Charles Priester Jincheng Wang Financial Strategies for the Manager With 35 figures Springer
Contents 1 Goals of Financial Management 1 1.1 Introduction 1 1.2 Getting More Mileage Out of a Company's Assets 4 1.2.1 Important Observation 4 1.3 What Information Do the Financial Statements Convey to the Manager 5 1.3.1 AClose-Up of the Financial Statements 5 1.3.2 An Important Observation about the Balance Sheet and the Income Statement 11 1.4 Income Statement 12 1.5 Flow of Funds Statement 13 1.5.1 Example of a Flow of Funds Statement 13 2 Financial Statements Analysis 17 2.1 Five Key Attributes of Performance 17 2.2 Liquidity 19 2.2.1 A Useful Analogy 19 2.3 The Broad Strategy of Managing a Company's Operational Cash Flows 20 2.4 Analytical Framework for "Speeding up the Dollar Inflow" 20 2.5 Financial Leverage 22 2.6 Activity or Productivity of Assets 26 2.7 The Operating Cycle 27 2.8 Observations about the Operating Cycle and Payable Cycle 28 2.8.1 An Example : 29 2.8.2 The Effect of this Strategy 29 2.8.3 Another Example 30 2.9 Profitability 30 2.10 The DuPont Approach to Performance Analysis 32 3 A Systematic Approach to Financial Performance Appraisal of a Company Based on Trend Analysis 37 3.1 Introduction 37 3.2 This Systematic Approach Involves Four Stages and Is Best Explained By Using an Example 38 3.2.1 Stage One 38 v
3.2.2 Stage Two 39 3.2.3 Stage Three 40 3.2.4 Stage Four 41 3.2.5 An Additional Analysis Liquidity 43 3.2.6 Valuation Ratios 44 3.3 An Example of Ratio Calculations 46 4 Risk & Defensive Strategies 50 4.1 The Concept of Leverage in Business Finance 50 4.2 The Safety Ratio and a Company's Break-Even Level 54 4.3 Defensive Strategies 55 4.3.1 Example of Defensive Strategy 55 4.4 An Example of a Systematic 4-stage Analysis of Case Study #10 56 4.4.1 Stage I 56 4.4.2 Stage II 57 4.4.3 Stage n 58 4.4.4 Stage IV 59 4.4.5 Valuation Ratios 60 4.5 RR Distributors Analysis Continued 61 5 Liquidity Management and Sales Growth 63 5.1 Going Broke While Selling More Than Ever 63 5.1.1 Liquidity and Sales Growth Is Rapid Growth in Sales Good News or Bad News 64 ov Working Capital Management 69 6.1 Introduction 69 6.2 Modern Communication Technology and the Smaller Company 69 6.3 Current Assets 72 6.4 Cash and Liquidity Management 72 6.4.1 First Current Asset, Operating Cash 72 6.4.2 Second Current Asset Receivables 73 6.4.3 Inventory Management 75 6.5 Business Intelligence The Key Asset 76 6.5.1 Inventory Richness 76 6.6 Two Approaches in Measuring the Costs of Receivables and Inventories 77 6.7 Receivables Management Introduction 78 6.7.1 Receivables Management 78 6.7.2 Summary 81 6.8 Inventory Management 81 6.8.1 Introduction 81 6.8.2 Inventory Management 82 vi
6.9 Operational Cash Management 86 6.9.1 Introduction 86 6.9.2 Global Distributing Example 86 6.10 Fluctuating Short-Term Debt 89 6.11 Cash Management 90 6.11.1 Some Useful Questions to Ask 90 6.11.2 Accounts Payable Management 91 6.11.3 Summary 92 6.12 Investment Analysis 93 6.12.1 Introduction 93 6.12.2 Investment Analysis 93 6.12.3 Summary 96 7 Fixed Assets 97 7.1 Capital Budgeting 97 7.1.1 Example of a Typical Capitalization of a Canadian Corporation 98 7.1.2 An Example of Spreadsheets Used for Capital Budgeting 98 7.2 The Analysis of "Financial Leasing" 102 7.2.1 Cash Flow Lease Analysis (Best Performed Using Spreadsheets as a Tool) 102 7.2.2 General Observation 106 8 Budgeting 107 8.1 Introduction 107 8.2 Less Common Financial Ratios for Use in Budget Design and Performance Appraisal Ill 8.3 A Particular Type of Budgeting: Pro-Forma Statement Building 114 8.4 Example of Pro-Forma Statement Building Based on the 1998 Financial Statements of Electronic Distributors Case #4 115 9 Economic Value Added 118 9.1 Using Economic Value Added (EVA) as a Strategic Evaluation Tool 118 9.2 A Fresh Look at the Balance Sheet 118 9.3 What About EVA Levels 119 9.4 To Calculate EVA We Need to Know the WACC% 120 9.5 The Debt/Equity Mix's Effect on WACC% 121 9.6 Strategies to Raise EVA 121 9.7 Three Measures of Financial Performance 122 9.8 Financial Goal-Setting Using EVA 123 9.8.1 Calculating EVA 123 vii
9.8.2 Conclusion 124 9.8.3 Approach One 124 9.8.4 Approach Two 125 9.8.5 Approach Three 127 9.8.6 Approach Four 130 9.9 Summary 132 9.10 Some Additional Thoughts about EVA-Enhancing Strategies 132 10 Foreign Exchange and Interest Rate Risk Management 136 10.1 Introduction 136 10.2 Foreign Exchange Risk Management Techniques 136 10.2.1 FX Forward Contracts 136 10.3 Foreign Currency Futures 137 10.3.1 FX Futures Contracts 137 10.4 Important Differences and Similarities Between FX Forward and FX Future Contracts 139 10.5 FX Options 139 10.6 Interest Rate Risk Management 141 11 Mergers, Acquisitions and Private Equity 143 11.1 Introduction 143 11.2 Synergy 143 11.2.1 Acquisition vs. Merger 144 11.2.2 Paying for the Purchase 144 11.2.3 Valuation 145 11.3 Which Companies are Doing Most of the Buying 145 11.4 Private Equity Firms Obtain Their Funding in Private Markets 147 11.4.1 Categories of Private Equity Investments Include 147 11.5 Will the Explosive Growth of Mergers and Acquisitions Activities Continue 148 11.6 How Long Can This Go On 149 Appendix A Solutions to Exercises 156 Appendix B Case Studies 1.15 (Solutions to Case Studies 1, 4 and 14) 173 Appendix C Glossary 212 VIII