Copyright: FinMan Copyright® 1994  Borje Kyrklund


Contents

   Version 1.0

Contents

Financial  Manager  (FinMan)

Introduction

Fundamentals of financial ratios

Planning cash flow

What FinMan is

How FinMan works

Glossary of terms

Important information

System requirements

Help on Help

Limited warranty

Using  FinMan

Getting started

Menu commands

Procedures

Dialog boxes

Technical support

Copyright

Registration

Technical support


Introduction

The responsibilities of the financial manager are:

1 	Ensuring that the company always has enough cash to meet its legal obligations and avoid insolvency; that is, to maintain adequate short-term flexibility;

2 	Obtaining whatever funds are required from external sources at the right time, in the right form and on the best possible terms;

3 	Ensuring that the company's assets and liabilities - current and long-term, financial and operating - are utilized as effectively as possible.

The successful achievement of the goals in items 1) and 2) depends on the financial performance and reputation of the company and item 3) reflects its actual performance.  Good performance is accordingly very important and the financial manager uses a  number of financial ratios for evaluating this feature of his company.  From the ratios, he can see whether it is performing well according to given criteria and  where improvements are needed.  This allows him to make suggestions to the rest of the management team about what needs to be achieved financially and to participate in developing a strategy for successful future development of the company.

Calculation of financial ratios is relatively easy, once you have the formulae required for it.  Understanding what the ratios mean is more difficult, especially as the reference for good performance for many of them depends on the business sector in which the company is active.  For instance, a certain financial ratio for a successful  chemical industry enterprise may be different from what is considered good performance in food manufacturing industries.  A sector may consequently be performing very well according to some criteria and not so well according to others.

The various financial ratios used may refer to operating performance, corporate liquidity, corporate value or serve to support management decisions.   They are the guiding stars for the management of a company; they provide their targets and standards.  They are helpful to managers in directing  them towards the most beneficial long-term strategies as well as towards effective short-term decision making.


Fundamentals of financial ratios

The balance sheet

Profit and loss statement

Performance

Liquidity and cash flow

Corporate valuation

Financial leverage

Sustainable growth

Investment ratios


The balance sheet

Components of the balance sheet

The balance sheet shows the sources and uses of funds - liabilities and assets.  In other words, where the funds came from and where they went.   It relates to one instance in time, and,  to see how the assets and funds change, we must review a number of balance sheets over time (months, quarters, years).

The 'Assets' block of the balance sheet consists of

 Fixed assets and

 Current assets

whereas the 'Liabilities' block consists of

 Ordinary funds,

 Long-term loans and

 Current liabilities.

Balance sheet terms

There are four very important terms used in the context of the balance sheet:

 Total assets

 Capital employed

 Net Worth

 Working capital


Fixed assets

The fixed assets include items which fall under three main headings:

1 	Intangibles;

2 	Net fixed assets;

3 	Investments.

The question as to wether the balance sheet should be adjusted to reflect current market values is a contentious question.  Where or when inflation is high, the value of fixed assets get out of line and it is recommended that they be revalued.  However, it is important to note that the balance sheet as such does not attempt to reflect the market value of the separate assets of the total company.


Current assets

'Current assets'  includes all the short-term assets in the company.  They will normally convert back into cash  within a short time.  All items under this heading can be put together under four headings:

1 	Inventories (stocks)

2 	Accounts receivable

3 	Cash

4 	Miscellaneous assets

These items are in constant movement.  Inventories of raw materials are converted into finished goods.  When these are sold, they convert into accounts receivable and, in time, into cash.

The two most significant assets under this heading are the inventories and the accounts receivable.  These often make up 50 percent of the total assets of a company.


Ordinary funds

This isa very important section of the balance sheet.  Unfortunately, it is also the area where the most confusing entries appear.

What matters under this entry is the total, not so much the breakdown, which is:

1 	Issued ordinary shares

2 	Capital reserves

3 	Revenue reserves


Long term loans

Long term loans are mortgages, debentures, term loans, bonds,etc. that run for more than a year, usually for several years.


Current liabilities

This includes all short-term liabilities, to be paid within one year, that is:

1 	Accounts payable

2 	Short-term loans

3 	Miscellaneous liabilities


Total assets

The definition of total assets is straightforward:  It is the sum of the fixed and current assets.  This tells you how the funds were used.

However. very often we use the term 'total assets', when we are really more interested in the other side of the balance sheet, that is,  where the funds came from.  It is then the sum of all liabilities: Ordinary funds, Long-term loans and Current liabilities.


Capital employed

Capital employed is often defined as:

•	Fixed assets, plus

•	Investments, plus

•	Inventories (stocks), accounts receivable, cash, minus

•	Accounts payable and short-term loans.

Taking into account the nature of the balance sheet, this can also be defined as:

•	Fixed assets, plus

•	Current assets, minus

•	Current liabilities.

This is also equal to:

•	Ordinary funds, plus

•	Long-term loans

or, simply

•	Total assets, minus

•	Current liabilities

These different definitions may seem obvious and irrelevant.  However, also reflect different ways of looking at capital employed.


Net worth

The net worth is equal to 'Ordinary funds' and consequently equal to

•	Issued ordinary shares, plus

•	Capital reserves, plus

•	Revenue reserves

Another definition of net worth, which follows from the structure of the balance sheet is

•	Fixed assets, plus

•	Current assets, minus

•	Current liabilities, minus

•	Long-term liabilities

The term net worth emphasises the second definition.  It tells us that the real value in this part of the balance sheet is determined by the value of all the assets, less all the external liabilities.  This is the shareholder's stake in the company.

