Presentation on theme: "UCSD LAMP 2014: Financial Success"— Presentation transcript:
1 UCSD LAMP 2014: Financial Success Dan Goldzband, CMAUniversity of California, San Diego, Extension DivisionGeneral Dynamics Global Imaging Systems, San Diego CA* All opinions expressed are the soley the presenter’s and do not represent the positions or policies of General Dynamics or the University of California.
3 Financial Success Overview: Purpose General:Provide a useful understanding of the basis of accounting and finance and how R&D fits into that schema;Enable you to communicate more effectively with your company’s financial managers and staff, for your mutual benefit.Specific: Provide tools to track and analyze your own LAMP project’s performance.
4 Financial Success Overview: Presentation Outline Underlying concepts: finance vs. accountingNature and analysis of costsProjecting project development cost / Using the Budget & Costing TemplateExercise: Set up Budget & Costing TemplateEvaluating future project or product financial performanceExercises:Project your team project’s financial performanceSouthwest Airlines landing system
5 Financial Success Overview: Presentation Outline (part 2) Evaluating company financial performanceReview Cohu, Inc. financial statementsSelect companies for more rigorous financial statement analysis at 2nd meetingR&D case studies:Assignment: R&D case studies to report at 2nd meetingCase Exercise: Gold Peak Electronics (if time permits)
8 Finance vs. Accounting (dueling definitions) Finance: Science of market valuationFinancial management: Area of management where decisions are based primarily on considerations of value.Accounting: Information system used to collect and organize data and provide information regarding an entity’s financial performance and condition.
9 Finance vs. Accounting (basic work products) Accounting: financial statements and various performance analyses derived from them (historical):Income statementBalance sheetCash flow statementFinance: performance projections and valuations (future-oriented):Cash flow projectionsNPV / Economic value added analysis
11 Cost Definitions -- Part 1 Cost: The amount of resources surrendered (or obligations incurred) to acquire or create a new resource.Expense: Amount of resources consumed to deliver goods/services to customers, or carry out the company’s major or central operations (i.e. use of either existing assets or new resources)Note: Costs are recognized as expenses only when the resources they represent are actually consumed. Only then can the costs be matched as expenses against revenues (directly or indirectly) and thus permit calculation of performance (accomplishments – efforts).
12 Cost Analysis concepts Cost Object: Anything about which cost data is collected; the point of reference of cost measurement.Cost Driver: Any independent factor (variable) that causes costs to be generated.
13 Cost Classifications (non-exclusive) Classification BasisProduct costs vs. period costs Relationship to revenue generationDirect vs. indirect Relationship to occurrence ofspecified activityCost behavior:Variable vs. fixed Relationship to volume of activity
14 Product Costs: accounting treatments according to product character Tangible product: Product in form of finished goods inventory until actually sold (i.e., reclassified from a cost to an expense)Examples: Delta Design (Cohu) test handlers, kits and spare partsGD GIT motors, resolvers and other devicesHP printersServices: Product in form of service, series of services or other intangible. Cost of providing these services or intangible benefits is expensed as incurred, regardless of how much (or little) revenue results in same period.Examples: AT&T communication servicesGoogle web-based advertisingSouthwest Airlines transport services
15 Period CostsDefinition: Costs not related to production activities. These usually occur as a function of the passage of time, or at least independently of fundamental production or operational activities.Typical period costs:Selling costs (advertising, commissions, delivery, support)General and administrative costsR&DNote: What is the fundamental activity of any company?
16 Product Costs: analysis Definition: Costs pertaining to the creation, acquisition or generation of the company’s product or services.Traditional manufacturing model of product costs:Raw materials+ Direct labor+ Overhead (includes depreciation*)= Product cost* Depreciation of production capital assets
18 Direct vs. Indirect Costs Traditionally applies specifically to product costsDefinitions:Direct costs: Product costs which can be related or traced to specific, discrete units of production or services.Indirect costs: Product costs which cannot be related or traced to specific, discrete units of production or services, or for which it is impractical to do so.
19 Direct vs. Indirect Costs (with production as cost driver)
20 Cost Behavior Patterns Variable costs: Vary in relation (usually directly) to the volume of a specific activity/cost driver (usually production or sales)Fixed costs: Do not vary directly as a function of same activity. (“Fixed” actually a misnomer—theses costs do vary, but are not driven by—are not a function of—production or sales).
21 Fixed vs. Variable Costs (contribution margin format P&L)
26 Costed Labor Routing (and full cost summary) OperationDescriptionHoursCost/Hr.Ext. Cost10Assemble2.50$25.00$62.5020Test1.0045.0030Move to stock0.2525.006.253.75$113.75Material cost2,020.00Total unit cost$2,133.75
27 Key Cost Accounting/Mgt Terms Standard cost: Pre-determined, per-unit cost for a component of production or service (material, labor or OH). Used in internal control process as benchmark standard.Cost variance: Amount of difference between actual and standard cost.Target costing: The process of setting product cost goals at or near start of product development process and designing products to meet those cost goals.
