dr hab.J. Komorowski prof. SGH

International
Corporate Finance

Lecture 2:

COORDINATION of OPERATIONAL AND
STRATEGIC MANAGEMENT REFLECTED
IN BUSINESS FINANCIAL REPORTS

Why holistic view of
Business is fundametal



Integration of economic, technological

social and psycholgic knowledge,



Respect for Accounting Principles and

overcome of mysteries of Accounting
Language



Strategic approach – a view of all

current factors as well as the total picture
of the Corporation changes upon time
horison



Operational approach - effective

application of
corporate strategy

S T R A C

 – The Holistic Model of Business
Management

The Model ignores and simplifies
qualitative factors as:

 Law regulations,

 Accounting standards and practice,

 Business environment risk,

 Problems of different currencies and
inflation,

 Business culture,

 ATITUDES and BEHAVIOUR of HUMANS
(bankers, accountants, managers, workers
etc.,)

 individual problems of particular case.

Simplifications halp to understand the
essence

Combination of business goals

1. Fulfilment of demand and social

recquirements

2. Profit Max

3. Cash Flows Max

4. Value Max (EVA, MVA, NPV)

5. Customer satisfaction

6. Market expansion

7. Economic Growth

8. Technological Development

9. Piramid of needs by Maslow

Strategic Dilemas:
Competition or

Cooperation

Continuation or

Development

Short or Long Time Horison

Assumptions of Model

Financial Reports of reflects the
Enterprise sittuation

1. Ballance Sheet

2. Cash Flows Report

3. Income Statement (Profit and Loss

Accounts)

All numerical datas in reports are

in forms of Matrixes (prices,
incomes, costs etc.)

as the Data Base for Computer

Processing

The main Factor of

SUCCESSFUL BUSINESS

(the opposite sittuation

means ....)

EARNINGS

(inflows)

Incomes

EXPENSES

(outflows)

Costs

SUCCESSFUL BUSINESS

The essence of a Profit and Loss

Statement

(Income Statement)

EARNINGS

(inflows)

Incomes

EXPENS

ES

(outflows

)

Costs

GAIN

(surplus)

Net Income

Profit

or Loss

Essence of Assets and Cash

Flows

changing Ballance Sheet Statements upon

time

BALANCE

FORWARDED

(FROM THE

PREVIOUS

TERM)

B

1

FLOW IN

F

IN

FLOW OUT

F

OUT

BALANCE

FORWARDED

(FOR NEXT

TERM)

B

2

B

1

+

F

IN

=

F

OUT

+

B

2

How to generate strategic

business growth

(

Relations of BALANCE SHEET & INCOME STATEMENT

)

BALANCE = THE FINANCIAL POSITION OF A BUSINESS
UNIT AT

THE END OF the consecutive FISCAL

YEAR

CF = TOTAL RESULT OF INFLOWS & OUTFLOWS DURING
THE

FISCAL YEAR

BALANCE SHEET

CASH FLOW and Balance Sheet
Relations

BALANC

E

(ASSETS

)

B
A
L
A
N
C
E

BALANC
E

(CAPITAL
)

PROFI

T

PROFI

T

FLOW

IN

FLOW
OUT

B
A
L
A
N
C
E
D

F
L
O
W

S

The Balance Sheet Structure

Current

Assets

Liqui

d

Asset

s

Cash

Notes

and

accounts

recievabl

e, trade

Inventories

Fixed Assets

Current

Liabilities

Notes and

accounts

payable,

trade

Short-term

borrowings

Long-term Liabilities

Shareholders’ Equity

SIX Factors of Business Position

 P – Price
 Q – Quantity
 F – Fixed Cost
 G – Gain (profit)
 V – Variable ratio
 m – marginal
ratio

INCOME STATEMENT

The Financial structures of the Units of PRODUCT and the

whole BUSINESS

P

vP

mP

PQ

vPQ

mPQ

F

G

x

Q

INCOME
STATEMENT

•HOW MANY FACTORS (variables) affect
PROFITABILITY Identify them on this scheme

.

