APICS - CPIM - 2019 - PT 2 - Mod 1 - SecF

SECTION F: BUSINESS PLANNING
AND FINANCE
Section F
Section F Learning Objectives
▪ Definition of business planning

▪ Financial statements and horizontal and vertical
statements
▪ Financial ratio analysis
▪ Master budget and its components
▪ Capital budgeting, payback period, accounting rate of
return, net present value, internal rate of return, and
profitability index
Module 1, Section F ■ 2 © 2019 APICS Confidential and Proprietary

Section F
Business Planning
Statement of long-term strategy and revenue, cost, and profit

objectives, accompanied by budgets, a projected balance sheet,
and a cash flow statement. Grouped by product family and
translated into synchronized functional plans.

Topic 1: Financial Statements
General Components of Financial Statements

 Financial statements are  Assets
used to describe, report,  Liabilities
and analyze a firm’s  Equity
financial performance and
 Profit (or income)
condition.
 Income or P&L statement  Expense
 Balance sheet
 Statement of cash flows

Income Statement
Income = Revenue −
Expenses
A financial
statement
showing net
income over a
given period of
time.

Balance Sheet
“A financial
statement showing
the resources
owned, the debts
owed, and the
owner’s share at a
given point in
time.”

Balance Sheet
Assets = Liabilities + Owners’ Equity
▪ Always in balance
▪ If liabilities < assets, owners’ equity increases
▪ If liabilities > assets, owners’ equity decreases
▪ Owners’ equity (a.k.a., equity, shareholders’ equity)
– Investments of owners and/or shareholders
– Retained earnings (reinvested funds) are what is
adjusted upward or downward to keep things in balance

Statement of Cash
Flows/Funds Flow
Statement
“A financial
statement
showing the
flow of cash
and its timing
into and out of
an organization
or project.”

Topic 2: Financial Statement Analysis
Analyzing Financial Statements
▪ Understanding what lies behind the data—positive or

negative variances in planned performance, trends,
successes, problems
▪ Data must be seen in context.
– Trends in data more accurately convey probabilities of near-
term performance.
– Size is relative.
– Performance must be considered in context of macro and
microenvironments.
– Data are interconnected.

Horizontal
Analysis
 Variances in
each item
from
previous
year or
years
 Flags trends
and
anomalies
for further
analysis
Vertical Analysis
 Also known as the

common-size
statement
 Shows items as a
percentage of the
largest item
 Used for external
and internal
comparisons

Ratio Analysis
 Comparison of one value with another
 Significance is specific to industry and strategy
Liquidity Activity Leverage

• Satisfy short-term • Efficiency of • Satisfy long-term
debt asset use debt
Profitability Market value

• Signals health • Stock
and management attractiveness

Examples of Financial Ratios

Ratio Formula Significance
Quick asset ratio Current Assets − Inventory Ability to pay debt
Current Liabilities without having to sell off
inventory
Inventory turnover Cost of Goods Sold Management of
Average Inventory inventory levels
Debt ratio Total Liabilities Ability to pay off loans
Total Assets (lower is better)
Profit margin Net Income Broad, comparative
Net Sales measure of return to
investors
Price/earnings Market Price per Share Shareholder confidence
(P/E) Earnings per Share

Topic 3: Budgeting Basics
Budgeting
Budget
“estimate of costs and revenues…a pattern for and control
over future operations”
Master budget
“...consolidates all other budgets into an overall plan,
including ... cash flow statement, an operating statement
for budget period, and a balance sheet for end of the
budget period.”

Topic 3: Budgeting Basics
Master Budget Components

Topic 4: Capital Budgeting
Capital Budgeting
Capital budgeting
Planning and financing of outlays for new equipment,
new product lines, and plant modernization
Sunk cost Opportunity cost

A cost already paid and Return on capital that could
not relevant to future have been if it had been
decisions invested in another way

Capital Budgeting Tools

Return on Investment and Residual Income

ROI RI
Relative measure of Net operating income
financial performance earned above minimum
comparing investments by required return on assets
profits returned
RI = Operating Income −
ROI = Gain − Cost (Required Rate of Return
Cost
× Operating Assets)
Above 0 is positive. Also known as economic value

added
Does not reflect time value Value as seen from investors’
or costs of borrowing perspective
Payback and Accounting Rate of Return

Payback ARR
Measure of time required to Comparison of required
recover initial investment investment to required
(shorter is better) return
Payback period = ARR =

Cost of Investment (Annual Cash Inflow −
Straight Line Depreciation)
Annual Cash Savings
0.5 × Initial Investment
Does not consider cost of capital Higher percentage is better.

