I.

AGENDA:

Financing the business

1. Accounting process and different uses of accounting information
2. Company’s Balance sheet and financial position
3. Company’s financial positions
4. Financial management

Organization models, Decision making process, management

1. Organization models
2. Management, function and types
3. Leadership
4. Decision making
I. AGENDA:

Financing the business

1. Accounting process and different uses of accounting information
2. Company’s Balance sheet and financial position
3. Company’s financial positions
4. Financial management
Accounting: the financial language that organization use to record, measure
and interpret all of their financial transactions and records.
All businesses, from small family shop to a giant corporation, use the
language of accounting to make sure they use their money properly and to
plan the future

Role of accounting Making business decisions

Accountants:
- Certified Public accountants (CPA): they have an impartial opinion regarding the
accuracy of the client’s financial statement
Most public accountants are members of large public acconting firms:
The top 10 largest accounting firms by revenue:
1.Deloitte – $46.2 billion (Deloitte Info)
2.PwC – $42.4 billion (PwC Info)
3.EY – $36.4 billion (EY Info)
4.KPMG – $29.75 billion (KPMG Info)
5.BDO – $9.6 billion (BDO Accounting Firm Information)
6.Grant Thornton $ 5.45 billion
7.RSM – $5.37 billion
8.Crowe Horwath $ 4.3 billion
9.Nexia International $4.3 billion
10.Baker Tilly $3.4 billion
The uses of accounting information:
- Internal uses: for managers and owners → planning and control
- External uses: stockholders, customers, employees, media, taxes..
Internal uses / managerial accounting:
Managerial accounting refers to the internal use of accounting statements
by managers in planning and directing the organization’s activities.
The greatest single concern form management is cash flow
Cash flow: the movement of money through an organization over a daily,
weekly, monthly, or yearly basis. An organization needs to generate enough
cash to pay its bills as they fall due
- Shortfall and cash crunch → to struggle to make payments to
employees, suppliers and lenders due to an inadequate cash flow

Budget
Budget: internal financial plan that forecast expenses and income over a
set period of time.
The principal value of budget lies in its breakdowns of cash inflows (entries)
and outflows: fore cast the expected operating expenses and the operating
revenues
Many companies prepare master budget for the entire firm, and also
prepare budgets for smaller segments of the organization such as divisions,
departments, product lines or projects.
Top down master budget vs bottom- up budget
Budget:
Top down master budget vs bottom- up budget

Top management

Sales (Inflows) Mktg Staff Manufacturing

(outflows)

Sales Sales Sales Mktg Staff Factory Factory

region1 region2 region3 1 2
Budget:
Top down master budget

3.000.000 $ sales-
Top management 2.000.000 $ expenses
1.000.000 $ benefit

Sales (Inflows) Mktg Staff Manufacturing

(outflows)

Sales Sales Sales Mktg Staff Factory Factory

region1 region2 region3 1 2
Budget:
Top down master budget

Top management

Sales (Inflows) Mktg Staff Manufacturing

(outflows)

Sales Sales Sales Mktg Staff Factory Factory

region1 region2 region3 1 2

1,2 M$ 1 M$ 0,8 M$ 0,2 M$ 0,8 M$ 0,5 M$ 0,5 M$

3 M$ sales 2 M$ expenses
Budget:
Top down master budget vs bottom- up budget

Top management

Sales (Inflows) Mktg Staff Manufacturing

(outflows)

Sales Sales Sales Mktg Staff Factory Factory

region1 region2 region3 1 2

1,5 M$ 0,75M$ 0,5 M$ 0,2M$ 0,6 M$ 0,4 M$ 0,5 M$

2,75 M$ sales 1,7 M$ expenses

External uses of accounting information:
Managers use accounting statements to report the business’s financial
performed to outsiders. Such statements are used for:
- Filing income taxes
- Obtain credit
- Reporting results to stockholders

Annual report:
- A summary of the firm’s financial information, products and growth
plans
Government
Owners
agencies Potential Stockholders
Lenders investors
Employees Suppliers
Annual report:
- Stakeholders: evaluate the return on investment and the overall quality
of the firm’s management team
- Potential investors: study the financial statements in a firm’s annual
report to determine whether the company meets their investment
requirements
- Banks and lenders: look at the financial statements to determine a
company’s ability to meet current and future debt obligations
- Short term lender: examines cash flows to asses its ability to repay a loan with
cash generated from sales
- Long – term lenders: examine the company profitability and debts to other lenders

- Labor unions and employees use financial statements to stablish

reasonable expectations for salary and other benefits
- Why might it be important to include sustainability an other factors in a
firm’s financial reports?
- Why do you think NASDAQ is beginning to require more information on a
firm’s corporate governance and enviromental activities?
The Accounting process:
Accounting is like a business language, and the basics to understand this
language are:
- The accounting equation
- Double entry bookkeeping system
The Accounting equation
Assets, liabilities and owners’ equity
Example: Floral shop: Maria’s Flowers.
Assets: the firm’s economic resources or items of value that it owns (cash,
inventory, land, equipment, building , and other tangible and intangible
things.
Which are the assets of our example: Maria’s Flowers?

