Ignacio Lezaun

English edition
2021

Fundamentals of
Finance
Contents of the course

1. The role of the Chief Financial Officer

2. Statement of cash flows
3. Working capital management
4. Short-term finance instruments
5. The time value of money
6. Conclusions
 UNIT
1

1. Role of the Chief

Financial Officer (CFO)
OBJECTIVES UNIT
1

1. Background
2. CFO responsibilities
3. CFO and financial planning
4. Shift in role of CFO
5. Exercise
 Treasury plan UNIT 1

 Objective of financial management and responsibility of the

financial director: guarantee the liquidity of the company

 Thus it is essential and necessary to have a treasury plan (i.e.

a budget)

 A treasury plan:
o Is a budget for collections and payments
o Allows you to anticipate treasury problems
o Facilitates liquidity management
o Can be done weekly, bi-weekly, etc.

 A treasury plan is not:

o An income and expense budget
o A sales budget
o A cost estimate
o An investment budget
 Exercise: Treasury plan UNIT 1
• Company XYZ presents the following balance
sheet as of December 31, 2020:
ASSETS 31/12/20 Net Equity and Liabilities 31/12/20
Intangible Assets 60,000.00 € Share capital 120,000.00 €
Tangible Assets 120,000.00 € Reservas 45,000.00 €
No Current Assets 180,000.00 € Income of the Year 25,000.00 €
Inventories 145,000.00 € Net Equity 190,000.00 €
Trade and other receivables 56,000.00 € Long term debt 150,000.00 €
Cash 111,950.00 € Non Current Liabilities 150,000.00 €
Current Assets 312,950.00 € Short term debt 75,000.00 €
Accounts payable 45,000.00 €
Short-term payable Public Authorities 32,950.00 €
Current Liabilities 152,950.00 €
Total Assets 492,950.00 € Total Equity and Liabilities 492,950.00 €

• The details of the balance items are as follows:

Trade and other receivables Short-term payable Public Authorities
November sales 24,500.00 € VAT 15,000.00 €
December sales 31,500.00 € IRPF (Personal income tax) 7,500.00 €
Total Trade and other Corporation tax 6,250.00 €
receivables 56,000.00 € Social Security 4,200.00 €
Total Short-term payable Public Authorities 32,950.00 €
 Exercise: Treasury plan UNIT 1

The details of the obligations with the Public Administration are as

follows:

• VAT and personal income tax are paid in the month following the
end of the settlement period (the company files quarterly returns).
• The Corporation Tax is paid in the month of July of the following
year.
• Social Security is paid in the month following the settlement
month.
The average collection period for the company is two months.
The expected sales (excluding VAT) for the year 2021 by months are
the following:
January February March April May June July August September October November December
Sales 25,000.00 € 32,500.00 € 36,800.00 € 42,000.00 € 52,500.00 € 54,000.00 € 65,200.00 € 22,500.00 € 56,700.00 € 49,000.00 € 55,000.00 € 68,500.00 €

• The VAT to be passed on by the company is 21%.

 Exercise: Treasury plan UNIT 1

• The average term of payment to commercial suppliers

is one month and the payment of supplies and other
expenses is in cash. The details of purchases, supplies
and other expenses for months of the year 2021 are
expected to be the following:
January February March April May June July August September October November December
17,500.00 28,000.00 15,000.00 24,000.00 30,000.00 52,000.00 30,000.00 28,000.00 35,000.00 40,000.00 12,000.00
Purchases € € € € 25,000.00 € € € € € € € €
Supplies 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 € 1,400.00 €
Other expenses 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 € 500.00 €

• The input VAT borne by the company is 21%.

Exercise: Treasury plan UNIT 1
The details of the payroll to the workers are as follows:

• The total gross monthly payroll is € 10,000.-

• The number of payments paid by the company is 14 (extra payroll
in June and December).
• The personal income tax that is withheld from workers is 15%.
• The social security that corresponds to the workers is 6% (it is
calculated on the total of payments, but it does not accrue in the
extras).
• The social security that corresponds to the company is 30% (it is
calculated on the total of payments, but does not accrue in the
extras).

