Robert Uberman, Financial Management, KA im Frycza Modrzewskiego 9

Session Nine Topics Responsibility Centers Responsibility Centers Fundamental Income Statement analysis Fundamental Income Statement analysis Budgeting and control tools and processes Budgeting and control tools and processes Other performance measurement concepts Other performance measurement concepts

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Responsibility centres Cost centres Cost centres cost only cost only Revenue centres Revenue centres revenues (usually combined with some costs) revenues (usually combined with some costs) Profit centres Profit centres revenues and costs but no capital expenditures revenues and costs but no capital expenditures Investment centres Investment centres all three: rev., costs, and CAPEX all three: rev., costs, and CAPEX measured by ROI, NPV, EVA(Residual Income) measured by ROI, NPV, EVA(Residual Income)

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego CVP analysis Cost structures - variability: Cost structures - variability: fixed costs fixed costs variable costs variable costs other types: other types: semi variable semi variable stepped costs stepped costs

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego B(reak) E(ven) P(oint) analysis BEP formula BEP formula BEP as a measure of companies’ risk exposure BEP as a measure of companies’ risk exposure

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego BEP concept Company A, likely: FMCG retail Company B, likely: metal industry, mining

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Contribution concept Contribution = Revenues - Variable costs Contribution = Revenues - Variable costs Contribution – ways of presenting: Contribution – ways of presenting: Value/unit or per tone Value/unit or per tone % of sales revenues % of sales revenues Named CVP = Cost Volume Profit Analyses Named CVP = Cost Volume Profit Analyses

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego BEP and pricing decisions Full absorption vs variable costing Full absorption vs variable costing Pressure on price Pressure on price Allocation of fixed costs Allocation of fixed costs Opportunity costs – limited resources issue – fixed costs as representation of limited resources Opportunity costs – limited resources issue – fixed costs as representation of limited resources

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Pricing – most widely used methods Cost + method Cost + method Mark-up vs Margin Mark-up vs Margin

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Variance analysis in the control process Volume and price variance Volume and price variance Budgeted amount = Budgeted amount = budgeted price * budgeted quantity Actual amount = Actual amount = actual price * actual quantity Variances’ tree Variances’ tree

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Variance analysis in the control process – practical issues Huge number of calculations: Huge number of calculations: 1500 products* 3-4 major costs components*time frame 1500 products* 3-4 major costs components*time frame Delay in time – actual data available when decisions are taken Delay in time – actual data available when decisions are taken Dynamic environment Dynamic environment Benchmarking issue

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Value creation measures ROCE ROCE Return = Net profit Return = Net profit Capital Employed = Equity + Debt = Net Working Capital + Fixed Assets Capital Employed = Equity + Debt = Net Working Capital + Fixed Assets EVA (RI) EVA (RI) EVA = Net profit - Capital Charge EVA = Net profit - Capital Charge Capital Charge = CE * cost of capital Capital Charge = CE * cost of capital

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Investment measures Hurdle rate as a cut-off point Hurdle rate as a cut-off point Shell to find 4 billions USD as ‘lazy assets’ - underperforming with ROCE less than 13-15% (FT.com., 22 December 2003) Shell to find 4 billions USD as ‘lazy assets’ - underperforming with ROCE less than 13-15% (FT.com., 22 December 2003)

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Budgeting and Control Budget as the key tool in any controlling process Budget as the key tool in any controlling process Budget vs plan Budget vs plan Levels of budgeting: Levels of budgeting: strategic strategic operational operational managerial managerial

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Budgeting - purpose + general remarks Resource allocation Resource allocation Congruence with strategy Congruence with strategy Master budget vs. operating budgets Master budget vs. operating budgets Monetary budgeting vs budgeting in natural units Monetary budgeting vs budgeting in natural units

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Budgeting - typical structure Revenues Revenues Variable costs Variable costs Fixed costs Fixed costs = OPEX Other Investment costs Other Investment costs Capital Expenditures (CAPEX) Capital Expenditures (CAPEX)

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Balance Scorecard as a non- financial performance measure Customer Perspective Customer Perspective Business Processes Perspective Business Processes Perspective Organisational learning (Development) Perspective Organisational learning (Development) Perspective Financial Perspective (RI) Financial Perspective (RI)

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Budgeting - typical processes Top -down (authoritarian) Top -down (authoritarian) Bottom up Bottom up participation participation consultation consultation Role of K(ey) P(erformance) I(ndicators) Role of K(ey) P(erformance) I(ndicators)

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Budgeting – KPI of Netia