The Finance Gem 💎 Week #45 - Leadership, Management, EBITDA and Costing

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• EBITDA vs. OCF vs. FCF vs. FCFE

• 16 Powerful Cost Saving Strategies

• The Financial Analysis Checklist

• Leadership is not Management

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EBITDA against The Cash Flows.

This is the ultimate Battle.

Let’s see who wins.

1️⃣ EBITDA

⚫ Not a GAAP metric

⚫ Not a cash flow metric despite often being mistaken for one.

⚫ Discretionarily adjusted. Non-cash adjustments beyond Depreciation and Amortization are all the rage in quarterly calls and annual reports.

⚫ Ignores investment required for working capital assets and fixed assets, both of which can be sizeable uses of cash for growing companies. Not even going to mention how it ignores real uses of cash like interest and tax.

2️⃣ Operating Cash Flow (OCF)

⚫ It’s a GAAP metric!

⚫ Represents the cash generated from regular business operations.

⚫ It indicates whether the company can generate sufficient positive cash flow to maintain and grow its operations as well as service its debt repayment obligations.

3️⃣ Free Cash Flow to Firm FCF

⚫ Not a GAAP metric.

⚫ Represents the cash remaining in the business after accounting for cash outflows that support its operations (operating expenses + working capital) and cash outflows that grow its capital asset base (capital expenditures).

⚫ Free Cash Flow however must first be used to meet principal and interest repayment obligations before it is truly “Free” to be distributed to shareholders.

4️⃣ Free Cash Flow to Equity (Levered Cash Flow)

⚫ Not a GAAP metric either.

⚫ Represents the cash remaining in the business after accounting for all business expenses, investments in working capital assets, investments in fixed assets, and also all debt obligations.

⚫ This is the true residual cash flow available to a company in any given period, and truly “Free” to be used for investments, dividend payments, returns of capital, additional debt repayments, or acquisitions.

⚫ Includes net debt which can skew the analysis.

➡️ If you are a banker looking to monitor a firm’s distributable cash flows, FCFE is a great metric to track in conjunction with leverage

➡️ If you are an investor looking to calculate the firm’s enterprise value through a DCF analysis, be aware of the downsides of using FCF

Sooner or later, you will need to start making strategic decisions in your company.

Here's a list of 16 powerful decisions you can consider for your costs.

🎯 Just-In-Time Inventory System (JIT):

- Maintain minimal inventory

- Order as required

- Reduce holding costs

- Avoid overstocking

🎯 Vendor-Managed Inventory (VMI):

- Suppliers manage inventory

- Inventory off company balance sheet

- Needed for production

🎯 Consolidation of Suppliers:

- Reduce supplier numbers

- Streamline procurement

- Bulk-purchase discounts

🎯 Outsourcing Production:

- Don't own factories

- Outsource production

🎯 Offloading Fixed Assets & Leasing:

- Sell and lease back assets for cash inflows

- Convert fixed to variable costs with revenue based repayments

- Improve financial ratios

🎯 Operational Efficiency:

- Refine processes

- Use technology

- Lower operation costs

🎯 Switch to Variable Cost Models:

- Use contract employees

- Convert fixed to variable labor

🎯 Strategic Supplier Relationships:

- Strong supplier relationships

- Negotiate favorable terms

- Lock-in prices, priority access

🎯 Vertical Integration:

- Control supply chain

- Eliminate markup

- Cost savings

🎯 Adopting Technology and Automation:

- Automation solutions

- Reduce labor-intensive tasks

- Lower labor costs

🎯 Focus on Core Competencies:

- Spin off non-core segments

- Focus on primary competencies

- Reduce overhead costs

🎯 Shared Service Models:

- Centralize back-office

- Economies of scale

- Reduce redundancy

🎯 Energy Efficiency and Sustainability:

- Invest in energy efficiency

- Sustainable practices

- Long-term savings

🎯 Economies of Scale:

- Increase production volume

- Spread fixed costs

- Reduce cost per unit

🎯 Relocating Operations:

- Move operations

- Lower costs regions

- Tax incentives, favorable regulations

🎯 Product Simplification:

- Reduce product complexity

- Streamline operations

- Reduce diverse product costs

Because financial analysis is not crunching numbers.

It is the transformation of raw data into actionable insights.

It is the strategic alignment of your business goals and finance strategy.

It is how you make sense of the past, manage targets, and plan future goals.

➡️Here are the 15 areas covered inside 𝐓𝐡𝐞 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐀𝐧𝐚𝐥𝐲𝐬𝐢𝐬 𝐂𝐡𝐞𝐚𝐭 𝐒𝐡𝐞𝐞𝐭:

1. Define Objectives: Set key goals for your financial analysis.

2. Data Collection: Gather relevant financial and operational data.

3. Environmental Scanning: Analyze the main factors impacting your strategic organizational context.

4. Competitive Benchmarking: Compare company metrics against industry peers.

5. Quality of Earnings: Assess how reasonable and sustainable reported profits are.

6. Ratio Analysis: Assess financial health using financial ratios.

7. Financial Statement Analysis: Deep dive into your company's financial reports.

8. Cash Flow Analysis: Evaluate the movement of cash within the business.

9. Budget vs. Actual Analysis: Compare projected figures to real outcomes.

10. Debt and Equity Structure: Analyze your company’s capital composition.

11. Valuation Models: Assess your company's market worth.

12. Risk Assessment: Evaluate potential financial threats.

13. Sensitivity and Scenario Analysis: Identify and estimate your various financial outcomes.

14. Summary of Key Findings: Round up your main insights from financial analysis.

15. Actionable Recommendations: Complete your analysis with strategic advice.

Click on the image to download a free copy of he Financial Analysis Checklist. Free access expires November 27.

Yes, they both aim to move organizations towards their goals

But no, their core philosophies aren’t the same.

Leadership is about Influence.

Management is about execution.

➡️ Here’s how they are different and how to transition from one to the other.

🎯Leadership is the art of motivating a group of people to act towards achieving a common vision.

🎯Leadership sets the horizon, lights up a path, and inspires growth, change, and innovation.

🎯Leadership designs the culture, catalyzes the vision, and it embodies the values and behaviors they seek to instill across the organization.

Meanwhile:

🎯Management is the science of systematically running an organization.

🎯Management involves detailed planning, efficient organization, and effective goal execution.

🎯Management maintains order, minimizes risks, and maximizes outputs with the resources at hand.

From Leadership to Management:

➡️Sharpen your project management and process optimization skills.

➡️Get comfortable with making short-term goals that align with the long-term strategy.

➡️Brush up on your ability to manage schedules, deadlines, and priorities without sacrificing quality.

➡️Cultivate a data-driven mindset that can identify trends, understand performance metrics, and make informed decisions.

➡️Learn the art of delegation: assigning the right tasks to the right people and following up effectively.

From Management to Leadership:

➡️Develop empathy, self-awareness, and social skills to influence and inspire your team.

➡️Learn to spot trends, identify opportunities for innovation, and think several steps ahead.

➡️Get comfortable with uncertainty and making decisions that may not pay off immediately but have the potential for significant impact.

➡️Leadership involves mentoring and developing future leaders by providing opportunities for growth and learning.

➡️Your communication should not just direct but also engage and get your team excited about the possibilities ahead.

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Thanks so much for reading. See you next week.

Oana