The amortization
January February table
March of the
April May short-term
June July bank loan isOctober
August September as November December
follows:
Installment 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 €

The loan instalments include both the return of principal and

the payment of interest.
 Exercise: Treasury plan UNIT 1
TASK: Prepare the monthly treasury budget
and profit and loss account forecast for the
year 2021 and draw conclusions
2021 January February March April May June July August September October November December
Opening balance

Receipts

Total receipts 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 €

Payments

Total payments 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 €

Net cash flows 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 €

Closing balance 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 € 0.00 €

PL Forecast 2021 2021

Sales
Purchases
Supplies and Other Expenses
Payroll
Social Security - Co.
Depreciation (*)
Operational income
Interest
Profit before taxes
Corporate tax
Net Income
 Exercise: Solution UNIT 1

First we have to identify the monthly receipts and payments, since the
planned sales and purchases are not collected and paid in the same
month in which they occur. Likewise, collections and payments include
the corresponding VAT. The sales and purchases of each month will be
the following:
January February March April May June July August September October November December
Sales 25.000,00 € 32.500,00 € 36.800,00 € 42.000,00 € 52.500,00 € 54.000,00 € 65.200,00 € 22.500,00 € 56.700,00 € 49.000,00 € 55.000,00 € 68.500,00 €
VAT charged 5.250,00 € 6.825,00 € 7.728,00 € 8.820,00 € 11.025,00 € 11.340,00 € 13.692,00 € 4.725,00 € 11.907,00 € 10.290,00 € 11.550,00 € 14.385,00 €
Total 30.250,00 € 39.325,00 € 44.528,00 € 50.820,00 € 63.525,00 € 65.340,00 € 78.892,00 € 27.225,00 € 68.607,00 € 59.290,00 € 66.550,00 € 82.885,00 €

Will be collected in April-2021 (2 months)….

Will be collected in March-2021 (2 months)

 January February March April May June July August September October November December
Purchases 17.500,00 € 28.000,00 € 15.000,00 € 24.000,00 € 25.000,00 € 30.000,00 € 52.000,00 € 30.000,00 € 28.000,00 € 35.000,00 € 40.000,00 € 12.000,00 €
Input VAT 3.675,00 € 5.880,00 € 3.150,00 € 5.040,00 € 5.250,00 € 6.300,00 € 10.920,00 € 6.300,00 € 5.880,00 € 7.350,00 € 8.400,00 € 2.520,00 €
Total 21.175,00 € 33.880,00 € 18.150,00 € 29.040,00 € 30.250,00 € 36.300,00 € 62.920,00 € 36.300,00 € 33.880,00 € 42.350,00 € 48.400,00 € 14.520,00 €

To be paid in March-2021 (1 month)….

To be paid in February-2021 (1 month)

January February March April May June July August September October November December
Supplies 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 €
Other expenses 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 €
Input VAT 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 €
Total 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 €

To be paid in the same month (cash)….

To be paid in the same month (cash)

TEMA 1: Empresa y el papel del director financiero

 Estimation - quarterly VAT Settlement:

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Output VAT 19.803,00 € 31.185,00 € 30.324,00 € 36.225,00 €

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Input VAT 13.902,00 € 17.787,00 € 24.297,00 € 19.467,00 €

VAT Settlement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Output VAT 19.803,00 € 31.185,00 € 30.324,00 € 36.225,00 €
Input VAT 13.902,00 € 17.787,00 € 24.297,00 € 19.467,00 €
VAT payable if (+) 5.901,00 € 13.398,00 € 6.027,00 € 16.758,00 €

To be paid in Jul-2021….

To be paid in April-2021

TEMA 1: Empresa y el papel del director financiero

 We have to breakdown the payroll payment and the payment of personal income tax:

January February March April May June June-Extra July August September October November December Dec-Extra
Payroll - Gross 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 €
IRPF Withholding 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 €
Social Sec-workers 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € - € 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € - €
Payroll - Net 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 8.500,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 8.500,00 €
Social Sec-Company 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € - € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € - €
Social Sec - payable 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € - € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € - €

Total Social Sec payable is the sum of the quota that

corresponds to the company and to the worker. It is
paid the following month

Quarter 1 Quarter 2 Quarter 3 Quarter 4

IRPF Settlement 4.500,00 € 6.000,00 € 4.500,00 € 6.000,00 €

To be paid in Jul-2021….

