162 Global tax planning 163 Double-taxation relief 164 Transfer pricing 164 Bringing taxation into the decision-making process 165 Taxation and the economy: future trends in tax collection 166 Summary 168 12 The value of a business 169 Building value 169 Methods of valuing a business 171 Summary 179 ConTEnTS vii 13 Financial strategy 180 Elements of a financial strategy 181 Strategic financial management 182 Summary 189 14 The cost of capital 191 The weighted average cost of capital (WACC) 192 The marginal cost of capital 192 The cost of ordinary share capital 192 Dividend growth model 195 Capital-asset-pricing model (CAPM) 195 Summary 196 15 Dividend policy 197 Influences in dividend policy 198 Dividend policy theories 199 Ways of paying dividends 200 Summary 202 16 Case studies 203 Case 1 Misuse of short-term funds with disastrous consequences 205 Case 2 Foreign exchange hedging v speculation 207 Case 3 Stock valuations and profits 209 Case 4 Bank loans and covenants 211 Case 5 Separating money transmission from a lending bank 213 Case 6 Credit ratings and fundamental analysis 215 Case 7 Advantages and disadvantages of internal charging 217 Case 8 Marginal costing v full absorption costing 220 Case 9 Overtrading: profits but no cash 221 Case 10 Integrating the planning and budgeting process, leading to outsourcing 223 Case 11 Government deficits and cost cutting 227 Case 12 A 5 per cent increase in sales is generally worth more than a 5 per cent reduction in costs 229 viii ConTEnTS Case 13 Large capital projects and cost control: critical path analysis and integration with mainstream accounts 231 Case 14 A mass of figures just makes life more complicated 233 Case 15 High levels of fixed costs when income is variable can cause failure 234 Case 16 Interest rates and inflation 236 Appendices 239 Index 241 ix onlInE RESoURCES A dditional resources to accompany the book are available on Kogan Page’s Strategic Success website: www.koganpage.com/strategicsuccess Online template 1 – Departmental expenditure variance analysis Online template 2 – Product contribution Online template 3 – Cash forecast Online template 4 – Planning and budgeting process Online template 5 – Direct materials budget Online template 6 – Direct labour budget Online template 7 – Cost variance analysis – manufacturing x THIS PAGE IS INTENTIONALLY LEFT BLANK
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