Assets of Maria’s Flowers:

- flowers, counters, decoration, vases, cards, other gifts
- Maria’s reputation for preparing and delivering beautiful floral
arrangements on time
The Accounting equation

Liabilities: debts the firm owes to others

Which are the liabilities of our example: Maria’s Flowers?

Liabilities of Maria’s Flowers:

- Money owed to the flower supplier
- Loans
The Accounting equation
Owner’s equity: all the money that has ever been contributed to the
company that never has to be paid back. The funds can come from
investors who have given money or assets to the company, or it can come
from past profitable operations
Which is the owners’ equity of our example: Maria’s Flowers?

All the money left over after selling all the shop’s assets and paying off its
liabilities

Accounting equation:
- Assets = liabilities + owners’ equity
 Double-entry bookkeeping:
Is a system of recording and classifying business transactions in separate
accounts in order to maintain the balance of the accounting equation:
Assets = liabilities + owners’ equity
Example of Maria’s flowers:

Assets Liabilities Owners' equity

Cash Equipement Inventory Debts to suppliers Loans Equity
Cash invested by Maria 3.000 € 3.000 €
Loan from the bank 10.000 € 10.000 €
Purchase of furnishings -3.000 € 3.000 €
Purchase of inventory -2.000 € 2.000 €
Purchase of roses 4.000 € 4.000 €
First month sales 3.000 € -2.000 € 1.000 €

SubTotal 11.000 € 3.000 € 4.000 € 4.000 € 10.000 € 4.000 €

Total 18.000 € 14.000 € 4.000 €
The accounting cycle:
Four step procedure of an accounting system
- Examine source documents: gather and examine source documents (checks,
receipts, sales slips…)
- Record transactions: each financial transaction is recorded in a journal (time
ordered list of account transactions)
- Post transactions: transfer the information from the journal to a ledger, which is
a computer program with separate files for each account (posting). At the end of
the accounting period, a trial balance is prepared. A trial balance is a summary
of the balances of all the accounts in the general ledger.
- Prepare financial statements. The information from the trial balance is used to
prepare the company’s financial statements. Public organizations and other
organizations need a CPA to attest or certify that the organization followed the
accepted accounting principles in preparing the financial statements.
Financial statements:
The end result of the accounting process are the financial statements. The
best known financial statements are:
Income statement: a financial report that shows an organization’s
profitability over a period of time. Other names: P&L (profit and loss)
statement or operating statement
Balance sheet: it presents a “snapshot” of an organization’s financial
position at a given moment.
It is based on the accounting equation:
Assets = liabilities + owners’ equity
The statement of cash flows: it explains how the company’s cash changed
from the beginning to the end of the accounting period
Financial statements:
1. Income statement: a financial report that shows an organization’s
profitability over a period of time. Other names: P&L (profit and loss)
statement or operating statement
This report offers one of the clearest possible pictures of the company’s
overall revenues and the costs incurred in generating those revenues.
Financial statements:
2. Balance sheet: it presents a “snapshot” of an organization’s financial
position at a given moment.
The balance sheet indicates what the organization owns, or controls and
the various sources of the funds used to pay for these assets
It is based on the accounting equation:
Assets = liabilities + owners’ equity
Assets: listed in descending order of liquidity
Current assets (short term assets): assets that are either cash or are expected to be
turn into cash with in the next 12 months
- Marketable securities: short term investments in securities that can be converted
to cash quickly
Non- current assets (fixed assets): have a minimum life expectancy that exceeds
one year.
Liabilities: long term and short-term loans
Current liabilities: obligations to short term creditors which must be repaid within
one year
Accounts payable: represents amounts owed to suppliers for goods and services
purchased with credit
Stockholders’ equity: all the money that has been contributed to the company by the
owners
Financial statements:
3. The statement of cash flows: it explains how the company’s cash
changed from the beginning to the end of the accounting period
The change in cash is explained in three categories:
- Cash from (used for) operating activities: it is calculated by combining the
changes in the revenue accounts, expense accounts, current assets accounts
and current liability accounts (positive → the business is doing extra cash;
negative is not always bad, it could mean rapid growth without profit)
- Cash from (used for) investing activities: it is calculated from changes in the long
term assets accounts (positive → the company is selling long term assets and
reducing capacity for the future; negative → the company is buying)
- Cash from (used for) financing activities: it is calculated from changes in
the long term liability accounts and the contributed capital accounts in
owners’ equity. Negative → the company is paying off long term debt or
returning capital to investors
desinvestment investment
Analyzing financial statements. Ratio analyzing
(from page 443 to 480 “Business A Changing World) )
Comparation the organization’s productivity, profitability and financing mix
with other similar entities
Profitability ratios: ratios that measure the amount of operating income or
net income an organization is able to generate relative to its assets
Asset utilization ratios: ratios that measure how well a firm uses its assets
to generate $1 of sales (efficient)
Liquidity ratios: ratios that measure the speed with which a company can
turn its assets into cash to meet short term debt
Debt utilization ratios: ratios that measure how much debt an organization
is using relative to other sources of capital, such as owners’ equity
Per share data: data used by investors to compare the performance of one
company with another on an equal, per share basis.
Analyzing financial statements. Ratio analyzing
Profitability ratios:
Return on assets: net income / assets

