Financial Management for Non-Financial Managers

256 Pages·2012·1.935 MB·English

by  Clive Marsh

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
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