The Finance Gem 2023💎 Week #19

Welcome to this week's edition of The Finance Gem 💎 where I bring you unabbreviated Linkedin insights you loved - so you can save them, and those you missed - so you can enjoy them.

This newsletter edition is brought to you by Financiario, your long term ally in business growth and strategic financial planning. They amplify the vision of CEOs and expand on the capabilities of CFOs, to provide dynamic financial models and memorandums that expedite financing transactions and drastically improve your outcomes.

And speaking of intelligence, none is more critical for an organization than cash flow intelligence.

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This week's financial leadership insights:

• The Corporate Finance Cheat Sheet

• The 25 Responsibilities of the CFO Office

• 20 Management Analysis Tools you Need to Know

• The 5 Types of Cash Flow and How to Use them

• 10 FREE Cash Flow Courses for You in celebration of my #1 Ranking in Favikon

Without further ado, let's dive in:

The Corporate Finance Cheat Sheet

Corporate Finance can be tough to understand.

But having the right perspective can change everything.

👉 𝐇𝐞𝐫𝐞 𝐢𝐬 𝐰𝐡𝐚𝐭 𝐓𝐡𝐞 𝐎𝐧𝐞-𝐏𝐚𝐠𝐞 𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐞 𝐅𝐢𝐧𝐚𝐧𝐜𝐞 𝐂𝐡𝐞𝐚𝐭 𝐒𝐡𝐞𝐞𝐭 𝐢𝐧𝐜𝐥𝐮𝐝𝐞𝐬:

🎯 Financial projections with assumptions for growth, cost breakdown, fixed assets and working capital investments
🎯 Working Capital Schedule with calculations for the Cash Conversion Cycle
🎯 Break-even Analysis: Contribution Margin & Break even Revenue
🎯 Capital Budgeting: NPV, IRR, Payback Period
🎯 Financial Analysis Ratios & Metrics
🎯 Vertical / Common Size Analysis
🎯 Horizontal / Trend Analysis
🎯 Free Cash Flows Calculations
🎯 Cash Flow Ratios
🎯 DCF Discounted Cash Flow Valuation with assumptions
🎯 Enterprise Value Sensitivity Table Analysis
🎯 Equity Value Sensitivity Table Analysis

The 25 Responsibilities of the CFO Office

🎯 The CFO is responsible for managing your company's financial operations and strategy. It is a highly demanding role overseeing the Controllership, the Treasury and the FP&A Functions.

🎯 Here are 25 responsibilities of the CFO office you should know:

⚫ Controllership:

1// Financial reporting >> oversee financial statement preparation in compliance with the relevant accounting framework

2// Internal controls >> develop and maintain an appropriate internal control framework to ensure data integrity and regulatory compliance

3// Tax compliance >> manage tax planning, filing, and regulatory compliance

4// Audit Management >> liaise with external accountants and ensure a smooth and efficient annual assurance engagement process

5// Accounts payable and receivable >> oversee AP and AR to ensure timely processing, contractual compliance and effective supply chain management

6// Payroll and benefits

7// Cost accounting >> analyze costs to support management decision-making

8// FIS >> ensure the accuracy and timeliness of general ledger entries and account reconciliations

⚫ Treasury:

9// Cash management >> monitor and manage cash flow, ensuring sufficient liquidity to meet operational and strategic needs

10// Risk management >> identify, assess, and manage financial risks (foreign exchange risk, interest rate risk, credit risk)

11// Capital structure management >> manage capital structure, optimizing cost of capital and maintaining financial flexibility

12// Investments >> oversee investments and align risk appetite & return objectives

13// Banking relationships >> develop and maintain strong relationships with banks and other financial institutions to support favorable financing terms and access to capital as needed

14// Financial covenant compliance >> monitor and ensure compliance with financial covenants outlined in credit agreements

15// FX management >> manage the organization’s exposure to foreign currency risk

16// Debt management >> manage debt presentations, negotiations, closings, renewals, covenant compliance

⚫ Financial Planning and Analysis (FP&A):

17// Budgeting and forecasting >> lead the annual budgeting process and develop rolling forecasts

18// Scenario planning >> prepare for future opportunities and challenges with the help of flexible long term plans