HOW TO CALCULATE “ADDED

VALUE” (or MARGIN PROFIT)

ILLUSTRATIO
N OF
BREAKDOWN
PER UNIT

SELLING

PRICE

P

VARIABLE

COSTS

vP

ADDED VALUE

per UNIT

mP

DIFFERENCE

m

V

ILLUSTRATIO
N OF
AGGREGATE
AMOUNT

SALES

VOLUME

PQ

VARIABLE

COSTS

vPQ

TOTAL

ADDED VALUE

mPQ

DIFFERENCE

m

V

x

Q

SALES
QUANTITY

T

H

E

S

E

A

R

E

T

H

E

K

E

Y

F

A

C

T

O

R

S

F

O

R

C

O

V

E

R

IN

G

F

IX

E

D

C

O

S

T

S

SIX ELEMENTS OF STRAC

0

1

2

3

4

5

6

7

8

9

P (PRICE)

- vP

= mP

X

Q

(QUANTITY)

= PQ

- vPQ

- mPQ

- F (FIXED
COST)

= G (GAIN)

270

140

130

100

27.00

0

14.00

0

13.00

0

17.00

0

-

4000

m

P

P

vP

V

m

PQ

vPQ

mPQ

F

V

m

F

G

x

Q

KEY FACTOR FOR

PROFITABILITY

$270

SELLING

PRICE

P

$140

UNIT PRICE OF

Variable Costs

vP

$130

REMAINDER

mP

V

PROFI

T

S

WHICH FACTOR CONTRIBUTES

TO COVER FIXED COSTS?

m

WHEN Manufacturer SELLS only ONE UNIT

WHEN WHOLE OUTPUT IS SOLD,

$130 PER UNIT COVERS FIXED COST

$270

SELLING

PRICE

P

$140

VARIABLE

COST

$130

ADDED VALUE

(marigin)

V

m

vP

mP

$17,000

FIXED COST

F

THIS IS THE KEY FACTOR WHICH COVERS FIXED
COST

Question: HOW MANY UNITS OF PRODUCTS
SHOULD YOU SELL IN ORDER TO COVER $17,000
OF FIXED COST?
Answer:------------------------------

WHY DO WE ADAPT PQ as the Structure of

SALES?

WHY DO WE ADOPT vP ( VARIABLE COST PER
UNIT)?

SELLIN

G PRICE

$270

VARIA-

-BLE

COST

PER

UNIT

$140

ADDED

VALUE

PER

UNIT

$130

P

0,7 P

0.3 P

P

vP

mP

0,55

0,45

V

m

ELEMENTS

STRATEGY

Traditional

Approach

Sale value

Sale

STRATEGIC

APPROACH

PQ

AVERAGE
SELLING X

SALES
PRICE

QUANTITY

P x Q
P x Q
P x Q

ANALYSIS of the COST

STRUCTURE

Total
Costs
=
EXPENSE
S

2 groups of
COSTS in
relation to
the sales
volume

FIXED COST

VARIABLE

COST

C

O

S

T

S

TOTAL
COSTS

Sales
Volume

WHAT DOES COMPANY DO WHEN IT HAS

A DEFICIT DUE TO SALES Quantity?

FIXED
COST

COST

TOTAL

VARIABLE
COST

VARIABLE
FACTORS

SUCH AS „COST OF
GOODS SOLD” WHICH
FLUCTUATE in
PROPORTION to SALES
VOLUME

FIXED FACTORS
General Expenses
Investments
Research

Depreciation
(Not depended on SALES)

THE COMPANY HAS A DEFICIT
UNLESS FIXED COST CAN BE
COVERED by
a marigin vPQ

WHAT DOES BREAK-EVEN POINT (BEP)
MEAN?

