Predictive Analysis

Presented by: Alan Miltz BSc, Bcomm Hon, ACA, ICMA InMatrix Technologies Pty Ltd

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What don’t we know?Predictive Analysis

How does Inventory impact on Cash Flow?

What are the implications of lead times on Cash Flow?

How do I pay bonuses?

Finance is the tool to measure Marketing, Operations and People

Predictive Analysis

For Example:-

What is more important 1. the Profit and Loss? 2. or the Balance Sheet?

Predictive Analysis

1. Profitability Also known as return on sales (ROS) Calculated as Profit/Sales as a % The definition of profit is the critical

issue The calculation should be based on profit

before interest and tax

Predictive Analysis

Profitability cont: Profit before interest and tax (PBIT) or (EBIT)

is the operating profit Profitability should be calculated before the

effects of the business’s external funding Profitability should also exclude abnormal or

extraordinary items What about tax? Is it an operating cost?

Predictive Analysis

Advantages Simple Commonly used

Disadvantages Ignores the balance sheet Relatively easy to manipulate Short term measure

Predictive Analysis

Profitability cont:

2. Activity Activity is Sales/Net Operating Assets The key word is Operating Also known as Asset Turnover

Predictive Analysis

Activity Activity indicates the level of balance sheet

efficiency. If a company has an activity of 4, this

indicates that for every $4 of sales generated, a $1 of Net assets is required.

Predictive Analysis

Take two businessesCompany A is a SupermarketCompany B builds Ships A has Net operating assets of 200,000 and

makes a profit of 20,000 on sales of $2,000,000

B has Net operating assets of 1,000,000 and makes a profit of 100,000 on sales of $2,000,000

Predictive Analysis

Which business would you rather be in?

A has low profitability and high activity

B has low activity and high profitability

What if we combine the two ratios?

Predictive Analysis

Activity

EBITRev Cogs O/hds- =

Net OpAssets

CurrAssets

CurrLiabs

NonCurr+ + =

Profitability

ROCE %Rev

ROCE Flowchart

ROCE = Profitability x ActivityROCE = EBIT/Sales x Sales/Net Operating

AssetsROCE = EBIT/Net Operating Assets

ROCE is also known as RONA

Predictive Analysis

Cost Earnings

Funding (E +ND)

Net Operating Assets

Predictive Analysis

Example: ROCE vs. Interest rateCompany C has the following balance sheetC borrows at 10% and has a ROCE of 8%

Equity + Net debt = Net operating assets1,000 + 7,000 = 8,000

Interest, 700 EBIT, 640

Providing a Loss of 60 !

Predictive Analysis

The company has the following choices:

Refinance at less than 8% Increase profit to over $700 Sell off any unused assets Put in equity

If the owner puts in equity, have they made a good investment ?

Predictive Analysis

An indicative ROCE is therefore at least equal to the cost of borrowed funds

Advantages Combines the P&L and Balance sheet into one

measure Simple Comparable across businesses Guide for investment decisions Widely used

Predictive Analysis

Disadvantages Short term measure Manipulable Doesn’t encourage long term decision making Ignores the impact of funding on the business Lack of a definitive method for calculating Ignores the effect of tax Ignores the time value of money

Predictive Analysis

Balance Sheet Inventory Accounts Receivable Accounts Payable Fixed Assets Other

Predictive Analysis

What should all companies be performing on an ongoing basis?

Conclusion

What if Analysis – I.e. ‘What if my Days Receivable were to be reduced from 70 to 55 days?’

Goalseeking – I.e. ‘How can I reduce my Cash Flow from

-$300,000 to zero?’ Variance Analysis – compare performance, and analyse

growth over two years Communicate Finance to non Financial people Compare one business outcome to another Projection

What if analysis

Goalseek

Goalseek

Variance Report

Assess Profitability over two seasons:

Compare Revenue% andGross Profit%

BusinessDrivers

BusinessResult

Graphic screens

Optimist KPI

Roll Forward

Key in Next Year’s

Targets