1 / 75

Communicating with CFOs Microsoft Sales Pilot Program January 6-7, 2009

Slide Deck 2. Communicating with CFOs Microsoft Sales Pilot Program January 6-7, 2009. Tony Dimnik, PhD tdimnik@business.queensu.ca. CFO Concerns. Impact of global economic conditions on Finance/IT Financial crisis → conserve cash and reduce costs

nijole
Download Presentation

Communicating with CFOs Microsoft Sales Pilot Program January 6-7, 2009

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Slide Deck 2 Communicating with CFOsMicrosoft Sales Pilot ProgramJanuary 6-7, 2009 Tony Dimnik, PhD tdimnik@business.queensu.ca

  2. CFO Concerns • Impact of global economic conditions on Finance/IT • Financial crisis → conserve cash and reduce costs • Volume and velocity of information → simplify • Competition → develop strategic advantages • Environmental pressures • Limits to growth • Continuous improvement

  3. Today’s Agenda • Introductions • Objectives – Pilot Program (Fire, Ready, Aim) • Finance issues • Language and tools • CFO concerns • Organizational structure • Fundamentals of Financial Accounting - QT • Costing – allocations and drivers Decision making tools • Strategy and finance • Shareholder value • Control • Selling to the Finance Department

  4. Decision-Making Tools Multi-attribute Model Cost-Volume Profit Model (CVP) Discounted Cash Flow Model (DCF)

  5. Investment ProcessIncreasing Use of Analytical Models • Models aid in decision-making • Reduces complexity by identifying key variables and the relationships amongst those variables • Involves cross-functional teams (e.g. CIO and CFO/Controller) • Generates "answers" sufficient for action • Organization-wide use of common models helps justify decisions • Persuasion and commitment • Checks and balances

  6. Three Types of Decision-Making Models • Multi-attribute models • Listing and weighting of key characteristics • Scoring through consensus or means • Useful for selecting amongst implementation alternatives • Accounting models • Profit and balance sheet focus (e.g. CVP, ROI, ROA) • Short-term • Time value of money models • Cash flow focus (e.g. DCF) • Life cycle

  7. Example of Multi-Attribute Model What are the implications for sales?

  8. Fixed and Variable Costs – CVP Model • Set up examples with simple numbers • Play around with the examples • Understand the concepts • Apply the concepts to more complex situations

  9. ANYCO • $5 selling price for each widget • $2 for materials, direct labour, packaging and shipping for each widget • $10 per year for rent of facility and manager’s salary How many widgets do we have to sell this year to cover all of our costs? What is the break-even? What is the profit at sales of 10 units?

  10. ANYCO

  11. CVP – Basic Break-Even Unit Sales Needed to Break-Even Fixed Costs = Contribution Margin Per Unit

  12. ANYCO Fixed Costs

  13. ANYCO Variable Costs

  14. ANYCO CVP Graph

  15. ANYCO Profit Graph

  16. ANYCOFixed Costs Increase to $15

  17. ANYCO Revenues Increase to $6 Per Unit

  18. ANYCOVariable Costs Increase to $3 Per Unit

  19. ANYCOHow would an investment in IT affect profit?

  20. Using the CVP Model • Strategic issues (fixed or variable cost structure) • Fixed cost is better when volumes increasing (growth) • Variable cost reduces risk (major motivation for outsourcing) • How does this relate to current business environment? • Tactical decisions (five levers of profit) • Price • Variable cost • Fixed cost • Mix • Volume • How can you push each lever?

  21. DCF is a Key Decision-Making Model • Underlies shareholder value (cash flow) • Can be used for post-investment audit (and learning) • Encourages strategic thinking by addressing structural cost drivers of investments (life cycle costs)

  22. Life Cycle Cost Patterns 100% Committed Costs Cash/Accounting Costs Investment Life Cycle Costs Plan R&D Design Launch Market & Support 0% 100% Investment Life Cycle

  23. Present Value of $1 Received in the Future

  24. Future dollars worth less because of RIO • Risk • Inflation • Opportunity

  25. An Example to Help You Understand NPV and IRR • Assume you put $1,000 in a savings account in a bank • Assume you get $100 interest every year • Assume you withdraw the interest • Assume you withdraw the $1,000 at the end of five years What is the rate of return of this investment?

