Financial Literacy for Emerging Leaders

Transcription

1 Financial Literacy for Emerging Leaders Karen Chan, P.Eng., CPA, CMA KPMG LLP

2 Project Manager (PM) concern with execution of a project Operation Manager concern with the sustainable operation of a business unit / PC Take-Away Concept (TAC): If project managers are empowered to make decisions on revenue-generating projects, should they also have the financial literacy to understand how these decisions will affect the PROFITABILITY of the company?

3 Misconception: Financial Statements are for reporting compliance and tax purposes only. Take-Away Concept (TAC): Financial Statements contain an array of valuable information that Managers can use in decision-making Note to Attendees: The following slides on financial analysis contain financial statements that have been presented under accounting standards used by for profit businesses.

4 PROFIT-ABILITY: the ability to make a profit Liquidity, asset/resource utilization, sales, cost Recognizing expenses and revenues as cash vs accrual Receivables and payables what manager must know to sustain cash flow Identify fixed vs variable costs to improve profit contribution KPI: profit margin, WIP/AR collection

5 HANDOUT: ABC Financial Statements Balance Sheet Income Statement (P/L) Cash Flow Statement As at For the period ending For the period ending Snap-shot at a given time External Users (lenders, investors) Accrual: matching costs with revenues Operation Managers Forecast cash position for financing needs Finance Department

6 Take-Away Concept (TAC): Accounting Equation must balance (A = L + E) Accrual: revenue is recognized when earned Cash cycle.wip (Unbilled) > Receivables > Cash > Bad Debt + Tax Payables Cash balance + Cash receipts - Cash disbursement = end-of-month cash balance

7 Take-Away Concept (TAC): Liquidity = ability to meet its short-term liabilities Return on Asset (ROA) = ability to employ company asset Fee-Based Business Current Ratio Current Asset / Current Liabilities Utilization % Hours spent on billable project / total # of hours worked, excl. holidays & vacation Product-Based Business Quick Ratio ROA (Current Asset Inventories) / Current Liabilities EBIT / Total Asset

8 Income Statement Revenue: dollars from sales Cost of Goods Sold (COGS): direct costs associated with creating the goods sold Expenses: costs incurred to carry out activities of the organization Gross Profit Margin % = (Sales COGS) / Sales Net Profit Margin % = Net Income / Sales

9 Pro Forma Income Statement (Handouts) Common Sizing (as % of Sales) Year-over-Year (YOY): compare the results at one time period with those from another time period Year-to-date (YTD), Variance Variable Costs vs Fixed Costs Take-Away Concept (TAC): For management purposes, use different techniques/tools to budget, compare, and benchmark against competitors.

10 Contribution Margin Income Statement Company as a Whole Company Breakdown by Geography Breakdown of Region B by Profit Centers ($ in thousands) Region A Region B Share PC 001 PC 002 PC 003 Service Net Revenue $ 2,000 $ 600 $ 1,400 $ 400 $ 700 $ 300 Variable Costs $ $ Contribution Margin 1, Controllable Fixed Costs $ Head Office Allocation $ Contribution by Profit Centre (CPC) $ 305 $ 180 $ 125 $ (305) $ 200 $ 250 $ (20) Income Taxes (@ 13.5%) $ 41 Net income $ % 41%

11 Tax Rates for Income Earned by a CCPC Effective January 1, 2014 and 2015 Small Business Income up to $500,000 Active Business Income Corporate Income Tax Rates Federal - effective 11.0% British Columbia 2.5 Combined 13.5% Tax Credit - SR&ED (35.0) Refundable Yes 15.0% % (13.0) Partially 2014 KPMG

12 PROFIT-ABILITY: the ability to make a profit Liquidity, asset/resource utilization, sales, cost Recognizing expenses and revenues on cash vs accrual Receivables and Payables what manager must know to sustain cash flow Identify fixed vs variable costs to improve profit contribution KPI: profit margin, WIP/AR collection

13 Take-Away Concept (TAC): Ratio Analysis: KPI to assess ability to generate profit Fee-Based Business Net multiplier Utilization % Overhead Rates Net Fee Revenue per EE WIP Days Lock-up Product-Based Business Net Profit Margin % Gross Profit Margin % Operating Expense % Sales Growth % Days outstanding in AR

14 Formulas Net Multiplier = Net revenue / Direct project labor Utilization % Monitor project profitability = Charged hours / Total hours worked Benchmark based on functional role of individuals Overhead rates = Indirect expenses / Direct labor Establish break-even billing rates

15 Formulas.continued Net Service Revenue per EE = Annual Operating Revenue / No. of employees Set overall revenue target WIP Days Lock-Up = Total WIP x 365 / Annual revenue Average time to complete invoice; WIP earned but not billed Days outstanding in AR = Average AR x 365 / Annual revenue Average AR = (End. Balance Beg. Balance) / 2

16 Take-Away Concept (TAC): WIP Lock-up and outstanding AR have important implications in determining the short-term viability of a company, particularly its ability to pay bills (and payroll) Cash cycle.wip (Unbilled) > Receivables > Cash > Bad Debt + Tax Payables Cash is King

17 Government Funding Opportunities to support industry-led innovation Scientific Research and Experimental Development (SR&ED) Tax Credit $3.6 billion Industrial Research Assistance Program (IRAP) $1.1 billion Sustainable Development Technology Canada MITACS Are you maximizing your access to these funding?

18 Take-Away Concept (TAC) - Summary: Financial Literacy = ability to understand how your decisions will affect profitability of the company Financial Statements: B/S, I/S (P/L), Cash Flow Income Statement is prepared on accrual basis Format: reporting compliance or internal analysis Financial Ratio: analyze ability to generate profits EBIT = Earnings before Interests and Taxes

19 Questions? THANK YOU Karen Chan, P.Eng., CPA, CMA KPMG LLP

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