Luk 14:28 For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?
- sit down - it is going to take a lot of time and effort to do the planning
- counting the cost - the purpose of accounting - know how to count the right thing rightly
- complete it - for the own project or business. Need to be comprehensive and complete.
- Business need to make profits to keep going.
- Making profits is the result of the delivery of a good value to customers.
- Even for non-profit making organizations, profits tells us how efficient we are running the charitable organisation. Cost saving will result in profit.
- There is nothing bad or evil in making profit. It is what you do to make profits that decide whether it is good or evil.
- Profits is needed for investing in future, to keep the business going and growing – sowing the seeds.
- Profits are tithed to God.
- Income Statement (Profit & Loss)
- How much did we make in a period (e.g. month, year)
- Balance Sheet
- How much we have or owe at a point in time.
- Cash Flow – Sources & Uses of Funds
- Where did our cash comes from and where did it goes
- Owner’s Equity (& Retained Earnings)
- Who owns the business & how much they own.
- Without financial measures, we do not know how to optimize our usage of resources. Optimization of our God given talents and resources are taught in the parables of the Good Stewards (Mat 25:14-30, Luk 19:11-27).
- If you don’t, your business will go bust.
- Mat 25:28-29 So take the talent from him and give it to him who has the ten talents. 29 For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away.
Economic Value Add (EVA) = Economic Profit
We present a important measure, EVA, that ties up the Profits from the P&L statement and the Working Capital of the Balance Sheet giving a better measure of true profit.
EVA = Net Operating Profit After Tax - Capital_Used x Weight_Avg_Cost_of_Capital
EVA highlights the following:
- Working Capital costs money
- Asset Light is the best policy
- Using the littlest money to make most profits
- Note: sometime right decision leads to wrong outcome
- E.g. sudden rise in the cost of raw materials, inventories may make such agile decision looks foolish – bad outcome.
- The Solution : Risk Management.
- Understanding the underlying assumptions especially the assumed trends
- Figure out how to mitigate the risks.
Profit is a delayed computed measure over a period of time. Profit does not pay your suppliers directly. You use cash (or if supplier allows, may be credit for a time, 30days, but when time is up, cash is please) to pay suppliers and employees. A company can make profits and yet still close down due to lack of cash. There is a trend towards using Free-Cash-Flow (FCF) to measure the 'health' of a company rather than profits.
- "Cash is King" or "He who has the cash has the say".
- Time have value.
Watch out for the time value of money.
A $1 now is of greater value than $1 at year end.
- Options have value.
Keeping the decision options opened have value.
If two plans give the same return, go for the one with greater options.
A 3% interest rate for a 6-month and a 12-month fixed deposits are not equal in value.
- Firstly, we realize that "Lay up treasures in heaven, not on earth Mt 6:20". Hence, the 1st portion of the profit is for the Lord.
- Secondly, profits is put back into the business as longer term investment for the future profits. Money is needed to continue to improve and innovate the business.
- Lastly, take it out and distribute to the owners (shares-holders) as returns for their investment.
- If you have going for a partnership, make sure there is a clause on how the profit made is to be taken out and distributed.
- Profits - NOPAT
- FCF Free Cash Flow
- EVA Economic Value Add, EVA Spread
- Owners Returns: TSR (3-5 years)
- EPS Earnings Per Share
- Employee Productivity
- VA/EC ratio Value-Add/Employee-Cost
- Assets Productivity: ROI, ROCA
About 12 of us gathered together for the seminar. The overall rating is 84%. The highest scores of 92% go to Knowledge of Speaker, followed by Length of Talk, Subject Area Coverage, and the lowest score is location 76%. The feedback from the attendees are shown below:
- Biz Value to Customer Delivered - customer pt of view.
- Value pricing
- Cost pricing is internal driven or my point of view
- Retained Earnings, Working Capital, Free Cash Flow
- Cash is King
- Explanation with real case studies; different interpretation of financial statements
- Incorporation of other theories/concepts from other fields eg Michael Porter's 5 forces, EVA.
- Although financial give a perspective of the state of the business, it is not the only measure.
- Operational measures & other measures, do play an important part in the running of the business
- EVA - It enlightens me on the cost of capital
- Learning about conflict of dept interest, loop holes in accounting system etc.
- Give me bigger picture of organizational behaviour
- Its application with real life examples
- This talk is a revelation to us - when you know the truth, the truth will set you free
- This is my 1st time so I do not have a benchmark. But I'm here to learn even though it is not very relevant to my job scope,
- Have more case studies to drive home points; preferably cases that pertain to current business and economic environment
- Spread the critical topics and allow more time for Q&A and discussion.