Finance For Non Finance

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Financial Acumen

Effective decision-making

Sales personnel to a businessman

Why do Company exits

To make profits

To maximize shareholder’s returnTo deliver back to society

To pay taxes

To pay salaries and other expense

To provide employment

Why do any company exits ??

To maximize all Stakeholder’s return (Patient , Investor , Employees, Supplier and customer)

Understanding Financial Statements

Financial StatementsA written report of the financial condition of a company. Financial statements include

Profit and Loss

AccountRecord all sales and Purchases

Balance Sheet

Outstanding receivable / Payable & Inventory

Cash Flow

Cash received and paid

Financial Statements

Profit & Loss Account : A period statement showing income and expenditure we have earned or expended during a given period. Period can be of one month , Quarter or a year

Balance Sheet : A position statement showing assets and liability which we own or owed as on a date. It reflects the net worth of a business/individual.

Cash Flow : A Statement showing flow of cash (in and out ) of Business and reflects the amount of money a business has earned (quality of earnings).

Cash flow is derived from Profit and Loss account and Balance sheet

Sample P&L – Listed Company

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Profit and Loss Statement

Accounting of sales, expenses, and net profit for a given period.

Within Company, the reference periods are the month, quarter, and fiscal year (Jan 1 to Dec 31)

Financial Statement that indicates profitability of a business

Revenue / Sales

Cost / Expenses Profit

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What are Company Sales?

How are sales calculated?

Selling Company products & services to third party customers

Sales = Sales Price per Unit x Number of Units Sold

Sales

What is ASP• ASP is Average selling price by product code.

Q. If ASP drops , how will that impact A) Sales B) Profit C) Cost

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Standard Cost

What does Cost means? Total cost to purchase 1 unit of product

How do we calculate CostFor distributed products, Standard Cost includes: Manufacturing cost provided by our Intercompany Plants Plus cost of inbound freight ( freight from plant to warehouse) Plus Duty ( wherever applicable)

For a manufactured product the Cost generally includes Raw materials Direct Labor Overheads

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What is Gross Profit

Gross Profit

Margin earned before incurring indirect cost to sell

Gross Profit % = GP expressed as a % of Sales

Product A has GP % of 60% . Next year cost will increase by 10% .To maintain the same GP% what should be the ASP increase %?

Interpretation of GP%An GP% of say 50% meansOut of $100 sales $50 reflects Gross Profit earned OROut of $100 sales $50 reflects the amount from where SG&A will be incurred

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Expenses relating to sales and marketing of productsAll indirect spending

SG&A Examples Payroll & Employee Programs Travel & Entertainment Grants

Marketing & Promotional expense Professional Services Depreciation

Selling ,General & Administrative Expenses /Opex

SG&A % = SG&A expressed as a % of SalesInterpretation of SG&A%An SG&A % of say 10% meansOut of every $100 sales $10 is spend on sales and marketing of the product or other indirect spending

Manufacturing Cost (In Case of manufacture)

Raw Material Packing Material Labour Cost Mfg Overheads

Freight & Duty Cost Purchase Cost (in case of trading) Primary & Secondary Freight Discards Depreciation on Placed assets

Indirect CostDirect Cost

Salaries & related Travelling Cost Training Cost Grants & promotion Cost Professional SFE Warehousing and CFA cost Administration Cost Depreciation Function Cost

Cost can be classified as…

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Pretax Profit/PTOP

Profit after all expenses (before government taxes ) which is used for share holders dividend or for future investments

Pre Tax % = Profit expressed as a % of Sales

Interpretation of Pretax % : A pretax % of say 40% means

Out of every $100 sales $40 is final profit (before payment of taxes) which is free for distribution to share holders

Sales

Selling Price

Units

Product - Volume Mix

Hospital Margin

Distributor /Liaison

Commission

Factors Affecting Sales

How to Increase Sales?

Increase Volume

Increase Price

??

?

