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Financial management Lecture # 6 Jan H. Jansen

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1 Financial management Lecture # 6 Jan H. Jansen

2 Programme (Spring 2008) #DateTopicChapters F&AAdditional readingsAssignments (2 hrs) Introduction Financial Statements Economic Trade Offs 1313 Atrill Drury 1 (Analyses Annual Report KPN 2006) (4 hrs) Accounting Financial Ratios 4 & 5 6 Horngren Drury 2 Benchmarking Annual Reports (2 hrs) Budgetting Variance Analyses 7Atrill Drury 3 (Case outsourcing) (2 hrs) Break Even Analyses Cost Prices 8Drury Horngren 4 (Budgetting case) (2 hrs) Working Capital Management Capital Budgetting & 12 5 (Variance Analyses) (2 hrs) Capital Budgetting Interest rate & Risk 12Drury Horngren Brigham 6 (Interest calculations) (2 hrs) DOSIT model Case study 7 (Capital budget) (2 hrs) Case study Test exam Case study8 (Investment decision) E Or Writte exam (2 hrs)

3 Investment Decisions

4 Investment trade off (I) Investment – Equipment – Building – R&D – Environment Sustainability – Staff / HR – Maintenance – Operating costs Additional Funds – Equity – Loans

5 Investment trade off (II) Cash Outflows – Equipment – Building – R&D – Environment Sustainability – Staff / HR – Maintenance – Operating costs Cash Inflows – Sales – Lower costs

6 Components of the Capital Budget Model Investment (Year 0) Economic Life of the Investment – Years 1 - n Interest Rate: i = r + π + σ r = real interest rate π = inflation σ = risk (project risk mark-up Annual Cash Flows (During economic life) – Expenses – Revenues

7 Decision Criteria Pay Back Period (PBP) Return On Investments Discounted Pay Back Period (DPBP) Net Present Value (NPV) Profitability Index Internal Rate of Return (IRR)

8 DOSIT Model Model developed by: – TNO (Applied Research in Science) – Chair of TQM in Networks of Organisations Prof. Gerard Berendsen – Source: Duurzaam innoveren met de DOSIT-methodiek, G. Berendsen cs, Sigma Kluwermanagement, June 2006

9 DOSIT Model Dutch Duurzaam Ondernemen Selectie Innovatieve Technologie English Sustainable Entrepreneurial Selection Innovative Technology

10 Why DOSIT? Hot topics in business are: Innovation – Product innovation – Innovation of processes Sustainability – Stewardship / Managership / Bailiff (UK) (Dutch: Rentmeesterschap) Investments

11 Sustainability Innovation: Products Process Investing

12 Sustainability & Entrepreneurship in SMEs Company meets the requirements from the government and keeps in mind future reqyuirements Company fulfils its social and cultural role in society Company plays in an effective way its role in the huge changes in society & economic development for the mid and long term

13 Sustainability & Entrepreneurship in SMEs The product, the way the product is used and will be used The production process (including resources) The way the product is introduced on the market

14 Basic assumptions: DOSIT model 1.Focus as a company on a limited number of activities connected to sustainability 2.Intrinsic motivation of staff concerning change in general and sustainability: specific 3.Communication in the company concerning sustainability: Top Down & Bottom Up 4.Quick and dirty job in SMEs, staff wants to see immediately results 5.Aspects of sustainability have influence on the continuity of the company 6.Sound financial base is important for the continuity of the company

15 ProfitPeople Planet

16 Stages in the DOSIT methodology 1.Preparation 2.Choice of priorities in the areas of Key Success Factors 3.Selection of possible Innovations 4.Final choices of Innovations 5.Implementation of Innovations

17 DOSIT Matrix (Overview Priorities) Supply Chain & Value Chain Raw materials Components Business development Logistic Processes (ITO) Production Packaging Warehousing & Distribution Product & Market Development Product Use / Reversed Logistics Aspects Planet People Profit

18 Constraints in the process of sustainable innovation ROI requirement (bottom line) Requirements clients How do process interfere in the chain? Feasibility (in a technical way) Connection with future developments & ambitions of the company What is target for the degree of sustainability How much will be the impact of the innovation (paradigm shift?)

19 DOSIT Method: Excel tool

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