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Predictive Analysis

Predictive Analysis. Presented by: Alan Miltz BSc, Bcomm Hon, ACA, I CMA InMatrix Technologies Pty Ltd. Predictive Analysis. Blind Spot. What don’t we know?. Known by others. Not known by others. Known by us. Common knowledge. Competitive knowledge. Not known by us.

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Predictive Analysis

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  1. Predictive Analysis Presented by: Alan Miltz BSc, Bcomm Hon, ACA, ICMAInMatrix Technologies Pty Ltd

  2. Predictive Analysis Blind Spot What don’t we know? Known by others Not known by others Known by us Common knowledge Competitive knowledge Not known by us Unknown

  3. Predictive Analysis Finance is the tool to measure Marketing, Operations and People • How does Inventory impact on Cash Flow? • What are the implications of lead times on Cash Flow? • How do I pay bonuses? For Example:-

  4. Predictive Analysis • What is more important • the Profit and Loss? • or the Balance Sheet?

  5. Predictive Analysis • 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

  6. 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?

  7. Predictive Analysis Profitability cont: • Advantages • Simple • Commonly used • Disadvantages • Ignores the balance sheet • Relatively easy to manipulate • Short term measure

  8. Predictive Analysis • Activity • Activity is Sales/Net Operating Assets • The key word is Operating • Also known as Asset Turnover

  9. 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.

  10. Predictive Analysis • Take two businesses • Company A is a Supermarket • Company 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

  11. 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?

  12. ROCE Flowchart - = Rev Cogs O/hds EBIT Profitability Rev ROCE % Curr Assets Curr Liabs Non Curr Net Op Assets = + + Activity

  13. Predictive Analysis • ROCE = Profitability x Activity • ROCE = EBIT/Sales x Sales/Net Operating Assets • ROCE = EBIT/Net Operating Assets • ROCE is also known as RONA

  14. Predictive Analysis Net Operating Assets Funding (E +ND) Cost Earnings

  15. Predictive Analysis Example:ROCEvs.Interest rate Company C has the following balance sheet C borrows at 10% and has a ROCE of 8% Equity+Net debt= Net operating assets 1,000+7,000= 8,000 Interest, 700 EBIT, 640 Providing a Loss of 60 !

  16. 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 ?

  17. 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

  18. 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

  19. Predictive Analysis • Balance Sheet • Inventory • Accounts Receivable • Accounts Payable • Fixed Assets • Other

  20. Conclusion • What should all companies be performing on • an ongoing basis? • 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

  21. What if analysis

  22. Goalseek

  23. Goalseek

  24. Variance Report Assess Profitability over two seasons: Compare Revenue% and Gross Profit%

  25. Graphic screens Business Drivers Business Result

  26. Optimist KPI

  27. Roll Forward Key in Next Year’s Targets

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