PQ

vPQ

mPQ

F

=

LOSS

PQ

vPQ

mPQ

<

F

PROFI
T

PQ

vPQ

mPQ

>

F

G

FUNDAMENTAL FORMULA FOR

BEP

mPQ = F

PROFITABILITY

Factors

PROFITABILITY

HOW TO INCREASE PROFITABILITY

F

>

PROFIT-
ABILITY

PROFITABILITY recquires:
MORE mPQ THAN F

mPQ

F

X

100 %

mPQ

WHEN BEP RATIO IS MORE THAN
100%, THIS INDICATES THE NUMBER
OF TIMES OF PRESENT SALES
QUANTITY YOU SHOULD SELL IN
ORDER TO ATTAIN BEP

CASE
A.

CASE
B.

WHEN BEP RATIO IS LESS THAN 100%,
THE LOWER THE PERCANTAGE, THE
BETTER THE PERFORMANCE (60%=”A”
RANK)

BEP (BEP RATIO)

BREAK-EVEN POINT

(traditional)

LOSS

Number of UNITS
Sold

C
O
S
T
S

PQ

TOTAL
COST

F

PROFIT

B.E.P
.

vPQ

FIXE
D
COST

BEP : Sales Income =
Total costs

BREAK EVEN POINT - Strategic

mPQ = F

PQ

mP
Q

A
M
O
U
N
T
S

Q

v.R.

m.R
.

BEP

G

F

BREAK-EVEN POINT Equation

F

So

=

(

PQ - vPQ)

F = mPQ m +v = 1
m = 1-v

mPQ = (1-v) PQ

BEP Sale Ratio = So

x Sales

CHART FOR BREAK-EVEN

POINT

(%)

60

70

80

90

100

110

D (POOR)

C (AVERAGE)

B (GOOD)

A (EXCELLENT)

F/mPQ

E (DEFICIT)

B

R

E

A

K

E

V

E

N

P

O

IN

T

120
MORE THAN

TWO KINDS OF CORPORATE

STRATEGIES IN ORDER TO MAKE

PROFIT

mPQ

F

INCREASE

MANAGE

THROUGH

THROUGH

mPQ

STRATEGIES

F

STRATEGIE

S

APPLICATION OF BEP

1 CALCULATION METHODS OF BEP

mPQ = F

2 CALCULATION METHODS OF BEP + G (PROFIT
GOAL)

mPQ = F + G

= F /
mPQ
= F / m

= F / mP

BEP Ratio

PQ

Q

PQ

Q

= F +
G / m

= F + G /
mP

STRATEGIES for mPQ

Maximisation

mPQ

STRATEGIE

S

PURCHASE RM AT

LOW PRICE

(

V

STRATEGY DIRECTLY

RELATED TO

F

STRATEGY)

mP and Q

P - vP

P

STRATEGY

v

STRATEGY

Q

STRATEGY

DON’T SELL CHEAP!

BE COMPETITIVE!

(P

STRATEGY DIRECTLY

RELATED TO

F

STRATEGY)

INCREASE
PRODUCTION

INCREASE
SALES

KEEP RM
PURCHASES,
PRODUCTION,
SELLING
ABILITY
BALANCED

m = (1-v)

STRATEGIES FOR F

Rationalisation

F

STRATEGIES

IMPORTANCE OF

INVESTMENT

JUDGEMENT

CONTROL INVESTMENT

SAVE COSTS in ALL
FORMS

MINIMIZE INTEREST
PAID

DEPRECIATION
POLITICS

REDUCE ADMIN.
EXPENSES

Good rate of INVESTMENT

Invest in PERSONNEL,

Ouality Assurance

Tech. Advanced Poduction

 R&D INVESTMENT

Early INVESTMENT

REDUCED

F

STRATEGY

EFFECTIVE

F

STRATEGY

Part Two:

Goals oriented strategy and planning
– strategic aproach

How to create the financial
strategy of the Business ?