To be paid in April-2021

TEMA 1: Empresa y el papel del director financiero

 The details of the monthly payment of the loan instalments are the following:

January February March April May June July August September October November December
Installment 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 €

Paid in the same month

Paid in the same month

TEMA 1: Empresa y el papel del director financiero

 The monthly treasury budget would be the following:
2021 January February March April May June July August September October November December
111,950.00 -47,097.67
Opening balance € 48,316.04 € 38,007.08 € 13,743.12 € 3,883.17 € -1,262.79 € -9,826.75 € -28,883.71 € € -25,139.63 € -62,955.58 € -57,332.54 €

Receipts
Sales 24,500.00 € 31,500.00 € 30,250.00 € 39,325.00 € 44,528.00 € 50,820.00 € 63,525.00 € 65,340.00 € 78,892.00 € 27,225.00 € 68,607.00 € 59,290.00 €
Total receipts 24,500.00 € 31,500.00 € 30,250.00 € 39,325.00 € 44,528.00 € 50,820.00 € 63,525.00 € 65,340.00 € 78,892.00 € 27,225.00 € 68,607.00 € 59,290.00 €

Payments
Purchases 45,000.00 € 21,175.00 € 33,880.00 € 18,150.00 € 29,040.00 € 30,250.00 € 36,300.00 € 62,920.00 € 36,300.00 € 33,880.00 € 42,350.00 € 48,400.00 €
Supplies and other
exp. 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 €
Payroll 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 16,300.00 € 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 16,300.00 €
Social Security 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 €
Loan installment 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 €
VAT payment 15,000.00 € 5,901.00 € 13,398.00 € 6,027.00 €
IRPF payment 7,500.00 € 4,500.00 € 6,000.00 € 4,500.00 €
Corp. Tax payment 6,250.00 €
Total payments 88,133.96 € 41,808.96 € 54,513.96 € 49,184.96 € 49,673.96 € 59,383.96 € 82,581.96 € 83,553.96 € 56,933.96 € 65,040.96 € 62,983.96 € 77,533.96 €

-63,633.96 -10,308.96 -24,263.96 -19,056.96

Net cash flows € € € -9,859.96 € -5,145.96 € -8,563.96 € € -18,213.96 € 21,958.04 € -37,815.96 € 5,623.04 € -18,243.96 €

-28,883.71 -25,139.63
Closing balance 48,316.04 € 38,007.08 € 13,743.12 € 3,883.17 € -1,262.79 € -9,826.75 € € -47,097.67 € € -62,955.58 € -57,332.54 € -75,576.50 €

• The Opening balance is the Closing balance of the previous month. In January, that of the close of 2020
(see Balance sheet)
• The sales collections in January correspond to the sales of November-2020 and those of February to
those of December-2020, those of March to those of January and so on.
• Payments for January purchases refer to purchases from December-2020 (see Balance), those from
February to January ...
• The January Social Security payment corresponds to that of December-2020 (see Balance), February
payment to January ...
• Tax payments based on the settlement period in each case.
TEMA 1: Empresa y el papel del director financiero
Conclusions UNIT
1
1. If we forecast the profit and loss account expected for 2021
we will see that the company obtains a positive result that
generates a profit:

PL Forecast 2021 2021

Sales 559,700.00 €
Purchases -336,500.00 € • We have considered an annual depreciation of €
Supplies and Other Expenses -22,800.00 € 10,000.-
Payroll -140,000.00 € • Interest corresponds to the part of the loan
Social Security - Co. -42,000.00 € instalment that is not repayment of principal
Depreciation (*) -10,000.00 € • The corporation tax has been estimated at 25%
Operational income 8,400.00 € of the profit before tax
Interest -1,019.50 €
Profit before taxes 7,380.50 €
Corporate tax -1,845.12 €
Net Income 5,535.37 €

2. The company will have a serious cash flow problem as of May since it
will not have the capacity to generate liquidity to meet all its
commitments.

3. Collection or payment policies may be revisited

4. Bank financing would help fund the investment in working capital