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WELCOME TO A NEW EDITION OF

THE FINANCE GEM 💎

weekly strategic finance gems to accelerate your career and grow your business

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• The CEO Growth Checklist

• NOPAT vs. EBIT

• The Corporate Finance Cheat Sheet

• The Budget Checklist

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CEO's need Growth.

And Growth needs Strategic Financial Planning.

If you’re a CEO, this should be on your agenda.

If you’re not a CEO, this is on your CEO’s agenda.

Which means it’s now on yours.

There are two kinds of growth: Organic and Inorganic.

🎯 Organic growth is built from within, leveraging existing capabilities to incrementally increase market share and revenue.

VS.

🎯Inorganic growth is pursued externally, requiring strategic partnerships, JVs, mergers or acquisitions to scale operations.

Regardless of strategy, both types of growth strategies demand a strong foundation in:

➡️ strategic financial planning

➡️ customer relations

➡️ brand management

➡️ innovation management

🎯 Here is a 60 point growth checklist to help CEOs and their teams execute on their growth strategies:

1️⃣ Organic Growth:

➡️Growth through internal initiatives (product development, market expansion, and improving operational efficiencies)

➡️Requires culture of continuous improvement and innovation

➡️Relies on reinvestment of earnings and may also involve external capital (debt/equity)

➡️ Could result in slower growth, but enhances the core business without the risks of external partnerships, or acquired / merged target integration.

2️⃣ Inorganic Growth:

➡️Involves mergers, acquisitions, joint ventures or alliances to achieve rapid market expansion and diversification.

➡️Demands rigorous due diligence, effective post-merger integration, and cultural harmonization to realize anticipated synergies.

➡️Often financed through debt or equity, necessitating substantial proactive planning, and a balanced approach to capital management and risk assessment.

3️⃣ Growth Fundamentals for Both Strategies:

➡️Strategic Financial Planning: financial and operating plans alignment, efficient resource allocation, and robust risk management

➡️Customer Focus: customer satisfaction and engagement

➡️Brand Management: reinforcing and evolving the brand identity to maintain market relevance and appeal.

➡️Innovation Management: a culture of innovation that encourages creative thinking and fosters research development, and novel ideas

Download free PDF checklist here.

Are they real?

Are they GAAP ?

How are they different?

Do you really need both?

Which one should you use?

🎯NOPAT and EBIT are frequently used to evaluate a company's profitability.

However, they are calculated differently and serve distinct purposes.

↪️ NOPAT (Net Operating Profit After Tax) represents a company's operating profit after tax deductions.

• It shows profitability from operations available to all capital providers (equity and debt).

• It’s a hypothetical metric showing what operating profit would be if the company had no debt and no tax advantages or obligations from its current debt structure

• Not technically a GAAP metric.

• NOPAT = EBIT * (1 - Tax rate)

↪️ EBIT (Earnings Before Interest and Taxes) represents the company's operating income without considering interest and taxes.

• A GAAP metric.

• EBIT = Operating Income

• EBIT = Revenue - Cost of Goods Sold - Operating Expenses

🎯How to use NOPAT and EBIT:

• NOPAT is useful for comparing companies with differing debt structures

• EBIT is useful for benchmarking companies within the same sector, and assessing debt coverage capacity

• Both metrics should be assessed together with revenue growth, net income, and return on equity (ROE)

🎯NOPAT Ratios to know:

• ROIC = NOPAT/Invested Capital

• EVA = NOPAT - (Invested Capital x Cost)

• NOPAT Margin = NOPAT / Revenue

🎯EBIT Ratios to know:

• Interest Coverage = EBIT / Interest

• Enterprise Value to EBIT = EV /EBIT

• EBIT Margin = EBIT / Revenue

Let’s recap:

➡️Are they real? NOPAT Is a hypothetical metric, so technically not real!

➡️Are they GAAP ? NOPAT is technically not.

➡️Which one to use? Both depending on objectives.