19// Performance management >> establish and monitor performance metrics, focused on key organizational financial and non-financial KPIs (financial results, customer satisfaction metrics, continuous improvement, professional development)

20// Financial analysis >> use financial dashboards, reports, and key performance indicators to analyze and optimize financial performance

21// Business planning >> enable the development and execution of the company's long-term strategic plan in alignment with financial goals and objectives

22// Capital budgeting >>oversee the process of planning and managing the company's long-term investments 

23// Profitability analysis >> analyze product, customer, and channel profitability to support margin improvements and optimize resource allocation

24// Management decision support

⚫ Additional responsibilities and functions within the CFO office may include:

25// Strategic Finance

• Mergers and acquisitions (M&A) >> evaluate and execute M&A transactions (due diligence, valuation, reporting, integration)

• Investor relations >> manage transparent and accurate communication with shareholders and analysts

• Strategic planning >> develop and execute long-term strategic plans that align with the business strategic objectives

20 Management Analysis Tools you Need to Know

1// DuPont Analysis

🎯 A profitability analysis method that breaks down your company's return on equity (ROE) into three components: net profit margin, asset turnover, and financial leverage.

It essentially shows:

☑️ the proportion of sales you keep

☑️ the efficiency with which you utilize your assets to generate sales

☑️ the extent to which you rely on borrowed funds to finance those assets

ROE = Net Profit Margin x Asset Turnover x Leverage Ratio

Net Profit Margin = Net Income / Sales

Asset Turnover = Sales / Average Total Assets

Leverage Ratio = Average Total Assets / Average Shareholders' Equity

2// Economic Value Added (EVA)

🎯 A financial performance measure that calculates the difference between your company's returns and its cost of capital.

☑️ It essentially shows the amount of value your company has created for its shareholders

EVA = Net Operating Profit After Taxes (NOPAT) - (Cost of Capital x Total Invested Capital)

NOPAT = Earnings before Interest and Taxes (EBIT) x (1 - Tax Rate)

Total Invested Capital = Total Assets - Current Liabilities (excluding short-term debt)

Cost of Capital = Weighted Average Cost of Capital

3// Return on Investment (ROI)

🎯 A measure of an investment profitability that calculates your return as a percentage of your initial investment.

☑️ It essentially shows the proportion of the profit or loss you made on an investment relative to its initial cost

ROI = (Net After Tax Cash Flow from Investment - Cost of Investment) / Cost of Investment

4// Debt-to-Equity (D/E) Ratio

🎯 A financial ratio used to assess financial leverage

☑️ It essentially shows you the proportion of your company's total debt in relation to the shareholders' equity and provides insight into the financial structure and risk profile of your business.

Debt to Equity = Total Liabilities / Total Equity

5// Gross Profit Margin

🎯 A financial ratio used to assess profitability

☑️ It essentially shows the percentage of revenue after discounts, returns and cost of goods sold which your company gets to keep.

Gross Profit Margin = (Gross Profit / Net Revenue) x 100

6// Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Adjusted EBITDA

🎯 A financial metric that measures your company's profitability by excluding the effects of financing, tax, or accounting policy choices. Often adjusted to reflect the economic reality of your company or its peers.

☑️ It essentially shows you the operating performance of your company by measuring its cash driven earnings derived from core business activities.

EBITDA = Net (Operating) Income + Taxes + Depreciation + Amortization + Interest

Adjusted EBITDA = EBITDA +/- Adjustments (Non-Cash Expenses, Provisions, Contingent liabilities, One-time expenses/revenues)

7// Operating Profit Margin

🎯 A financial ratio that measures your company's operating efficiency by dividing its operating profit by its net revenue.

☑️ It essentially shows the percentage of revenue after discounts, returns, cost of goods sold and operating expenses which your company gets to keep.

Operating Profit Margin = (Operating Profit / Net Revenue) x 100

8// Net Profit Margin

🎯 A financial ratio that measures your company's profitability by dividing its net profit by its net revenue.

☑️ It essentially shows the percentage of revenue after discounts, returns, cost of goods sold, operating expenses, interest and taxes which your company gets to keep.