The Part Two:

1.Financial analysis

2. Six steps of the Goal oriented
Financial Strategy and Planning

3. Analysis of performance
and correction of strategy

Financial Ratios

L
P

Corp.A
(period 1)

Corp.B
(period 2)

1.Current Liquidity Ratio
2.Fast liquidity Ratio
3. Working Capital
4. Employed Capital
5. Current liabilities
6. Current Liabilities/ current Assets
Coverage
7. Long Term Liabilities
8. Long Term Liabilities/ Fixed Assets
9. Shareholders Equity
10. Shareholders Equity/ Fixed Assets
Coverage
11. Structure of Financing
12. Financial Leverage
13. Financial Risk

1

 

 

2

 

 

3

 

4

 

 

5

 

 

6

 

 

7

 

 

8

 

 

9

 

 

1
0

 

 

1
1

 

 

1
2

 

I. Financial Analysis of Business Position

- a set of financial ratios (symphtoms review),
- vertical and horisontal relations of the Statements Datas ( static
analysis)

- changes of Datas upon a time (dynamic analisis)

(short therm convenience can bring long term dangers)

Balance Sheet in %

Current

Assets

65%

Liqui

d

Asset

s

45

%

Cash

10%

Notes

and

accounts

recievabl

e, trade

35%

Inventories

20%

Fixed Assets

35%

Current

Liabilities

55%

Notes and

accounts

payable,

trade

25%

Short-term

borrowings

30%

Long-term Liabilities

25%

Shareholders’ Equity

20%

B/S

Compare A with B

Current

Assets

60%

Liquid Assets

40%

Inventories
20%

Fixed Assets

40%

Current Liabilities

55%

Long-term Liabilities 25%

Shareholders’ Equity20%

Current

Assets

50%

Liquid Assets

30%

Inventories
20%

Fixed Assets

50%

Current Liabilities

25%

Long-term Liabilities
20%

Shareholders’ Equity55%

A Corp.

B Corp.

Analysis Point 3

A Corp.

B Corp.

Inventories 20%

Liquid Assets

40%

Current Liabilities

55%

Payment
Deficit

Current Liabilities

25%

Inventories

20%

Liquid Assets

30%

Credibility

Analysis Point 4

A Corp.

B Corp.

Fixed Assets

40%

Long-term Liabilities

25%

Shareholders’ Equity

20%

Fixed Assets

50%

Long-term Liabilities

20%

Shareholders’ Equity

55%

5%

25
%

BREAKDOWN OF VARIABLE &

FIXED COST

RAW

MAERIALS

COSUMED

+

INPUT &

COMPLETION

COST

COST

OF

GOODS

SOLD

(D/C)

DEPRECIATION

LABOR COST

MFG. COST

COST

OF

UNIT

GOODS

SOLD

(F/C)

SELLING EXP.

GEN. & ADM. EXP.

R & D EXP.

NON-OPERATING EXP.

(INTEREST)

VARIABL

E COST

FIXED

COST

F

TOTA

L

COST

COST Analysis

FIXED
+1,500
COST
+2,000

VARIABLE
COST
5000

FULL

COSTING

DIRECT

COSTING

(5 UNITS)

5,000

1,500

2,000

TOTAL

COST 8,500 COST

8,500

LINEAR

RELATIONSHI

P

for 5 units

THREE

ELEMENT

S OF

COST

MATERIALS
COST
LABOR COST
MFG. COST

Resources

P- Average Unit Price (PQ : Q)

 

Year
1

 
2

 
3

 
4

 
5

-vP- Variable cost per Unit (vPQ :
Q)

 

 

 

 

 

 

= mP - Marigin per Unit (P -
vP)

 

 

 

 

 

 

Q quantity of Units Sold

Market Share =
q:Q

 

 

 

 

 

PQ - Total Incomes ( P x Q )

Dynamics Sale
2004:2005

 

 

 

 

 

- vPQ – Total Variable Cost (vP
x Q)

(vPQ : PQ)

 

 

 

 

 

  = mPQ - Marig. on Oper. (PQ -
vPQ)

(mPQ : PQ)

 

 

 

 

 

