7.- Action Plan (I)

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En provenance du cours de IESE Business School

Operational Finance: Finance for Managers

313 notes

IESE Business School

Operational Finance: Finance for Managers

313 notes

Cours 2 sur 5 dans Specialization Foundations of Management

When it comes to numbers, there is always more than meets the eye. In operational finance, you will learn how to read the “story” that the balance sheet and income statement tells about the company’s operations. The insights you gain from this “financial story” will then become a tool for short-term decision-making at the top management level relating to current assets, current liabilities and the management of working capital. Finally, by the end of the course you will understand the financial consequences of managerial decisions on operations, marketing, etc.

À partir de la leçon

Week 3: Diagnosis and Action Plan

By now you have a pretty good grasp of the Polypanel case and the main issues that could impact future financing. This week, it’s time to roll up our sleeves and work out a diagnosis for these issues. We’ll discuss Need of Funds for Operations (NFO) and Working Capital (WC), two concepts that will help us better understand the company’s problems. Finally, with a solid diagnosis we can develop an action plan that will lead to sustainable growth. Objectives: By the end of the session you will have a framework for diagnosing a company’s financial health. You’ll also gain insights into how to develop an action plan to address its problems.

1.- Recap from Week 24:52

2.- Recap from Week 2, (continued)7:27

3.- Diagnosis (I)6:16

4.- Need of Funds (NFO) and Working Capital (WC)6:15

5.- Need of Funds (NFO) and Working Capital (WC), (continued)4:12

6.- Diagnosis (II)4:58

7.- Action Plan (I)7:19

8.- Action Plan (I), (continued)6:41

9.- Action Plan (II)6:01

10.- Action Plan (II), (continued)5:20

11.- Sustainable Growth6:24

12.- Sustainable Growth, (continued)6:04

13.- Brief Recap5:12

Rencontrer les enseignants

Miguel Antón
Associate Professor
Financial Management

[MUSIC]

We have a problem in this company.

The company needs more and more credit.

And we didn't know what that was, right?

That was why we did the diagnostics, right?

Now, we understood that the diagnosis of the problem is basically that

the company needs more financing, that what the company is able to generate.

So the growth of NFO is actually bigger than the growth of working capital,

which are two concepts that we just saw literally two clips ago.

Now, let's move now onto the action plan.

Now that we know the diagnosis, let's see what we can do.

So an action plan, we need an action plan here, what do we do in action plan?

There are many things that we can do, as you can see this module,

this whole operation of finance course.

is not just about understanding would the numbers mean,

like being able to read a balance sheet and read a P&L.

That's what you did in a way with the accounting course.

Now we are, in a way, using those foundations to build on that and say,

how can you make a robust business,

using the basic financial tools that we have in the company.

Every company has a P&L, a balance sheet, cash flow statement.

Every company has financial statements.

And with the financial statement, you are able to make better decisions and

to build robust businesses.

Many businesses die out of cash.

Many businesses die out of lack of financing.

So if you are able to read and interpret a P&L and a balance sheet, and

make decisions based on that, then you have made a lot of progress, right?

Now in terms of action plan, what kind of we need to change or we could change?

Before we move on to that, let's see an action plan has to have some characters,

the first one is that it has to be realistic, it has to be doable.

We have to be carefull when we do some teaching or

you take a course in which, you'd learn a lot of theory and

you try to apply the theory to practice and there are things that do not match.

You have to use your common sense.

You cannot give some recipes that are completely undoable.

You need to think of the company, of the person that is in the company,

of the environment, the economic outlook, you need to know if that's feasible or

not, if that's doable.

Second, it has to be effective.

Now, you have to solve the problem.

Imagine that you hire a consultant that spends six months doing some work for you,

you have to pay him a ton of money and then he ends up not solving the problem.

You would fire him and say, hey I hired you to solve the problem, right?

You have to be effective.

And third, an action plan has to be efficient.

We will want to be low-cost.

If you want to be a reasonable cost for the problem that you are solving, right?

So if we go back to the diagnosis, you remember that the problem is that NFO is

growing faster than networking capital, right?

So we either have to work on the NFO or on the working capital, right?

We either want to lower that upper mouth of the crocodile or

make a little steeper the lower mouth of the crocodile, right?

How can we work on the NFO?

Well basically, working on the NFO means working on the components of the NFO,

which is receivables, inventory, and payables, right?

Now, let's think for a second.

So receivables.

Where were we?

I mean, we were in 81 days in the year 2008.

We agreed when we started the company, if you remember, on giving

the customer 60 days to pay, to most of them, and then to some of them, 90 days.

Which makes an average of about 70, if we take that everything into account.

Now, we know that over the last four years,

we've been delaying payments for 11 days.

So do you think part of the action plan could be reducing receivables?

Could we actually reduce the days or not?

Can you reduce them to zero?

You would agree with me that if we reduced the days of receivable to zero,

we would completely solve the problem.

The NFO would [SOUND] complete lower down and then we will perfectly fine,

because all the NFO that comes from receivables would disappear.

You will not need to finance that.

Now, is that feasible, is that doable as we said before?

Can you decrease the days of receivable to zero?

Well actually, you can't, right?

You have all your clients, imagine that these guys, basically Munich, vicinity of

Munich, selling panels for construction to small contractors and consumers, right?

Now, they are used to paying 80 days.

If you tell them now you have to pay me in cash, they might say I have no cash.

I need to wait, so that my clients in turn pay me.

So I cannot pay you in cash right now, I just can't.

And if you oblige me to pay you cash, I'm going to go to the competition.

It's not that easy to reduce the days of collection.

I agree, perhaps we can reduce ten days, from 81 to 70.

Well what would be the effect of that?

Well if you remember, we have to compare it with daily sales.

Daily sales is about 10,000 euros a day in year 2008.

If you remember it was 8,000 in year 2007,

but as we increase sales 25% we are in 10,000.

So if we decrease ten days of receivables, we would gain 100,000 Euros, right?

However, we know that some are going to get angry if we reduce the days and

we will lose some customers.

So we have to be a little careful, and then they are good customers, and

they are coming to us, so we cannot squeeze them too much.

I mean, I agree, another option would be to offer them an early payment discount.

Like if you are offered to pay in cash right now, but

if you are offered a discount, you may be tempted to say, okay,

I pay in cash if have to pay less money, right?

But let's see, on the one hand if we offer,

how much do you think we could offer?

I mean if we offer what, a 3% for example, that is attractive.

But then if you offer 3% that means that, if you look at the P&L top line of sales,

you should multiply the top line times 0.97, right?

Which means that in the lower line which is going to be the net income,

the return on sales, you remember that it was about 1.5.

If you reduce the prices 3%, if you give an early payment discount of 3%,

you're going to lose money, you don't have profits anymore.

On the other hand, if you just offer a 1% discount,

it's not very attractive to a customer.

It's going to say for 1%, I'd rather pay in 80 days rather than pay today, right?

[MUSIC]

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