1. Predictive Analysis Presented by: Alan Miltz BSc, Bcomm Hon, ACA, ICMA InMatrix Technologies Pty Ltd

2. Known by us Known by others Not known by others Common knowledge Competitive knowledge Not known by us Unknown Blind Spot What don’t we know? Predictive Analysis

4.  How does Inventory impact on Cash Flow?  What are the implications of lead times on Cash Flow?  How do I pay bonuses? Finance is the tool to measure Marketing, Operations and People Predictive Analysis For Example:-

5. What is more important 1.the Profit and Loss? 2.or the Balance Sheet? Predictive Analysis

6. 1.Profitability  Also known as return on sales (ROS)  Calculated as Profit/Sales as a %  The definition of profit is the critical issue  The calculation should be based on profit before interest and tax Predictive Analysis

7. Profitability cont:  Profit before interest and tax (PBIT) or (EBIT) is the operating profit  Profitability should be calculated before the effects of the business’s external funding  Profitability should also exclude abnormal or extraordinary items  What about tax? Is it an operating cost? Predictive Analysis

8. Advantages  Simple  Commonly used Disadvantages  Ignores the balance sheet  Relatively easy to manipulate  Short term measure Predictive Analysis Profitability cont:

9. 2.Activity  Activity is Sales/Net Operating Assets  The key word is Operating  Also known as Asset Turnover Predictive Analysis

10. Activity  Activity indicates the level of balance sheet efficiency.  If a company has an activity of 4, this indicates that for every $4 of sales generated, a $1 of Net assets is required. Predictive Analysis

11. Take two businesses Company A is a Supermarket Company B builds Ships  A has Net operating assets of 200,000 and makes a profit of 20,000 on sales of $2,000,000  B has Net operating assets of 1,000,000 and makes a profit of 100,000 on sales of $2,000,000 Predictive Analysis

12. Which business would you rather be in?  A has low profitability and high activity  B has low activity and high profitability What if we combine the two ratios? Predictive Analysis

13. Activity EBITRevCogsO/hds -= Net Op Assets Curr Assets Curr Liabs Non Curr ++ = Profitability ROCE %Rev ROCE Flowchart

14. ROCE = Profitability x Activity ROCE = EBIT/Sales x Sales/Net Operating Assets ROCE = EBIT/Net Operating Assets ROCE is also known as RONA Predictive Analysis

15. Cost Earnings Funding (E +ND) Net Operating Assets Predictive Analysis

16. Example: ROCE vs. Interest rate Company C has the following balance sheet C borrows at 10% and has a ROCE of 8% Equity + Net debt= Net operating assets 1,000 + 7,000 = 8,000 Interest, 700 EBIT, 640 Providing a Loss of 60 ! Predictive Analysis

17. The company has the following choices:  Refinance at less than 8%  Increase profit to over $700  Sell off any unused assets  Put in equity If the owner puts in equity, have they made a good investment ? Predictive Analysis

18. An indicative ROCE is therefore at least equal to the cost of borrowed funds Advantages  Combines the P&L and Balance sheet into one measure  Simple  Comparable across businesses  Guide for investment decisions  Widely used Predictive Analysis

19. Disadvantages  Short term measure  Manipulable  Doesn’t encourage long term decision making  Ignores the impact of funding on the business  Lack of a definitive method for calculating  Ignores the effect of tax  Ignores the time value of money Predictive Analysis

20. Balance Sheet  Inventory  Accounts Receivable  Accounts Payable  Fixed Assets  Other Predictive Analysis

21. What should all companies be performing on an ongoing basis? Conclusion  What if Analysis – I.e. ‘What if my Days Receivable were to be reduced from 70 to 55 days?’  Goalseeking – I.e. ‘How can I reduce my Cash Flow from -$300,000 to zero?’  Variance Analysis – compare performance, and analyse growth over two years  Communicate Finance to non Financial people  Compare one business outcome to another  Projection

22. What if analysis

23. Goalseek

25. Variance Report Assess Profitability over two seasons: Compare Revenue% and Gross Profit%

26. Business Drivers Business Result Graphic screens

27. Optimist KPI

28. Roll Forward Key in Next Year’s Targets