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Executive finance and strategy - Ralph Tiffin

Year 2014


IntroductionOrder of the chaptersTerminology used in this bookStructure of the chaptersHow you might use this book1. What is strategy? What does financial strategy mean?Content, order and logic of this chapterOrder and logicDefinitions of 'financial', 'strategy' and 'strategic'FinancialStrategyStrategicFurther strategy-related definitionsAlignGoalObjective(s)MissionMission statementsMotiveTacticTargetValuesVisionWhat is business strategy?What is the objective of financial strategy?Why be in business?Conclusion2. Financial strategy. Why be in business?Content, order and logic of this chapterOrder and logicWhat do successful companies say?How does making a return on investment link with strategy?What successful companies sayMaking a good return is the objective, but what exactly is ROI?The base modelAn arithmetical proof of a high-return strategyStrategic drivers of ROI1. A higher margin (selling price)/lower operating cost strategy2. Higher sales/volume strategy3. Lower margin/higher sales volume strategy4. Lower capital employed strategy - 'cheap is good!'5. Life-cycle costing/whole-life costing strategy6. High gearing strategyConclusionRevision and learning pointers3. Basic financial reports and conceptsLinks between financial statements and strategyContent, order and logic of this chapterOrder and logicThe importance of cash records and reportsCash flow reports - illustrationCash flow forecastsBedrock conceptsGoing concern - a fundamental concept, also termed an underlying assumptionAccruals or matching conceptIncome statement - the P&L accountIncome statements - P&L accountsCost of salesGross profitReview question - interpreting P&L account profilesStatement of financial position -the balance sheetFinancial position - the balance sheetA simple balance sheet and a layout used for management purposes'Reading' the balance sheetWhat do balance sheets reveal about a business?More practiceAlternative balance sheet layoutsConclusionRevision and learning pointers4. What underpins financial statements?Links with strategyContent, order and logic of this chapterLogic and orderCompany law and directors' responsibilitiesUK company law requirementsCompany law requirements re storage and access to recordsOther UK company law that has a bearing on financial strategiesFurther Companies Act 2006 sections of which executives should be awareSummary of legal requirements regarding the strategic report (covered in detail in Chapter 6)Record keeping/bookkeepingWhy have accounting records? Why bother with bookkeeping?AssetsLiabilitiesIncome/sales/revenueExpenses/costs/purchases/overheadsTheir place in financial statementsThe academic 'accounting framework' definitionsBookkeeping examplesThere is no such thing as 'just a figure'Internal controls - accounting systems and procedures - prevention of error and fraudAccounting systemsInternal controlsOther reasons for internal controlExternal and internal audit - prevention of error and fraudAudit functionExternal auditSummaryDirectors' responsibilities statementsInternal audit functionCorporate governanceCorporate governance covers much more than ethicsConclusionRevision and learning pointers5. Accounting 'rules'. How accounting theory and rules affect the strategic numbersContent, order and logic of this chapterOrder and logicBackground to accounting standardsWhy the emphasis on 'useful in making economic decisions'?Enhancing qualitative characteristicsUnderstandability (this word does not pass spell checkers!) and the existence of accounting phenomenaThe probability of future economic benefitThe objective or purpose of financial statementsWhat do GAAP, FASB, IASB and IFRS mean?Financial position - the balance sheetAssetsLiabilitiesEquityRecognition and measurementRecognition of assetsRecognition of liabilitiesRecognition of incomeRecognition of expensesMeasurement of the elements of financial statementsPrincipal accounting concepts -going concern and accrualsGoing concern - a fundamental concept, also termed an underlying assumptionAccruals concept - a fundamental conceptMaterialityHow might materiality impinge on strategy?Substance over formPrudencePrudence and strategiesCompletenessComparabilityHow the concepts impact on the figures (and restrain some behaviour)So how does all of this affect financial strategy?Creative accounting/aggressive accountingYou cannot do what you likeGAAP, which may cause issues with strategiesRevenueLeasesConclusionRevision and learning pointers6. Published or statutory accountsLinks between published financial statements and financial strategyContent, order and logic of this chapterOrder and logicWhat extant accounting standards requirePurpose of financial statementsIncome statements and other comprehensive incomeExamples of published income statementsBalance sheets - statements of financial positionBT plc Group balance sheetNotes to financial statementsUK full financial statementsDevelopments in financial reportingThe strategic reportLong-term views are encouragedFuture developmentsConclusionRevision and learning pointers7. Interpreting financial statementsInterpreting financial statementsLinks between interpretation and financial strategyContent, order and logic of this chapterOrder and logicTechniques for interpreting financial statements1. Comparisons with past or budgeted performance or position2. Ratios - presenting one figure relative to another3. Materiality and relative amounts4. Considering relationships - analytical review5. Comparisons with external benchmarks6. Charts and graphsFurther considerationsException reportingRandom eventsAutomating the interpretation - intelligent interpretationRatio analysisA food producer and an engineering companyThe pyramid of ratiosMore detailed analysis is requiredWorking capital ratiosCurrent ratioLiquidity ratio/quick ratio/acid test ratioGearing or leverage ratiosAnalytical reviewUses of analytical reviewsExternal