Net Profit Margin = (Net Profit / Net Revenue) x 100

9// Price-to-Earnings (P/E) Ratio

🎯 A financial ratio used in valuation which compares your company's stock price to its earnings per share.

☑️ It essentially shows you the valuation of your company by comparing its current share price to its earnings per share.

(P/E) Ratio = Market Price per Share / Earnings per Share

10// Cash Flow Analysis

🎯 A financial analysis method to evaluate your company's financial health by analyzing the cash sources and uses of funds from operations, investing and financing over a specific period of time.

☑️ It essentially shows you where the cash is coming into your business and how it’s being used by your business.

Net Cash Flow = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow

11// Net Present Value (NPV)

🎯 A financial metric used to assess the profitability of an investment or project.

☑️ It essentially shows whether the present value of your company's expected cash inflows exceeds the present value of its expected cash outflows.

NPV = present value of cash inflows - present value of cash outflows

12// Cost Volume Profit Analysis (CVP)

🎯 A financial management tool used to analyze the relationship between your company's sales volume, costs, and profits.

☑️ It essentially shows you your break-even point and analyzes the impact of changes in costs, prices, and sales volume on your company's profitability.

Contribution Margin = Sales Revenue - Variable Costs

Contribution Margin Ratio = Contribution Margin / Sales Revenue

Break-Even Point (in units) = Fixed Costs / Contribution Margin per Unit

Break-Even Point (in dollars) = Fixed Costs / Contribution Margin Ratio

Profit Target = (Fixed Costs + Profit Target) / Contribution Margin Ratio

13// Payback Period

🎯 A financial metric that measures the length of time it would take for your investment to recover the initial costs.

☑️ It essentially shows you the amount of time it would takes for an investment you made to recover its initial cost

Payback Period = Initial Investment / Annual Cash Inflows

14// Internal Rate of Return (IRR)

🎯 This is the discount rate that makes your Net Present Value for a particular investment equal to zero.

☑️ It essentially shows you the annualized percentage rate of return at which your investment's net present value becomes zero

15// Cash Conversion Cycle (CCC)

🎯 A financial metric that measures the time it takes for y9our company to convert its investments in inventory and AR into cash.

☑️ It essentially shows you the time it takes for your company to convert its investments in inventory and accounts receivable into cash, while accounting for the time it takes to pay suppliers.

CCC = Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) - Days Payable Outstanding (DPO)

16// Return on Assets

🎯 An financial metric measuring the total earnings as a proportion of your total assets

☑️ It essentially shows you how efficiently your company is using its assets to generate profits and create value for shareholders.

ROA = (Net Income / Average Total Assets) x 100

17// Debt Service Coverage Ratio

🎯 An indicator of your company’s ability to meet its fixed debt payment obligations of principal and interest.

☑️ It essentially shows your company's ability to meet its debt obligations by comparing its operating income to required principal and interest payments

DSCR = EBITDA / (Principal + Interest)

18// Return on Invested Capital

🎯 A financial metric that measures your company's ability to generate returns on the capital invested in the business.

☑️ It essentially shows the percentage of profit generated from your company’s invested capital (both equity and debt).

ROIC = (Net Operating Profit After Taxes (NOPAT)) / (Total Debt + Total Equity - Cash and Cash Equivalents) x 100

19// Weighted Average Cost of Capital (WACC)

🎯 A financial metric that calculates the overall cost of your company's capital, including both equity and debt, weighted by the proportion of each in the company's capital structure

☑️ It essentially shows the average rate of return your company is expected to pay to its capital providers, as well as the minimum rate of return it should aim to generate in order to create value for its shareholders.

WACC = (Cost of Equity x % Equity) + (Cost of Debt x % Debt) + (Cost of Preferred Stock x % Preferred Stock)

20// Dividend Payout Ratio

🎯 A financial ratio that measures the proportion of your company's earnings that are paid out as dividends to shareholders.

☑️ It essentially shows you the percentage of your company's earnings that gets distributed to shareholders in the form of dividends as opposed to retained in the business to fund growth and other objectives.

Dividend payout ratio = Dividends Paid / Net Income

The 5 Types of Cash Flow and How to Use them

They are highly confused, often misunderstood and mostly underutilized.