Food retail market Textile commercial distribution sector

Analyzing financial statements. Ratio analyzing
Profitability ratios:
Return on equity (ROE) or return on investment (ROI):
net income / stockholders’ equity
The explanation for this considerable
difference between DIA and the other two
competitors is that, in the case of DIA,
equity only represent 9% of the total
value of liabilities and equity (vs 61% in
Mercadona).
In this sector in particular, the companies’
revenues mainly come from assets sol,
so ROA is more relevant than ROE
Food retail market
Analyzing financial statements. Ratio analyzing
Liquidity ratios:
Current ratio = current assets / current liabilities
Current ratio indicates the speed a company can turn into cash to meet debts as
they fall due

DIA shows the most challenging situation

where current liabilities are twice larger
than current assets.
The situation of Mercadona is related with
the long-term contracts signing with their
suppliers
In the US, the average current ratio of
food retail market is 1,51 in 2017

Food retail market

Analyzing financial statements. Ratio analyzing
Debt ratios:
Debt to assets= debt (total liabilities) / total assets
It indicates how much of the firm is financed by debt and how much by owners’
equity

Firms tend to keep debt to assets levels

below 50% because the use of debt
carries an interest charge that must be
paid regularly regardless of profitability

Food retail market

Analyzing financial statements. Ratio analyzing
Mercadona, Carrefour or DIA? (today is 01/01/2018)
Analyzing financial statements. Ratio analyzing
Mercadona, Carrefour or DIA?
DIA

Carrefour
Importance of integrity in accounting
ENRON Scandal:
Importance of integrity in accounting
ENRON Scandal:

Enron Corporation was an American energy, commodities, and

services company based in Houston, Texas.
It was founded in 1985 as a merger between two small
regional companies. Before its bankruptcy on December 3,
2001, Enron employed approximately 29,000 staff and was a
major electricity, natural gas, communications and pulp and
paper company, with claimed revenues of nearly $101 billion
during 2000.
Fortune named Enron "America's Most Innovative Company" for
six consecutive years.
Importance of integrity in accounting
ENRON Scandal:
• Enron's leadership fooled regulators with fake holdings and off-the-
books accounting practices.
• Enron used special purpose vehicles (SPVs), or special purposes entities
(SPEs), to hide its mountains of debt and toxic assets from investors and
creditors.
• The price of Enron's shares went from $90.75 at its peak to $0.26 at
bankruptcy.
• Enron’s accounting firm, Arthur Andersen was convicted of obstructing
justice
Enron would build an asset, such as a power plant, and immediately claim the
projected profit on its books, even though the company had not made one dollar
from the asset. If the revenue from the power plant was less than the projected
amount, instead of taking the loss, the company would then transfer the asset to an
off-the-books corporation where the loss would go unreported. This type of
accounting enabled Enron to write off unprofitable activities without hurting its
bottom line.
I. AGENDA:

Financing the business

1. Accounting process and different uses of accounting information
2. Company’s Balance sheet
3. Company’s financial positions
4. Financial management
I. AGENDA:

Financing the business

1. Accounting process and different uses of accounting information
2. Company’s Balance sheet
3. Company’s financial positions
4. Financial management
Financial management
Financial management:
Financial management is the operational activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary for
efficient operations - J. Massie

Financial management is the activity concerned with planning, raising,

controlling and administering of funds used in the business.” – Guthman
and Dougal
Financial management:

- Management of short term assets, which company use to generate sales

and manage ordinary day –to – day business operations
- Management of short term liabilities: the sources of short term funds
used to finance the business
- Manage long term assets and liabilities: plants, equipements, and the
use of common stock (owners’ equity) and bonds (long term liabilitiy) to
finance these long-term corporate assets
- Security markets: trading of stocks and bonds
Financial management:

- Management of short term assets, which company use to generate sales

and manage ordinary day –to – day business operations
Managing current (short term) assets:
The chief goal of financial managers when managing current assets and
liabilities is to maximize the return to the business on cash, temporary
investments of idle cash, accounts receivable and inventory
1. Managing cash (managing effectively the cash flow)
2. Investing free cash
3. Maximizing accounts receivable
4. Optimizing Inventory
Managing current (short term) assets:
1. Managing cash (managing effectively the cash flow)
Ensure that sufficient funds are on hand to meet the company’s obligations
(employees wages, supplies and utilities)
To ensure that enough cash flows through the organization quickly an
efficiently, companies try to speed up cash collections from customers
Managing current assets:

2, Investing Idle Cash

Marketable securities: temporary investments of “extra” cash by
organizations for up to one year (US)
- Treasury bills (T-bills): short term debt obligations the U.S government sells to
raise money
- Commercial certificates of deposit (CDs): certificates of deposit issued by
commercial banks and brokerage companies which may be traded prior to
maturity
- Commercial paper: a written promise from one company to another to pay a
specific amount of money (big companies)
- Eurodollar market: a market centered in London for trading U.S dollars in foreign
countries
Managing current assets:
3, Maximizing accounts receivable
Accounts receivable: money owed to a business by credit customers
(example gasoline purchase). Many companies make a great part of their
business on credit.
The typical terms require customers to pay within 30, 60 or 90 days from
the date of the sale
- How can we encourage quick payment?
- Discounts for quick payment
- Charges for late payment
- Information of customer credit rating. Can we offer credit to all our customers?
Example of a report of a
company credit rating giving
by a national credit rating
agency
Example of a report of a company credit rating giving
by a national credit rating agency
Example of a report of a company credit rating giving
by a national credit rating agency
Managing current assets:
4, Optimizing Inventory
Finance vs Production vs Marketing / Sales
Minimize the company’s investment in inventory without production
cutbacks or lost sales due to insufficient finished good inventories
- Just in time production : JIT is a management strategy that aligns raw-
material orders from suppliers directly with production schedules.
Companies employ this inventory strategy to increase efficiency and
decrease waste by receiving goods only as they need them for the
production process, which reduces inventory costs. This method requires
producers to forecast demand accurately.
What does Finance manager think about this system?
What do Marketing and Sales team think about this system?
Financial management:

- Management of short term assets, which company use to generate sales

and manage ordinary day –to – day business operations
- Management of short term liabilities: the sources of short term funds
used to finance the business
- Manage long term assets and liabilities: plants, equipements, and the
use of common stock (owners’ equity) and bonds (long term liabilitiy) to
finance these long-term corporate assets
- Security markets: trading of stocks and bonds
Managing current liabilities:

1. Accounts payable
2. Bank loans
3. Non bank liabilities
Managing current liabilities:
1. Accounts payable
Account payable is money an organization owes to suppliers for goods or
services
Trade credit: credit extended by suppliers for their goods and services. Most
suppliers offer discounts to organizations that pay their bills early
Example: 1/15 net 30 means that the purchasing organization may take
1% discount from the invoice amount if it makes payment by the 15th day
after receiving the bill, if not, the total amount is due within 30 days

When is it interesting for a Financial Manager to give discounts to a

customer when paying a bill early? Which is the limit of discount?
Managing current liabilities:
2 Bank loans: short term funds for operating from banks
Line of credit: (like a credit card) an arrangement by which a bank agrees to
lend a specified amount of money to an organization upon request.
Secured loans: loans backed by collateral that the bank can claim if the
borrowers do not repay the loans
Unsecured loans: loans backed only by borrowers’ good reputation and
previous credit rating.
Those loans has an interest rate (prime rate) that the commercial banks
charge their best customers.
Managing current liabilities:
3 Non bank liabilities
Insurance companies, pension funds, market funds, finance companies
also make short term loans.
Factor: A factor is an intermediary agent that provides cash or financing to
companies by purchasing their accounts receivables. Factoring can help
companies improve their short-term cash needs by selling their receivables
in return for an injection of cash from the factoring company.
For example a factor may pay 80.000€ for receivables with a total value of
100.000 €
Financial management:

