1. Connecting the numbers to the
business
Comprehensive training in the basic
concepts of financial statement
relationships and analysis techniques
Global Financial Bridge training

2. Course Content
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The why
Creating value the ROCE way
Profitability management
Working capital
Cash flow
Revenue (good and bad growth)
Integrating with quick books
Using GFB

3. The why
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I have never heard a business person say “I
don’t want to make more money”
Yet the solution is not always obvious
Our mission is to communicate, bridge and
connect the numbers to the story behind the
numbers.
We assist in in the why (why we can improve), the
what (what needs to be done) and how (how it will be done)

4. The problem
?
How do these statements help the
business person
Was growth good or bad
Identify where money is been made or lost
What is the quality of my cash flows
How fixed are my costs
Do I have good debt or bad debt
Where to focus limited resources
 Am I in a position to pay a dividend
?

5. Our solution – the one page financial
scorecard
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Telling the total
story in one
interactive
platform
Perform what ifs
Communicating
the impact of the
what if
Driving the future creating the
budget
Setting 2 or 3 key goals 
 To be touched on but not the focus of this course

6. The basics
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The ultimate reason why people go into
business in to make money
The key way to measure the ability to make
money is the return on capital provided into
the business
ROCE = Return on Capital Employed

7. ROCE – how we fund the business
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The only way a business can be funded in
through debt and equity.
Debt is defined as interest bearing debt only.
It does not include non interest bearing
liabilities.
Calculate the funding base. See work book
(WB 2)
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Calculate the equity for the 2007 (WB3)

8. ROCE – how the funds are used
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At the end of the day we have to have a
balanced balance sheet
If one half of the balance sheet is how we
fund the business the other half is …
How the funds are used in the business
Calculate how the funds are used see (WB 4)

9. Calculating ROCE %
ROCE %
=
EBIT (Earnings before interest and tax
commonly called operational profit)
Net operating assets (NOA) or capital
employed see WB2

10. How do business improve performance
ROCE % = $EBIT/$NOA
The heart of the scorecard
DO MORE EBIT WITH LESS NOA.
Think about how many decisions can be made
using this guide.

11. ROCE – Combining income statement and
balance sheet management
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ROCE=EBIT/NOA = 300,000/357,534=83.91%
Expressed differently
Revenue
EBIT
X
Revenue
NOA
Income statement
Balance sheet
300,000/1,500,000
20%
x
1,500,000/357,534
4.2
= 83.91%

12. ROCE – Combining income statement and
balance sheet management
Benchmarks
In summary
Business
type
Industrial
Service
Profitability
Profitability x balance
sheet turnover
= ROCE %
10%
15%
Balance
sheet turns
3
4
30%
60%
ROCE

13. Using ROCE to diagnose
Benchmarks
Where is the problem?
1.
In the income statement
performance
2.
In the balance sheet
performance
Compare with
1.
Benchmark
2.
Prior periods profitability and
balance sheet turnover
Business
type
Industrial
Service
Profitability
10%
15%
Balance
sheet turns
3
4
30%
60%
ROCE

14. ROCE and the scorecard
Reflecting the profitability measure (EBIT %) and the balance sheet
measure (Operating asset turnover) 12.16% x 2.04 = 24.85%

15. EBIT NOA decision example
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We are a building supplies distribution company
Want to make a decision about hiring a new sales
person.
Facts
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Cost of sales person $150,000
Sales person sales $1,500,000 PA
What other information would assist you in making a
good decision
See WBS 5

16. Working Capital

17. Working Capital
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Calculate the total working capital for the
2007 and 2008 periods WB 5
The working capital needs for 2008
Calculate Accounts receivable days,
Inventory days and Payable days for 2008
year WB 6

18. Working Capital
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A quick test is to compare the the growth % of total
working capital from one period to the nexxt with the
annualized revenue growth rate.
If WC % growth > working may be mismanaged
If less determine the reason if mainly due to high
increase in payables explain the risk.
If less due to all components working in the right
direction. Determine what actions were taken to
achieve this improvement and can we do more of
them

19. Cash flow and funding

20. Cash flow and funding
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Cash Gross profit % = Gross profit per cash flow
statement. (reports cash flow statement) Compare
this with the accounting gross profit %.
Big differences highlight the inefficiencies of working
capital management.
the inefficiency (difference between income
statement gross profit and cash gross profit ) is
quantified by working capital efficiency $