Margins

USD K P&L Variance Qty 16.5 1.5 ASP 10 - Sales 165 15 SGP 69 6

% to Sales 42% 0% OV 6 (1) AGP 63 6

% to Sales 38% 0%

Direct Marketing 24 - Direct W&D 6 (1) Direct G&A 3 - Opex 32 (1)

% to Sales 19% 1%

Ops Profit 31 5 % to Sales 19% 2%

Impact of Volume Increase

+10%

+10%

+10%

USD K Original P&L

Qty 15 ASP 10 Sales 150 SGP 63

% to Sales 42% OV 6 AGP 57

% to Sales 38%

Direct Marketing 24 Direct W&D 5 Direct G&A 3 Opex 31

% to Sales 21%

Ops Profit 26 % to Sales 17%

USD K P&L Variance Qty 15.0 - ASP 11 1.0 Sales 165 15 SGP 78 15

% to Sales 47% 5% OV 6 - AGP 72 15

% to Sales 44% 6%

Direct Marketing 24 - Direct W&D 5 - Direct G&A 3 - Opex 31 -

% to Sales 19% 2%

Ops Profit 41 15 % to Sales 25% 8%

+10%

USD K Original P&L

Qty 15 ASP 10 Sales 150 SGP 63

% to Sales 42% OV 6 AGP 57

% to Sales 38%

Direct Marketing 24 Direct W&D 5 Direct G&A 3 Opex 31

% to Sales 21%

Ops Profit 26 % to Sales 17%

Impact of ASP Increase

1818

Increase in ASP directly flows to our Profits

Impact of Discount / Free SamplesUSD K OriginalQty 10ASP 15Sales 150Sales Discount 0Cost 87SGP 63% to sales 42%OV 6AGP 57% to sales 38%Opex 31% to sales 21%Operating Profit 26% to sales 17%

USD K Discount @ 10% VarianceQty 10 - ASP 15 - Sales 150 - Sales Discount 15 15 Cost 87 - SGP 48 (15) % to sales 32% -10%OV 6 - AGP 42 (15) % to sales 28% -10%Opex 31 - % to sales 21% - Operating Profit 11 (15) % to sales 7% -10%

-10%

Any discount / Free goods directly reduces our Profits

Impact of Discount / Free Samples

Any discount / Free goods directly reduces our Profits

USD K OriginalQty 10ASP 15Sales 150Sales Discount 0Cost 87SGP 63% to sales 42%OV 6AGP 57% to sales 38%Opex 31% to sales 21%Operating Profit 26% to sales 17%

USD K Free goods VarianceQty 11 1 ASP 15 - Sales 150 - Sales Discount 0 - Cost 95.7 9 SGP 54.3 (9) % to sales 36% -6%OV 6 - AGP 48.3 (9) % to sales 32% -6%Opex 31 - % to sales 21% - Operating Profit 17.3 (9) % to sales 12% -6%

Lets See Product Mix Impact with help of Example

Product PriceA 10B 12

Case I Case IISale - 2 units of Product A, 1 Unit of Product B Sale - 1 units of Product A, 2 Unit of Product B

Sales will be Sales will be Qty Price Sales Value Product Mix Qty Price Sales Value Product Mix

A 2 10 20 67% A 1 10 10 33%B 1 12 12 33% B 2 12 24 67%Total 3 32 100% Total 3 34 100%

Product Mix Impact on Sales

Assuming both products generate same profit margin, it will be more profitable to make sales in Case II

HospitalCompany Plants Distributor

Sales Distribution Network

PatientPatient

Pays the MRP to Hospital

Hospital buys products from Company and

sells it to a patient

Distributor will supply product to final customer and

earns a commission % normally 8%

Company either buys or

manufactures a product at certain

costASP= MRP minus

Hospital Margin minus Distributor commission

Distributor Price= 278

Hospital Purchase price

= Rs 300MRP = Rs 500

MRP= 500Hospital Margin= 200Commission= 22 Company ASP= 278

Margin Game!Mr India ( Company top sales manager) was being approached by customer for a business proposal

• Business Value : INR 50 Lakh• 30000 product A @ Rs 40 each : Company Cost @Rs 20• 760 bottles of Product B @ Rs 5000 each : Company Cost @2500

• Hospital Sales product to patient on MRP• Product A @ Rs 60 each• Product B @ Rs 7000 each

• Hospital Overhead assumption 5% of sales value• 10 marketing events (each cost approx INR 30K)• Participation in Conference (cost approx 3 Lakh/doctor)• Distributor margin (with 12% commission).• Distributor credit term to hospital of 18 days • Distributor started business with Rs 1 Lakh investment and requires

Rs 25 K to meet operational expenses• Assume Company Distributor commission = 8% , OV =5% of sales ,

SG&A = 10% of sales

Would you accept this proposal?

Hospital

Company’s Margin

Lets work out the P&L Sales = Rs 50 LakhDistributor commission (12% of 50 Lakh) = (Rs 6 Lakh)Cost of product = (30000 X Rs 20 + 760 X Rs 2500) = (Rs 25 Lakh)OV / Freight and Distribution = (Rs 5 Lakh)Manpower / Back end support = (Rs 5 lakh)Profit = Rs 9 Lakh% to sales = 18%

Would you accept this proposal?