- Management of short term assets, which company use to generate sales

and manage ordinary day –to – day business operations
- Management of short term liabilities: the sources of short term funds
used to finance the business
- Manage long term assets and liabilities: plants, equipements, and the
use of common stock (owners’ equity) and bonds (long term liabilitiy) to
finance these long-term corporate assets
- Security markets: trading of stocks and bonds
Managing Fix assets
Long term assets are expected to last for many years (facilities, offices,
equipment, heavy machinery, furniture, automobiles…
The challenge of managing fixed assets is to obtain long-term financing
One approach is leasing assets. Leasing involves paying a fee for usage
rather than owing the asset:
- Capital lease: is a long term contract and shows up on the balance
sheet as an asset and liability
- Operating lease: is a short term cancelable lease and does not show up
on the balance sheet
 Managing Fix assets:
Three considerations when you take the decision of invest in a new project:
I. Capital budgeting and project selection:
The process of analyzing the needs of the business and selecting the assets /
projects that will maximize its value
After selecting the project, all assets must be continually reevaluated
II. Assessing risk
Evaluation the risk of an investment. Example of the case study (gas station):
Invest in the
Buy another
Repair old Buy a coffee creation of a Invest in a car Highest risk
Lowest risk machinery maker small wash machine
gas station in
other village
supermarket

III Pricing long term money

The returns from any project must cover not only the return of operating the project
but also the interest expenses for the debt used to finance its construction
Managing long term liabilities:
Companies need to raise low-cost long-term funds to finance the developing of fixed
assets. Two options:
- Taking on long term liabilities (debt financing)
- Attracting new owners (equity financing)
Managing long term liabilities with debt financing:
Long term liabilities are debts that will be repaid over a number of years, such as
long term bank loans and bond issues. These takes many different forms, but in the
end, we are talking about debt
Bonds: debt instruments that larger companies sell to raise long term funds. The
bond contract is called indenture and it specifies the basic term of the bonds such a
face value (initial price), maturity date, the annual interest rate (also called coupon
rate) and the procedures to be followed in case the organization fails to make the
interest payments.
Types of bonds:
- Unsecured bonds (debentures): they are ot back by collateral
- Secured bonds: they are backed by specific collateral that must be forfeited in
the case that the issuing firm defaults
- Floating rate bonds: their interest rate changes with current interest rates
otherwise available in the economy
- Junk bond (bono basura): high interest rate bond with high risk
Managing long term liabilities with Owners’s equity
Owners’ equity refers to the owners’ investment in an organization.
- Sole proprietors and partners equity includes their money and assets
- Corporate owners own stock and shares of the companies
Common stocks is the single most important source of capital for most new
companies. If your company has no access to the capital markets, you can look for a
venture capital firm. The idea of a venture capital is to invest in a company’s
balance sheet and infrastructure until it reaches a sufficient size and credibility so
that it can be sold to a corporation
Investment banking
Investment banking is a specific division of banking related to the creation of capital
for other companies, governments, and other entities.
Investment banking activities include underwriting new debt and equity securities
for all types of corporations, aiding in the sale of securities, and helping to facilitate
mergers and acquisitions, reorganizations, and broker trades for both institutions
and private investors. (Merryl Lynch, Goldman Sachs or Morgan Stanley)
A company needs more money to expand may be able to obtain financing by issuing
stocks
- Going public (Initial public offering - IPO): first time selling stocks
- Primary market: the market where firms raise financial capital
- Secundary market: stock exchanges where investors can trade their securities
with others
Example: Facebook went public on May 18th 2012. Its IPO raised $16 billion for the company
and stockholders. Once the investment bankers distribuited the stock to retail brokers, the
brokers sold it to clients for 38$ per share. Two years later the value per share was double….
Financial management:

- Management of short term assets, which company use to generate sales

and manage ordinary day –to – day business operations
- Management of short term liabilities: the sources of short term funds
used to finance the business
- Manage long term assets and liabilities: plants, equipements, and the
use of common stock (owners’ equity) and bonds (long term liabilitiy) to
finance these long-term corporate assets
- Security markets: trading of stocks and bonds
Security markets
Security markets provide a mechanism for buying and selling securities. They make
it possible for owners to sell their stocks and bonds to other investors.
Secondary market trades used to be divided into organized exchanges or what is
known as the over the counter market (OTC)
The two biggest stock markets are the New York Stock Exchange and the NASDAQ
market (3rd is the Japan Exchange Group)
The NYSE used to be primarily a floor traded market, where brokers meet at trading
post on the floor of the NTYE (11 Wall Street) to buy and sell common stocks and
NASDAQ has been an electronic market. Today this traditional division is less
important as the exchanges become electronic.