The Budgeting Essentials and Development course focus on an integrative and practical view of concepts, methods, and techniques to develop a budget. After finishing this course, learners will be able to: - Develop the budget with a broad view of the corporate functions; - Integrate the strategic guidelines into the discussions of budgeting process; - Structure the budget planning and development in a logical sequence - Coordinate the project of budget planning with the different areas of the company - Actively promote assumptions discussions to improve the process of developing the budget - Apply financial concepts to support the budget planning process - Design a budget monitoring and control model to support the performance management - Evaluate the performance of the company by managing the results and the budget In this course, learners will have a deeper understanding of the budgeting process, its challenges, common issues, and approaches to mitigate the problems and improve the learning curve of budget planning. It is integrative by emphasizing the transition between the corporate strategy and the budget. It is practical by following a structured process of going through a framework that illustrates and demonstrates how to analyze, develop and control the budget.
Video 2 - Financial performance management
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Budgeting essentials and development
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MODULE 4 - Financial and reporting model
In this module, we will develop an understanding of how to consolidate the reporting model on the budget, through a financial approach with emphasis on a budget perspective. To build this knowledge, we will walk through a conceptual overview and components, visit an overall managerial view of profits and losses, work on the cash budget and forecasting cash-flow concepts and application. We also discuss the accounting reports and the relevance of the financial and non-financial indicators.
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Alberto Sansiviero Jr.MBA
FIA Futures Studies Program
Samantha MazzeroMSc, MBA, BS Math
FIA Profuturo – Futures Studies Program
Nelson YoshidaPh.D., MBA, B.Eng.
FIA Profuturo – Futures Studies Program
Roberto Dumas DamasM.Sc., CFA
FIA Profuturo - Futures Studies Program
Fernando FleuryPh.D.
FIA Profuturo - Futures Studies Program
Now, let's start part two of lesson four.
If we move forward,
for example, banks, financial market,
they usually also use that kind of ratio that what we call Net Debt over EBITDA.
It's a very common ratio,
usually are taught by banks to assess the company's leverage compared to its EBITDA.
There is a rule of thumb compared to banks.
Net debt to EBITDA are both three and four,
shows that your company is too leveraged.
So, be careful because net debt to EBITDA,
although we understand that EBITDA is not just what we call cash flow,
but reads that threshold is the rule of thumb that is above three,
four.That's always it depends how much cost a loan but usually three of four,
Net Debt to EBITDA.
This ratio is considered to be a little bit too high.
Also we have, straight to the point,
instead of talking about EBITDA,
we have another leverage ratio what we call Financial Results over Operating Cash Flow.
I think it's pretty much straightforward.
Financial results.
How much you have to pay for banks and how much you generate cash?
Obviously, it show if there is
enough operating cash flow to assist the debt service due by the company.
Is that advisable to be lower than one?
Obviously, if your company does not generate operating cash flow,
you have no cash to pay or to
assist your debt service and your bank is going to check that and said,
obviously, I'm not going to give you more money.
You do not generate enough cash,
not even to pay your financial expense so please check that.
Further, isn't that nice to get funds to pay down its original debt service.
If you were in a position that your financial results is much higher,
I mean your financial expense is higher than your operating cash flow.
I might be wrong,
but you are already get in the game that you may
lose credit to worthiness was your banke because what you say to your banker is,
"Listen, my operating cash flow is not enough to pay my interest expense.'"
How the bank is going to talk to you?
Say, "What are you telling me, my friend?
Are you telling me that I'm not going to generate
enough cash so are you going to default on my debt.?"
Yes, so please don't sit in a table with
a bank with that kind of ratio below one because,
obviously, you guys are going to need a restructuring, a debt restructuring.
Let's move forward. Hopefully, it's not going to happen to you.
Profitability ratios.
That what we have return on Equity,
which is given by net income from your income statement divided by total equity.
What does that mean return on equity?
As the name stands,
it shows how the equity or company own resource have been remunerated.
For example, I own a company.
I use $100,000 or $100 million.
Obvioulsly, I don't have $100 million,
but I use $100 million and the net income is just 10%.
How am I able to analyze it?
Listen, I invest $100 million and I have as a return 10%.
Is it enough? Well, it depends how much US Treasury Bills was paying.
Eventually, 10% is enough for me for my money so I would rather get in a budget plan.
I would rather be an entrepreneur because I believe that
once that I put $100 million, $1 million.
I don't get 10% in the after a year.
It's a good remuneration so we have to check return on equity.
That's a kind of explanation you give to
the major quarterly shareholder but not just that.
You have also what we call Return on Asset.
You bought assets, you bought equipments,
you bought machines so this machine has been remunerated.
How can I understand this?
Use net income/total assets.
It shows the effectiveness of asset utilization.
You bought asset, you bought machines, equipment, land.
Those equipment, those net fixed asset,
they are generating enough returned or not?
Not. So, why did you buy?
It means that your asset or your total asset,
your net fixed asset has not been used efficiently.
That's how you can assess if your project,
your company is going well.
Obviously, there are also other indicators such as EBITDA margin.
That's EBITDA margin that's what we do,
what we call vertical analysis.
EBITDA/net sales.
Some that's we discussed.
Also, net income margin, net income/net sales.
Remember, I know, I know.
Remember EBITDA margin is important.