Additional cost 10 marketing events (Rs 30K X 10) = (Rs 3 Lakh)Participation in conference (Rs 3 Lakh X 2) = (Rs 6 Lakh)Total Additional Cost = (Rs 9 Lakh)

Hospital’s Margin

Lets work out the P&L Sales Product A (30,000 X Rs 60) = Rs 18 Lakh

Product B (760X Rs 7000) = Rs 53 LakhCost Product A (30,000 X Rs 40) = (Rs 12 Lakh)

Product B (760X Rs 5000) = (Rs 38 Lakh)

Hospital Overhead 5% of sales value (Rs 15lakh + Rs 45.6 Lakh) = (Rs 3 Lakh)

Profit earned by Hospital = Rs18 Lakh

Pre tax % to Hospital = 25%

Distributor’s Margin

Distributor commission (12% of 50 Lakh) = Rs 6 LakhExpense = Rs 25 K X12 = (Rs 3 Lakh)Profit = Rs 3 Lakh% to sales = 50%

Investment made by the distributorWorking capital of distributorAnnual Turnover and commission value earnedProfit value earned by distributorROI on annualized basis

Investment by Distributor Initial Capital Investment = Rs 1 LakhAverage AR Investment/Working capital = Rs 2.5 LakhTotal Investment = Rs 3.5 Lakh

ROI = Rs 3 Lakh / Rs 3.5 Lakh = 86%

Key Factors for Account Management

• Number of Beds• Specialties• Capacity Utilization• Opportunity /Maintenance account

Future Potential of the account

• Man-hours – Field Force ( KAM/SM/ASM)• Asset Placed in the account• CME and other educational programs• Back end support cost

Investment in the account

• All Company supplied products should be considered • Offer complete range of products to maximize ROI

Basket of products supplied

• Company Margin /ROI• Distributor ROI• Retail Margin

Margin Analysis

SALES

Infrastructure CostWarehousing & Distribution centers

Cost of servicing the account Back End support

Educational ActivitiesPromotion & CMEs Placement of machines Patient servicing cost

Coverage of AccountSalary Travel

Cost of Covering an AccountAll figures in INRK per month

15K 5K

10K 2K10K

5K 11K 15K

250K

Factors Affecting Pretax

Effective forecasting Lower Slow/Non moving : Less Discards Inventory control : positive cash flow Re-distribution : Reduced /eliminate wasteful freight cost Freight and Duty : Reduced Emergency supply

SG&A : Operating expense Hospital related expense : Check ROI Rationale travel : Avoid unplanned/unnecessary travel Analyze ROI on marketing spend Ensure effective utilization of Baxter’s Money

What is a Balance Sheet / MCB?• Statement reflecting what you /entity owns & owes• Snapshot of a business financial condition and net worth• Also referred as Managed Capital Base in Company• Balance sheet has two components 1) Assets 2) Liabilities

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• Assets : Everything that is owned by a business (tangible or intangible) and must have an associated future value stream that can either be converted directly into cash or has a value in itself which includes Account Receivable , Inventory , Capex ,Prepaid

• Liability : Every thing which is a legal debts or obligations that arise during the course of business operations for example Accounts Payable , Accrued Expenses

Does Higher Assets means Healthy Business?

Does Lower Liability means Healthy Business?

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Credit Cards Outstanding

Houses/Property

Cars

Home Loans

Savings/Bank

Wife’s JeweleryPersonal Loans

Example of Personal Balance SheetAssets Liabilities

Sales

Working Capital

• Working capital, in simple terms represents amount of funds blocked by business to carry out day to day operation

• Working Capital = Current Assets − Current Liabilities

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Low Working capital means higher funds availability for investment and spending

Higher Working Capital Means either high Current Assets ( Inventory / AR) or Low Current Liability ( Payables)

Key Take Away!

Sales & SGP

• Increase in ASP or discounts directly impacts Profits

• Analyze distributor / Hospital margin to impact ASP

• Better Mix of High GP products

Cost

• Eliminate Wasteful expenditure• Discard• Redistribution

• Ensure optimum utilization of placed assets

• Check ROI for all marketing investments

• Monitor and Maximize productivity of all resource

Distributor and Hospital

• Distributor• Investment• Working capital• Turnover and commission• Profit earned• ROI on annualized basis

• Hospital• Future Potential• Baskets of product• Margin• Baxter’s Profitability

Thank You