21. Cash flow and funding
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Operational cash flow. (reports cash flow) This is
one of managements key performance measures.
Always advise clients if they ever consider a
performance remuneration system to include this
measure in the formula.
What is the operational cash capability to (a) pay
interest (b) taxes (c) capital expenditures
Most importantly what is the capability to pay a
dividend

22. Cash flow and funding
!Operating cash not able to cover current
period interest payment.
Bankers are now paying more attention to
this servicing capability. Additional debt has to
be incurred to repay the cost of the debt. This
is not a good indicator

23. Good vs. bad debt
Compare the ROCE with the average cost of debt
ROCE % = (1) ability assess leverage. How much money do we make from other
peoples money. Measured by difference in interest rate and ROCE% = margin of
safety.

24. Larry help
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Way to automate this process
Provide red and green lights

25. Step 2- Profitability review

26. BHT Techniques
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The what if on the best
The comparative what if
The challenge what if
The price volume what if

27. Work books (WB)

28. Workbook –income statement

29. Workbook - balance sheet

30. WB 1 – Funding calculation
2007
Debt
Equity
Total
funding
2008

31. WB 2– calculate how the funds are used
2007
2008

32. WB 3 – Calculate equity
2008 Equity

33. WB 4 Calculating working capital
Working
Capital
components
2007
2008
Movement

34. Work book solutions (WBS)

35. WBS 1 Funding solution
2007
2008
Short term debt
$
348,000
$
304,931
Long term debt
$
500,000
$
800,000
Total debt
$
848,000
$
1,104,931
Total equity
$
445,000
$
705,946
Debt plus equity
$
1,293,000
$
1,810,877

36. WBS 2 Capital Employed/net operating assets calculation
Funding
2007
2008
Short term debt
$
348,000
$
304,931
Long term debt
$
500,000
$
800,000
Total debt
$
848,000
$
1,104,931
Total equity
$
445,000
$
705,946
Debt plus equity
$
1,293,000
$
1,810,877
Capital employed (net operating assets)
Cash at bank
$
22,000
$
8,000
Accounts receivable
$
380,000
$
557,000
Inventory
$
420,000
$
7,770,000
Other current assets
$
56,000
$
62,000
Total current assets
$
878,000
$
8,397,000
Fixed assets
$
850,000
$
1,050,000
Other Non current assets
$
55,000
$
61,000
Total non current assets
$
905,000
$
1,111,000
Accounts payable
$
380,000
$
567,123
Other current liabilities
$
65,000
$
75,000
other non current liabilities
$
45,000
$
55,000
Total other liabilities
$
490,000
$
697,123
Total capital employed
$
1,293,000
$
8,810,877
investments

37. WBS 3 Calculating retained earnings 2008
Retained earnings per current
period (2008) income statement
$
260,946
Retained earnings per balance
sheet previous period (2007)
$
425,000
Retained earnings per the
balance sheet for the current
period 2008
$
685,946

38. WBS 4 Working capital
Working Capital
component
2007
2008
Variance
Variance
%
Accounts Receivable
$380,000
$557,000
($177,000)
47%
Inventory
$420,000
$770,000
($350,000)
83%
($380,000)
($567,123)
$187,123
49%
$420,000
$759,877
($339,877)
81%
Accounts payable
Working Capital

39. WBS 5 – EBIT NOA decision example
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Further information- EBIT driven
 What is the margin on the sales
 Answer 30%
Further information NOA driven
 Are we selling to our existing customers
 If what is the average collection period
 Answer 55 days
 Will the salesperson be selling our existing product range
 Answer – no
 What is the average inventory holding of the new product line
 90 days
 The average payable days is 30

40. WBS 5.1 – EBIT NOA decision example
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Is this a good decision
Things to consider
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Income statement contribution
Balance sheet (NOA) impact
Cash flow.
You have just performed a customer or product one
unit analysis at the same time .

41. WBS 5.2 – EBIT NOA decision example
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Go to a blank GFB scorecard
Enter $1,500,000 into revenue
Enter 70 into COGS %
Enter $150,000 into operating cost
Enter 55 in receivable days
Enter 90 into receivable days
Enter 30 into payable days

42. WBS 5.3 – EBIT NOA decision example