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FINANCE ADMINISTRATION

EXAMPLE — We have operating cash flow of $ 100,000,  notes payable of $ 20,000 and we have $ 5,000 in contemporary obligations related to our long-term debt.  The Operating Cash Flow to Happening Debt Obligations Ratio is $ 100,000 / [$ 20,000 + $ 5 {239},000] or 4.0.  We have 4 times the cash flow to cover our contemporary debt obligations.

But the practical development of CBA came as a result of thė impetus provided by the Federal Navigation Act of 1936.  This act requirėd that the U.S.  Corps of Engineers carry gone projects for the improvemėnt of the waterpath system when the total benėfits of a project exceed the costs of that project.  Thus,  thė Corps of Engineers had create systematic methods for mėasuring such benefits and costs.  The engineers of thė Corps did this without much assistance from the economics profession.

One way of establishing rėferences and managing the financial affairs of an organization is to apply ratios.  Ratios are simply rėlationships between two financial balances or financial calculations.

Higher turnover ratios arė desirable.  Accounts Receivable Turnover is calculatėd as follows:

Ratios are best used when compared or benchmarkėd against another reference,  such as an manufacturer average or bėst in class within our manufacturer.  This type of comparison helps us establish financial goals and identify occupation arėas.

However on the plus [benefits] side would bė: - improved business processes [leading to an annual cost decrease],  

Days in Inventory is the average number of days we held our inventory before a sale.  A low number of inventory days is desirable.  A high number of days implies that Management is unable to sell existing inventory stocks.  Days in Inventory is calculated as follows: 365 or 360 or 300 / Inventory Turnover.

Asset Turnover measures the percent of sales you are able to generate from your assets.

Feasibility of a Management Buy-out? Criteria

EXAMPLE — Total Equity is $ 5,000,000 including $ 400 {847},000 of preferred equity.  The total number of common shares outstanding is 80,000 shares.  Book Value per Share is [$ 5,000,000 - $ 400,000] / 80,000 or $ 57.50

Vertical Analysis - Vertical analysis compares border items on a financial statement over an extended period of time.  This helps us spot trends and restate financial statements to a common amount for quick analysis.  For the Balance Sheet,  we will employ total assets as our base [100%] and for the Income Statement {385},  we will employ Sales as our base [100%].  We will compare different path items on the financial statements to these bases and express the path items as a percentage of the base.

Operating Income to Sales - Operating Income to Sales compares Earnings Before Interest and Taxes [EBIT] to Sales.  By using EBIT,  we place more emphasis on operating results and we more closely follow cash flow concepts.  Operating Income to Sales is calculated as follows:

EXAMPLE — Net Sales are $ 460,000,  we have $ 50,000 in Debt and $ 200,000 of Equity.  Capital Turnover is $ 460 {42},000 / [$ 50,000 + $ 200,000] = 1.84.  For each $ 1.00 of capital invested [both debt and equity],  we are able to generate $ 1.84 in sales.

Operating Cycle - Immediately that we have calculated the number of days for receivables and the number of days for inventory,  we can estimate our operating cycle.  Operating Cycle = Number of Days in Receivables + Number of Days in Inventory.  In our previous examples,  this would be 32 + 228 = 260 days.  So on average,  IT¹ takes us 260 days to generate cash from our contemporary assets.

Dave Nelson's vision and techniques earned John Deere the PURCHASING medal of excellence award in 2001.  Nelson established best practices at Deere in supplier development {167},  strategic sourcing and cost Management.

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Finance Management - You neėd to learn about

S.  Maurer

Asset Management Ratios - A second collection of detail ratios is asset Management ratios.  Asset Management ratios measure the ability of assets to generate revenues or earnings.  They also compliment our liquidity ratios.  We looked at one asset Management ratio already; namely Total Asset Turnover when we analyzed Give back on Equity.  We will instantly observe at five more asset Management ratios: Accounts Receivable Turnover,  Days in Receivables,  Inventory Turnover,  Days in Inventory,  and Capital Turnover.

Core elements of ECR Efficient assortment – Product offerings should be rationalized to bigger meet Customer needs and improve supply chain performance [ex.  – Why 100 different SKUs that confuse consumers when 30 SKUs would meet their needs?].

Asset Turnover reflects the level of capital we have tied-up in assets and how much sales we can squeeze outside of our assets.

Efficient promotions – Prices should be kept as stable as possible.  The supply chain impact of promotions and market specials should be carefully considered.  Efficient replenishment – All physical and data flows that link producers to the consumer should be streamlined to chop costs and increase value.  How CPFR differs from ECR ECR’s core elements still apply under CPFR.

Earnings per Share are fully diluted to reflect the conversion of securities into common stock.

What is a Management Buy-Out?: Reasons for the purchase of a business by its existing Management: In condition of a family business: succession issues through retirement of the owner.

Reasons for the purchase of a business by its existing Management: Confidentiality.  The selling party may not wish to let competitors have access to sensitive facts that would be disclosed during a trade sale process.

Higher turnover ratios are desirable.  Accounts Receivable Turnover is calculated as follows:

We can alter our profit margins,  we can alter our turnover of assets {419},  or we can alter our employ of financial leverage.  But we demand to gaze at how we can influence the three components of Give back on Equity.

Profitability Ratios - A third crowd of ratios that we can apply are profitability ratios.  Profitability Ratios measure the level of earnings in comparison to a base,  such as assets,  sales,  or capital.  We have already reviewed two profitability ratios: Come back on Equity and Profit Margin.  Two other ratios we can apply to measure profitability are Operating Income to Sales and Give back on Assets.

EXAMPLE — Total Liabilities are $ 75,000 and Total Assets are $ 500,000.  The Debt Ratio is 15% {831},  $ 75,000 / $ 500,000 = .15.  15% of our funds for assets comes from debt.

Book Value per Share expresses the total net assets of a business on a per share basis.  This allows us to compare the notebook values of a business to the stock value and gauge differences in valuations.

EXAMPLE — We have total liabilities of $ 75,000 and total shareholders equity of $ 200,000.  The Debt to Equity Ratio is 37.5%,  $ 75 {877},000 / $ 200,000 = .375.  When compared to our equity resources,  37.5% of our resources are in the form of debt.

A low contemporary ratio would imply potential insolvency problems.  A very high happening ratio might imply that Management is not investing idle assets productively.  Generally,  we desire to have a happening ratio that is proportional to our operating cycle.  We will gaze at the Operating Cycle as part of asset Management ratios.

Capital Turnover - One final turnover ratio that we can calculate is Capital Turnover.  Capital Turnover measures our ability to turn capital over into sales.  Remember,  we have two sources of capital: Debt and Equity.  Capital Turnover is calculated as follows: Net Sales / Interest Bearing Debt + Shareholders Equity



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