(discounted payback period Does not consider cost of
method avoids this drawback) capital or profitability at the end
of the project
Stops at break-even point
Time Value of Money
Time value of money

Cumulative effect of elapsed time on value based on
earning power of equivalent investment.
Discounted cash flow

Future cash flows are converted or discounted to their
value at the present time

Cash Flow-Based Tools: Net Present Value (NPV)

NPV
Discounted value of future earnings (in which operating expenses
have been deducted from net operating revenues) for “n” periods
Initial investment $20,000

Estimated life 20 years
Annual net cash inflows $5,000
Cost of capital (minimum rate of return required) 12%
Present value ($5000 × 7.47) $37,350
Initial investment ($20,000)
Net present value $17,350

Cash Flow-Based Tools: Internal Rate of Return
IRR
Rate of compound IRR is compared to firm’s hurdle
interest at which the rate, the minimum accepted rate
firm’s outstanding of return on investments.
investment is repaid Attractive projects exceed the
by project proceeds
hurdle rate.

Investment Ranking Tools: Profitability Index
Profitability index (PI)

Present value of projected
revenue stream from an
investment divided by the
investment
Present Value $37,350

PI = = = 1.87
Investment $20,000

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SECTION F: BUSINESS PLANNING

Section F Learning Objectives

▪ Definition of business planning

Module 1, Section F ■ 2 © 2019 APICS Confidential and Proprietary

Statement of long-term strategy and revenue, cost, and profit

Module 1, Section F ■ 3 © 2019 APICS Confidential and Proprietary

General Components of Financial Statements

Module 1, Section F ■ 4 © 2019 APICS Confidential and Proprietary

Module 1, Section F ■ 5 © 2019 APICS Confidential and Proprietary

Module 1, Section F ■ 6 © 2019 APICS Confidential and Proprietary

Module 1, Section F ■ 7 © 2019 APICS Confidential and Proprietary

Module 1, Section F ■ 8 © 2019 APICS Confidential and Proprietary

Analyzing Financial Statements

▪ Understanding what lies behind the data—positive or

Module 1, Section F ■ 9 © 2019 APICS Confidential and Proprietary

 Also known as the

Module 1, Section F ■ 11 © 2019 APICS Confidential and Proprietary

Liquidity Activity Leverage

Profitability Market value

Module 1, Section F ■ 12 © 2019 APICS Confidential and Proprietary

Examples of Financial Ratios

Module 1, Section F ■ 13 © 2019 APICS Confidential and Proprietary

Module 1, Section F ■ 14 © 2019 APICS Confidential and Proprietary

Master Budget Components

Module 1, Section F ■ 15 © 2019 APICS Confidential and Proprietary

Sunk cost Opportunity cost

Module 1, Section F ■ 16 © 2019 APICS Confidential and Proprietary

Capital Budgeting Tools

Module 1, Section F ■ 17 © 2019 APICS Confidential and Proprietary

Return on Investment and Residual Income

Above 0 is positive. Also known as economic value

Payback and Accounting Rate of Return

Payback period = ARR =

Does not consider cost of capital Higher percentage is better.

Time Value of Money

Time value of money

Discounted cash flow

Module 1, Section F ■ 20 © 2019 APICS Confidential and Proprietary

Cash Flow-Based Tools: Net Present Value (NPV)

Initial investment $20,000

Module 1, Section F ■ 21 © 2019 APICS Confidential and Proprietary

Cash Flow-Based Tools: Internal Rate of Return

Module 1, Section F ■ 22 © 2019 APICS Confidential and Proprietary

Investment Ranking Tools: Profitability Index

Profitability index (PI)

Present Value $37,350

Module 1, Section F ■ 23 © 2019 APICS Confidential and Proprietary

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