  - F - Fixed Costs

Fix.Cost Ratio
(F : PQ)

 

 

 

 

 

= G Profit on Operations ( mPQ
- F)

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 L Long and Short term Liabilities

Indebt. Ratio.L:
TC

 

 

 

 

 

  + Shareholders Equity

Structure of
Capital Ratios

 

 

 

 

 

  = Total Capital (TC)

 

 

 

 

 

 

  Rentability of Sale (G: PQ)

 

 

 

 

 

 

  x Turnover of Capital (PQ:TC)

 

 

 

 

 

  = Rentability of Capital (G : TC)

 

 

 

 

 

 BEP Analysis (F : mPQ) x100 %

 

 

 

 

 

 

Step 1. Strategic (dynamic) Projection of
Financial Variables

Part Two:

1.Financial analysis

2. Six steps of the Goal
oriented
Financial Strategy and
Planning

3. Analysis of performance
and correction of the strategy

Step 1:

Definition of G value for the next
financial year,

G (Gain) = a value of Profit after Tax

Traditional approach:

Gain as a result of operations (a
dependent variable)

:

Income - Costs = Gain

Strategic approach:

G + C = I or I - G = C (limit)

Ggain as an Independent Variable and an
operational target:

– determined by: I-G= ( C + Invest+ WACC + Tax +
Premium) limit

-investment prgramme, - (Invest)
-Costs of Capital, Income Taxes, (WACC +Tax)
- bonusing and Dividend Politics, (Premium)

Step 2:

Calculation of Total Marigin

( mPQ )

G + F = mPQ

Step 2:

Knowing G

G + F = mPQ

Now we have to calculate:

F - Fixed Costs:

Step 3:
Calculation of F - Fixed Cost Budget

Pozycja

a) Determined
positions

b)

New positions

and changes

Total
a + b

Curent
Cost

Disper
s-
ion

Depreciation

Related to Fixed
Assets

+ Increase of assets,
 
- Sale of assets

 

 

 

Labour Cost

Structure of
Employment

Increase of
Employment, planned
changes of sales and
vages

 

 

 

Operations Cost

Follow standards,
efficiency and
technology,

Changes of productivity
and costs of technology
imput

 

 

 

Cost of R&D, D

Follow plans

Additional costs of R&D

 

 

 

 

Cost of
Distribution

According plans
of promotion,
contracts, fees
and mariginc

Costs of development of
distribution media ,
additional promotions,

 

 

 

HR Cost

According the
plans .

Changes of costs,
changes of social
insurrance burden,

 

 

 

Non-operations
Costs

WACC

Changes of WACC

 

 

 

Total Fixed Cost

 
A

 
B

Flanne
d
F

 

 

After Step 3

- knowing the value of sum G+ F

G + F = mPQ

Now, we go to Step 4:

- calculation of mP - Marigin Value per
Unit

mP = (1 – v) x P = P - vP

Now, we know the value of marigin recquired G
+ F = mPQ

Step 4:

Calculation of Marigin per Unit Unit - mP
= (1-vP)

Price per Unit

(P)

Variable Cost
per Unit

-

(vP)

Marigin per
Unit

= (mP)

Current

Current

Current

Planned

Planned

Planned

Step 5:

Calculation of Quantity of Units Sold:

Regarding relation

Q = mPQ : mP = (F + G) : mP

and

mPQ = F + G,

than :

Q = (F + G) : mP

Ouantity of Sale is also compared with
Market Forecasts

Projection of Profit and Loss

Accounts

(as a plan or forecast)

In practice, a procedure can be

reverseed

1

2

3

4

5

PQ Incomes

- vPQ Variable
Cost

= mPQ Marigin on
Operatins

- F Fixed
Costs

= G Gain

Step 6:

Financial

Ratios

Current Value

Planned Value

mR
= mPQ:PQ
fR= F : PQ
gR= G : PQ
vR = vPQ :

PQ
BEP=F: mPQ

Step 7:

Controlling of financial ratios

Thank you for attention !!!