➡️How are they different? NOPAT reflects operational profitability after taxes; EBIT shows profitability regardless of tax or capital structure.

➡️Do you really need both? In investment and Valuation, probably. In Performance Management and Debt Management, EBIT is much more relevant.

This is how one insightful page can hold most of the knowledge you need.

Corporate Finance can be tough to understand.

But having the right perspective can change everything.

👉 𝐇𝐞𝐫𝐞 𝐢𝐬 𝐰𝐡𝐚𝐭 𝐭𝐡𝐢𝐬 𝐄𝐱𝐜𝐥𝐮𝐬𝐢𝐯𝐞 10-𝐢𝐧-1 𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐞 𝐅𝐢𝐧𝐚𝐧𝐜𝐞 𝐂𝐡𝐞𝐚𝐭 𝐒𝐡𝐞𝐞𝐭 𝐋𝐢𝐭𝐞 𝐢𝐧𝐜𝐥𝐮𝐝𝐞𝐬:

🎯1. Financial projections with assumptions for growth, cost breakdown, CAPEX and working capital investments, salvage values, tax rate and initial equity investment

🎯2/3/4. Vertical dynamic 3-statement model linked to assumptions for the Income Statement, Balance Sheet and Cash Flow Statement

🎯 5. Working Capital Schedule linked to financial statement model with component calculations for the Cash Conversion Cycle (DSO, DIO and DPO)

🎯 6. Break-even Analysis: Contribution Margin & Break Even Revenue

🎯 7. Capital Budgeting: NPV, IRR, Payback Period

🎯 8. Financial Analysis Ratios & Metrics

🎯 9. Vertical / Common Size Analysis

🎯 10. Horizontal / Trend Analysis

Download a free Excel copy here.

For your reference, here’s an AI rendition of these concepts:

You're getting the Budget all Wrong.

It's not an exercise.

It's not a mere formality

It's not a set-and-forget plan.

It's your blueprint to the future you're building.

It's your compass to know where you're supposed to be going.

It's your mirror to evaluate if you did what you said you were going to do.

🎯🎯🎯Here’s a highly valuable checklist covering 15 strategic budget areas you need to pave your future.

- Strategic Alignment: Align budget with strategic and stakeholder objectives; foster strategic awareness and transparent decision-making.

- Market and Economic Analysis: Continuously update market and economic analyses, integrating insights into budgeting.

- Historical Analysis and Trend Examination: Review past budget performances and trends to inform future budgeting.

- Top-Down and Bottom-Up Budgeting: Balance top-down objectives with bottom-up departmental insights and strategic alignment.

- Participative Budgeting Process: Engage departments in budgeting, fostering ownership, collaboration, and inclusive decision-making.

- Zero-Based Budgeting for Specific Areas: Apply zero-based budgeting principles selectively, focusing on cost justification and strategic alignment.

- Detailed Revenue Forecasting: Utilize historical data and market analysis for accurate revenue forecasting aligned with strategic goals.

- Cost Identification and Categorization: Categorize and regularly audit costs, promoting cost awareness and efficiency.

- Resource Allocation Focused on Strategic Priorities: Prioritize funding based on strategic impact and ensure collaborative and transparent allocation.

- Scenario Planning with Rolling Forecasts: Develop adaptable budget scenarios with rolling forecasts, aligned with strategic objectives.

- Integration of Performance Metrics: Define performance metrics aligned with strategic objectives and budget goals.

- Regular Review with Rolling Adjustments: Schedule regular budget reviews and adjustments, fostering continuous improvement.

- Covenant Compliance and Management: Manage covenant compliance proactively in budgeting with transparency and stakeholder communication.

- Effective Feedback Mechanisms: Establish feedback channels, using feedback to inform budget decisions and improvements.

- Continuous Improvement and Learning: Foster a learning culture in budgeting, encouraging innovation and cross-departmental collaboration.

Download a free PDF copy here.

For your reference, here’s the AI rendition of these topics:

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Thanks so much for reading. See you next week.

Oana