Net Income margin is important but never, never.
I know it's the last lesson,
but please don't forget.
Don't forget cash. This is crucial.
If you see what we have in our example,
I just plot a balance sheet.
Three years income statement,
three years and then we calculate current ratio,
quick ratio, inventory turnover,
and average collection period.
You see in the first year,
our current ratio was 1.69 and the last year was 1.18.
Quick ratio: 0.6, 0.68, and 0.43.
You see that my quick ratio or the quick ratio of this company is declining.
It seems that you have less liquid assets to assist current liabilities.
Inventory turnover, remember, what I want in terms of inventory turnover,
which is average inventory/cost of goods sold.
I want my inventory to turnover much faster so I want my inventory turnover to be lower.
It means that, my cost of goods sold is higher than my level of inventory.
My inventory turnover move from 2.09,
1.49 and 1.21. Good point.
You doing a very good inventory management.
It's improving. I'm not saying, okay.
I'm not saying that's good. I'm just saying that it's improving.
It could be better. It always could be better.
Never accept enough.
It always could be better your performance.
Average collection period.
Remember, average collection period.
I want higher or lower,
depends on my working capital.
Listen, average collection period is a kind of credit that I give to my client.
I want lower, yes so what do we have.
106 days, 136 days, and 107.
Actually, it did not change.
It deteriorate in a second year,
but went back to the normal situation or average situation.
Average collection period.
It means that once you make a sale, you sold something.
Usually, we will receive your money after 107 days.
That some said that, I know again.
It will impact to your cash flow.
Financial ratios, net debt to equity.
It moved from 0.23, 0.26, and 0.38.
In terms of net debt to equity,
the main shareholder or the shareholder of your company might be happier.
I'm not say completely happier,
but a little bit happier.
Why? Because your leverage is increased but cannot increase much.
Why? Because if your net debt increased too much, the financial service,
the financial expense you have to assume is going to be too big
and your operating cash flow eventually might not be enough to assist your debts service.
Let's check, net debt to EBITDA.
Do you remember that we say?
Three net debt to EBITDA,
number of three is the kind of rule of thumb.
What we have here? Net debt to EBITDA, the first year,
the second year at 1.3, and then last year 2.48.
Let's say your leverage is increasing.
So far so good,
but the last one is crucial.
Financial results/operating cash flow,
0.31, 0.62, 1.19. What does that mean?
1.19, financial expense over operating cash flow.
It means that this company does not
generate enough operating cash to pay financial expense.
Despite the fact that we said, deliberately we said,
higher net debt is good,
your company does not generate enough operating cash flow to assist the debt service.
So, please, please decrease your leverage as soon as possible.
What have you done with your working capital, my friend?
So, decrease your leverage because you are this close to go bankruptcy.
And believe me, banks are looking at
this ratio and banks are not going to be willing to lend money.
Or, banks is going to be willing to lend money to you but a much higher expense.
So, you need a financial management. I know.
I know. Don't tell me, I know.
You have a very good marketing plan.
You have a very good propaganda plan,
but check your management plan.
It doesn't matter if you got this and that.
You are entrepreneur, you are financial management.
You have to be good in everything.
You have to check everything.
That's how a good executive must work.
I think that there is one profitability ratio that I'd like to address.
Net income over equity,
that what we call Return on Equity.
It move from 53% positive to -78%.
So, everything is going wrong with this company.
Profitability is going bad.
Leverage is going too high.
How about, Duma, sorry,
you said that 2.38 net that over be that is not too high.
Yes, but is high enough compared to your operating cash flow,
because guys, your operating cash flow is not enough to pay your financial expense.
Net income to total assets, is got worse,
from 8%, 13%, and -7%.
Let me understand, you bought machines,
you bought land, you bought equipment,
and you get a negative return?
You're using my assets in a very, very inefficient way.
Please, fire this financial management.
It's absolutely wrong what he's doing with this company.
Don't blame the sales because as you can see,
horizontal analysis, my sales is going up.
Nothing to do with marketing.
But, eventually, you may have a very good budget plan,
very good marketing plan,
but look at the financial management, is going wrong.
The relationship with the bank is going wrong.
The relationship that management working capital is going wrong.
So, just don't rely on marketing.
You have to do your financial management [FOREIGN] I'm coming down again.
I'm coming down.
EBITDA margin move from 25% to 15%.
Look how this EBITDA margin could be misleading.
EBITDA margin is positive.
We are fine. Let's pop champagne.
It's fine. No, it's not fine.
EBITDA margin is still positive.
But, we discuss it already.
There is not enough operating cash flow to pay your financial expense.
Eventually, this company went bust.
Net income, you see EBITDA margin is positive.
25 to 15, decrease but it's still positive,
but check the net income margin.
It move from 7% to 13% and -7%.
In a nutshell, what you see in this company?
Profitability is no longer profitable. Cash flow.
Yes, it generates cash flow but not enough to assist the debt service.
So, it doesn't matter if you have a good marketing plan.
Check, re-calibrate your model, re-calibrate your budget,
check your working capital,
check all your relationship with banks and you'll see a fall.
I believe, okay, I'm too excited to see what's happening with this company.
But I think it's a very good point for you guys to understand that
financial management is crucial to understand and to manage budget in a company.
Thank you very much. It's a pleasure.
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