ratiosShare valuesEarnings per share (EPS)Dividends per share (DPS)Dividend coverEarnings yield and dividend yieldPrice to earnings ratio (P/E ratio)Market to book ratioEBITDAWhy we have to disclose ratiosConclusionRevision and learning pointers8. Cash: the vital elementLinks between cash and financial strategyContent, order and logic of this chapterOrder and logicWhere cash appears in financial statementsCash flows for trading - working capitalWorked exampleInsolvency - going concern - overtradingInsolvencyGoing concernOvertradingCapital cash flowsStatement of cash flowsThe structure of a statement of cash flowPublished statements of cash flowIAS 7 Statement of cash flowsThe statement of cash flows - the three views of business cashOperating activitiesInvesting activitiesFinancing activitiesExamples of company cash flows and how they relate to strategiesCommentaryWhat does the BT pic cash flow statement tell us?Cash-flow-focused strategies1. The mundane money-making strategy -cash generation for ever2. The capital investment strategy - invest for a longer-term return3. The acquisition strategy - investing cash, or better still little or no cash but rather issuing shares, to acquire businesses which may be a bargain or which you can turn around4. Acquisition 'run-out' strategy5. Trading strategy - acquire and dispose of companies6. The extractive strategy7. Invest and sell on a promise strategy - beauty is in the eye of the beholder (or the deceived or delusional!)ConclusionRevision and learning pointers9. Management accounting. Internal reports and business modelsHow does management accounting support strategy?Links between management accounting and financial strategyContent, order and logic of this chapterLogic and orderThe wide scope of management accountingCautionary words on modellingModelling operational structure, particularly costsModelling the futureBudget modelsCash flow modelsManagement reports - to assist with understanding strategy and its deliveryWhy have detailed internal management reports?Why does the management report exist?Appropriate design of reports is importantA checklist to assist with making clear, actionable reportsFuture reportingSales and costing definitions and modelsCommon types of modelsCosting models - definitionsCosting models - costing for planningCosting models - costing to calculate full costsReporting overheads - overhead analysisKPIs, dashboards and detailed analysisAnalytics - can there be too much analysis?ConclusionRevision and learning pointers10. BudgetingContent, order and logic of this chapterOrder and logicWhat does budgeting mean?Forecasting methodsThe difference between 'forecast' and 'budget'How you might forecastMethods of forecasting(a) Incremental budgeting(b) Researching (c) Extrapolation methods(d) Leading indicators(e) Modelling(f) Guaranteeing the figuresWhy budget?Where do budget objectives come from?Budget stagesHow to budgetMethods of budgetingAn incremental approachZero-based budgetingWeaknesses of traditional budgeting and how ZBB differsProblems in implementing a ZBB systemFinally, does ZBB work?Budget reportsBudget cultureThe ideas, customs, and social behaviour of a particular people or societyThe attitudes and behaviour characteristic of a particular social groupExample A - XYZ picExample BExample CConclusionRevision and learning pointers11. Investment appraisal. Investment strategyLinks between investment and financial strategyContent, order and logic of this chapterOrder and logicThe need for investment appraisalArithmetic of appraisal - discounting cash flowsTime value of moneyCompounding and discountingTime baseThe simple truths from the tablesThe time value of money and required ratesWhat is meant by 'rate'?What (discount) rate should be used?Cash flow modelsCommon errors in appraisal cash flowDepreciation costs are includedInterest and loan repayment are includedSunk costsCommon appraisal measuresNon-discounted methods - accounting rate of return, ROCE or ROINon-discounted methods - paybackNet present value (NPV) or present worthInternal rate of return (IRR) or DCF yieldNPV or IRR - which should be used?Risk identification and managementNeed for a defined modelSensitivity analysisThe need for the most likely caseNo need for provisions or contingencies'One at a time' approachLinked parametersHow much analysis should be carried out?What is meant by 'sensitive' - what levels of sensitivity can be tolerated?The need for a consistent and robust processProject appraisal - an integrated approachThe many uses of appraisal modelsLease versus buyIn favour of purchasingIn favour of leasingValuing propertiesConclusionRevision and learning pointers12. Structural or pure financial strategiesContent, order and logic of this chapterOrder and logicBasic definitionsEquitySources of fundsCost of capitalGearing or leverage and the 'magic' of gearingWhat is the 'magic' of gearing?Leasing and off-balance sheet financeSubstance over formLessee accounting - basic approachInitial measurementThe dual approachLeases where the lessee consumes or uses up part of the underlying asset (Type A leases)Leases where the lessee pays for the use of the underlying asset (Type B leases)Sale and leasebackAsset lightAsset strippingGroup structuresAssessing control - investor assessmentCriteriaDetermining controlSpecial purpose vehicles or entities -off-balance sheet activitiesIFRS 12 Disclosure of Interests in Other EntitiesObjective of the standardInterests in subsidiariesInterests in joint arrangements and associatesInterests in unconsolidated structured entitiesForeign currency issuesHedging strategiesConclusionRevision and learning pointers13. SummaryWhat are your company objectives - where do you fit in?Long term (and sustainable)Short or medium termShort termStrategies both financial and physical to support objectivesLinks between the book's chapters and strategiesAre your strategies co-coordinated and aligned?AphorismsGLOSSARY
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