Here’s what they are and how to use them

1️⃣ 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰

⚫ net cash generated by your company's core operations

⚫ adjust Net Income for non-cash items & changes in net working capital assets.

⚫ use it to assess:

>> financial health

>>ability to meet financial obligations

>> ability to generate sufficient cash to fund ongoing business operations

>> trends

2️⃣ 𝐈𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰

⚫ net cash generated by investments in long-term assets

⚫ total the net investments in PPE over the period (purchases less sales of PPE)

⚫ use it to assess:

>> investment decisions

>> ability to generate returns from investments

3️⃣ 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰

⚫ cash generated by net debt and/or equity activity.

⚫ total net debt and equity proceeds over the period.

⚫ use it to assess:

>> financing choices and risk profile

>> ability to raise capital

4️⃣ 𝐅𝐫𝐞𝐞 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐭𝐨 𝐅𝐢𝐫𝐦 (FCFF or Unlevered Cash Flow)

⚫ cash remaining after accounting for cash outflows that support product sales and operations (product costs + operating expenses + working capital) and cash outflows that maintain the capital asset base (capital expenditures).

⚫ adjust Operating Cash Flow for after tax interest expense and investments in capital assets

⚫ use it to assess:

>> financial strength and ability to generate sufficient cash for growth and reinvestment

>> company value based on the discounted cash flow (DCF) valuation.

5️⃣ 𝐅𝐫𝐞𝐞 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐭𝐨 𝐄𝐪𝐮𝐢𝐭𝐲 (FCFE or Levered Cash Flow)

⚫ cash remaining after all business expenses, investments in working capital assets, investments in fixed assets, and debt obligations.

⚫ adjust Operating Cash Flow for after tax interest expense, investments in capital assets and net debt payments.

⚫ available to be used for investments, dividend payments, returns of capital, additional debt repayments, or acquisitions, but skewed by new debt raises.

⚫ use it to assess:

>> ability to generate cash for distributions to shareholders holders

Celebrating my Favikon ranking with a FREE Cash Flow Masterclass for you

I'm celebrating my Favikon ranking with a FREE Cash Flow Masterclass with 10 FREE Cash Flow Courses for You.

Want to know who are the Top 30 Content Creators on Linkedin? Check out the Favikon page here: https://app.favikon.com/creators-tops/all-categories/all-niches/linkedin/

I really want to help you master the game of Cash Flow.

So I’ve curated my best 10 Cash Flow posts for you.

0// The Cash Flow Cheat Sheet: https://lnkd.in/eae9tzkR

1// How to connect Cash with Profit: https://lnkd.in/ecMzMnd6

2// The 3 Main Cash Flow Drivers: https://lnkd.in/eqy9JNvN

3// Cash Inflows and Outflows: https://lnkd.in/ei8vdP_B

4// Cash Flow Statement: Direct or Indirect: https://lnkd.in/e-NBhUG4

5// The Cash Conversion Cycle: https://lnkd.in/eWZgYGBQ

6// The Business Cash Flow Dashboard for CFOs: https://lnkd.in/etSAAjCU

7// The 5 Steps to manage your cash flow: https://lnkd.in/eXckPBqb

8// Cash Flows in Capital Budgeting: https://lnkd.in/eBFDr9F9

9// 16 Cash Flow KPIs: https://lnkd.in/eQEr7ADj

10// The Master Budget Flow: https://lnkd.in/ebycc5fJ

If you are looking for more strategic finance support, here are 3 ways in which I can help you:

1. Upgrade your strategic finance skills with The Cash Flow Masterclass. Leverage this unique on-demand video course to drive sustainable business growth and accelerate your career. Check it out at oanalabes.com 

2. Book 1-1 me for Strategic Finance Coaching and get personalized training in the areas where you need it most - book my calendar directly here

3. Sponsor this newsletter - partner with me and bring your business in front of a highly engaged professional community made up of CFOs, CEOs, CPAs, MBAs, FMVAs, Controllers, Finance Managers, Presidents, Business Owners, and upcoming leaders - book directly here

Thanks so much for reading. See you next week.

Oana