  26. Calculate the Net Present Value (NPV) of your savings account usingdiscount rates of 5%, 10%, and 15%

  27. Timeline

  28. Start with the Timeline • Single most important contribution to decisions • Estimate nominal dollars • Use timeline presentation format • Draw separate timelines for each alternative • Numbers are like motions for voting • Use team meetings to refine the numbers (like amending motions for voting)

  29. NPV at 5% +

  30. NPV at 10%

  31. NPV at 15%

  32. Internal Rate of Return (IRR) and NPV • If the NPV is positive then the IRR of the project is higher than the discount rate used • If the NPV is negative then the IRR of the project is lower than the discount rate used • If the NPV is zero then the IRR is equal to the discount rate used • The IRR is the discount rate that makes the NPV of a project equal to zero • What discount rate should you use?How high should an IRR be?

  33. Setting the Discount Rate(WACC, Hurdle Rate) Investment Pot O' Money Equity Debt

  34. Beta is Measure of Volatility If this is relevant to you, ask for Digressions into Finance.

  35. WACC and Hurdle Rate • WACC is the Weighted Average Cost of Capital • Hurdle Rate is the discount rate used to evaluate investment proposals • If you use the hurdle rate to calculate the NPV of a project and the NPV is positive, the project has "jumped over" the hurdle • If you calculate the IRR of a project and the IRR exceeds the hurdle rate, the project has "jumped over" the hurdle • The Hurdle Rate is usually a few points higher than the WACC (e.g. if a company has a WACC of 12%, the hurdle rate might be set at 15%)

  36. Dodie 2000 Kris Ashar, managing partner of an insurance brokerage, was thinking of buying a $100,000 Customer Relationship Management (CRM) system, the Dodie 2000. Table One shows the expected increase in cash flows due to the improvements in customer service of the Dodie 2000 over a period of four years. Kris was advised to use straight-line depreciation for the system for both financial accounting and tax purposes and assumed there would be no residual value for the system. Question Assuming a 40% tax rate, and a required after-tax return of 10%, should Kris buy the Dodie 2000? Calculate the Net Present Value (NPV), the Internal Rate of Return (IRR), and the payback of the Dodie 2000. Table One

  37. The Dodie 2000 Cash Flows After Tax

  38. NPV Calculation for Dodie 2000 Payback

  39. Payback for the Dodie 2000

  40. 13% IRR for the Dodie 2000

  41. Three Other DCF Issues • Sensitivity Analysis • Best case • Worst case • Most likely case • Critical variables • Assumptions of the Status Quo • Dealing with the unquantifiable

  42. Assumption of the Status Quo Estimated Flows With Investment Net Cash Flows Assumed Status Quo Years

  43. The Reality of Declining Cash Flows Estimated Flows With Investment Net Cash Flows Actual "Status Quo" Years

  44. True Differential Cash Flows Net Cash Flows Cash Flow Missing From Status Quo Assumption Years

  45. Status Quo Questions • What will happen if we invest? • What will happen if we do not invest? • What will happen if our competitors invest?

  46. Quantifying What You Can • Calculate NPV with all the "hard" numbers • Identify all the unquantified benefits • A positive NPV represents the lower range of the "real" NPV • A negative NPV represents the investment required to achieve the unquantified benefits (i.e. the cost of the unquantified benefits)

  47. Example of Quantifying What You Can • We have escalating problems with our current Business Intelligence system. • It will cost us $3,000,000 for a new system. • The present value of the quantifiable benefits of the new system are $2,000,000. • The NPV of the new system is ($1,000,000). • There are unquantified benefits in making the investment: • Raise morale of managers and IT staff. • Signal commitment to knowledge management. • Better impression for visitors (customers and analysts). • Consider the $1,000,000 negative NPV as the cost of the unquantified benefits.

  48. Strategy and Finance Shareholder Value Control Systems

  49. Why do you invest in a company?

  50. Total Shareholder Returns (TSR) • Share price at the end of 2006 is $100 • Share price at the end of 2007 is $120 • Dividend payment in 2007 is $10 Share Price Appreciation of $20/$100 = 20% Dividend Yield of $10/$100 = 10% Total Shareholder Returns = 20% + 10% = 30%

More Related