38 Net Present Value (NPV) Criteria: Value added from final product.Calculation:Sum of present values of cash flows (negative and positive)Project 1 Incremental Value:Investment (750,000)PV of Op C/F’s ,360,803NPV ,803
39 Relative Merits Payback: Critical to capital management ROI: Ease of understanding and applicable to post-investment performance evaluationNPV: Directly addresses fundamental issue of shareholder value
40 Relative Disadvantages Payback: Disregards time value of money and actual value createdROI: Disregards time value of money and actual value createdNPV: Best used as investment decision rule, not well-suited for post-hoc analysis
44 Net Present Value (NPV) (Project 2) Criteria: Value addedCalculation:Sum of present values of cash flowsScenario 1 Incremental Value:Investment (1,500,000)PV of Op C/F’s 2,464,429NPV ,429
45 Comparison of Methods and Results Project 1 Project 2Payback yrs yrsROI 50% %NPV , ,429
46 Assignment (right now!) Project your project’sROIPayback(Suggest you add to final report, refining the estimates as necessary)
47 Group ExerciseRead WSJ article: “A Radical Cockpit Upgrade Southwest Fliers Will Feel”List every conceivable (and plausible) investment, expenditure or operational change that Southwest will have to make to implement and maintain this system (the negative cash flows in an NPV analysis). Also list any non-obvious possible positive cash flows or benefits.
49 There are only four things that happen in baseball: You throw the ball,You hit the ball,You catch the ballAnd you run.
50 Only Four Things Happen in Finance (with apologies to Bull Durham) You raise capital (from investors)You invest capital (in capital assets or product development)You return capital (to the investors)You restructure capital (debt for equity, or vice versa)
51 Capital Cycle: Presentation in Financial Statements Source of capital:InvestorsRepayment of & return on investment (principle, interest , dividends & stock buy-backs)Equity / debt investment in ventureCash Flow Statement:Financing SectionInvesting Section(CAPEX only)FinancingPositive operating C/F (we hope!)Income Statement / Profit and Loss (P&L)Operations (utilizing capital assets or developed IP)Investment(in capital assets, or product development for tech/bio ventures)Cash Flow Statement:Operations Section
52 Basic Financial Statements Profit and Loss Statement / Income StatementSummarizes historic economic/financial performanceAlways 3 years comparative statementsCash Flow StatementCategorizes and presents all cash flowsBalance SheetSummarizes all financial resources and obligations/ claims against assets to arrive at accounting of enterprise valueAlways 2 years comparative statements
53 Basic Financial Statements Owners’ Equity StatementSummarizes transactions affecting shareholders’ interest in the companyAlways 3 years comparative statementsNotes to Financial Statements
54 Basic Financial Statement Analysis: The Four Questions What is the trend and quality of recent earnings performance?What are the trend and drivers of recent operating cash flow performance?How has the company been providing for / investing in its future, and how is it financing this investment?Assess the company’s financial condition and its financial strategy.
55 Financial Performance Profitability: Ascertain profitability (net income and other interim income measurements) and trend(source: P&L/Income Statement)Cash Flow: Is the company generating a positive and increasing operating cash flow?(source: Cash Flow Statement, operating section)
56 Changes in Components of Financial Performance Prepare and review P&L vertical analysis for the 3 years to identify trends and changes in performance driversIdentify reasons for changes in operating cash flow.
57 Extent of Investment in the Future R&D as % of revenues (source: P&L)Capital expenditures (Cap X) in new productive assets and acquistions(source: Cash Flow Stmnt, Investing Section)Sum of R&D expense and Cap X, as % of revenues (combined “plowback ratio”)Revenue (the fundamental company activity) is the standard basis for performance benchmarking
58 Financial Strategy & Condition Four financial activities:Raising capital (from investors)Investing capitalReturning capital (to investors)Restructuring capital (usually to improve overall cost of capital)#1, 3 and 4 are the “3 R’s” which indicate a company’s overall financial relationship with respect to its investors—what is the net activity over the 3 years represented?
59 Clues to Financial Strategy & Condition In C/F statement:Net financing C/F (positive, negative or neutral?)Dividends being paid?Stock repurchases?Debt activity (issuances, repayments or both?)In Balance Sheet:Change in $ amount of debt or equityChange in capital structure (debt/equity ratio)
60 Review of Cohu, Inc. F/S’s Go to LAMP Holistic Financial Statement Analysis.