The first definition is an accounting definition, where shares are issued and reserves are accumulated over time, using various accounting rules and conventions.  The second is more pragmatic.  Simply take all the values of the assets and deduct outstanding loans - anything left is shareholders money.  If the book value of the assets are equal to their actual value, both approaches give the same answer.  It follows that the amount of realism in the net worth depends on the validity of the values of the assets.


Working capital

The widely used definition of net working capital is current assets less current liabilities.  It represents the amount of day-to-day operating liquidity available to a business.

Operating liquidity is a term used to describe cash and near-cash assets available to meet ongoing cash needs.

A company can be very rich in assets, but short of liquidity, if the assets cannot readily be converted into cash.

A less common definition looks at the left side of the balance sheet:

•	Ordinary funds, plus

•	Long-term loans, minus

•	Fixed assets

This is a very important way of looking at the structure of a company.  The working capital in this definition is the long-term funds that are not tied up in long-term assets.  When there is a need for increasing the working capital, it must be done either by providing additional long-term funds or by disposing of fixed assets.


Profit and loss

General

The profit and loss statement or account forms a bridge between the opening and closing balance sheets of an accounting period.  Its function is to identify the total revenue earned and the total costs incurred over that period.  The difference between these two is the operating profit.

Timing

Timing of costs and revenues is vital.  Having established what they are, we must include them in the correct time period.  The issue arises just before and just after the cut-off date between accounting periods.  We may have to move revenue or costs forwards or backwards to get them into their correct time periods.

What profit - what loss?

The distribution of profits is usually clearly defined in legislation.  The fixed order in the queue for distribution is as follows:

•	to the lenders

•	to the taxation authorities

•	to the shareholders

Correspondingly, there are four different measures of profit, which follow one another in sequence:

•	Profit before interest and tax. Once interest is paid, it becomes

•	Profit before tax.  Once tax is paid, it becomes

•	Profit after tax.  Once dividends are paid, it becomes

•	Retained earnings.

The interest payment affects the items long-term loans and current liabilities (short-term credits) in the balance sheet.  The retained earnings, on the other hand, are credited to the ordinary funds.

Related topic

Total costs incurred


Total costs incurred

Two rules

Two rules apply to what is included in total costs incurred.  The costs that must be included are:

•	those that relate directly to revenue, for instance, the direct cost of the goods sold, including depreciation, and

•	those that relate to the given accounting period, such a salaries for the period.

Even with these rules, however, there are a number of uncertain cases.  For instance, should research and development costs be charged in the year in which they were incurred?  Can replacement of a roof of a building correctly be charged as a cost?  Is a particular depreciation charge correct?

Costs and cash flow

The profit and loss is not concerned with cash flow, which is covered by a separate statement.  However, the distinction between profit and cash flow must be clear.  For instance, salaries incurred but not paid must be charged as costs.  On the other hand, payment to suppliers for goods received are not costs, simply cash flow.  Costs are incurred when the goods are consumed, not when they are purchased or paid for.

Similarly, cash spent on the purchase of assets is not a cost, but the corresponding depreciation over the following years is.  A loan repayment is not a cost, because an asset (cash) and liability (loan) are both reduced by the same amount, so there is no loss in value.


Performance

General

Performance is measured by return on assets.  Thus, information given in the balance sheet and the profit and loss statement are combined to measure performance.  The return on assets can be defined in several ways. What is important in that context is, however, is not the name, but what profit and what asset is referred to in each case.  In this program, two returns on assets are used:

•	Return on total assets, which gives a measure of the operating efficiency of the total business or efficiency of usage of the total assets;

•	Return on equity, which assesses the return to the shareholder.

Both these ratios refer to return on investment (ROI), although the profits and the investments are different.  The rule for evaluation of return on total assets is in general that if it is greater than the cost of funds, then the business is viable.  If the rate of return is less, the business has no long-term future.

A good return on equity brings success to the business - it results in a high share price and makes it easy for the company to attract new funds.  This leads to high value and continued growth in wealth of its owners.

At the level of the individual company, a good return on equity keeps in place the financial framework for a thriving, growing enterprise.  At the level of the total economy, return on equity drives industrial investment, growth in gross national product, employment, government tax receipts, etc.  It is therefore a critical feature of the overall modern market economy as well to companies with that economy.

....and go  on to:

Standards of performance

Performance drivers


Standards of performance

It was already mentioned that the criterion for a good return on total assets is the cost of money, that is,  the interest paid on loans.  This can also be taken to apply to return on equity.  Thus, a return on investment  greater than the cost of money is a good figure.

This gives us one reference point, applicable anywhere, regardless of  the cost of money  and the inflation in a given economy.  However,  it is also interesting to compare the performance of the company with other enterprises that are considered successful.

Walsh (1993) uses a sample extracted from the Financial Times Stock Exchange (FT-SE) 100 Share Index  listing of the 100 largest companies in the UK as a standard for performance. His sample includes 58 companies from that list, representing six of seventeen sectors:

•	Food retailing

•	Food manufacturing

•	Chemicals

•	Stores

•	Brewers and distillers

•	Health and household

The summary balance sheet and profit  and loss account for the aggregate of this sample is shown in

Results of 57 FT-SE companies in 1990

The average return on total assets of these companies was 14.2 percent and the return on equity was 17.9 percent.

The results of the FT-SE companies on 1990 is a very good reference for the UK and especially for the economic situation there in 1990.  However, for a wider applicability, the reference for the returns on investment must be converted into a form which can be used meaningfully in other economic situations elsewhere.  Taking the cost of money in the UK in 1990 as 14 percent (the financial rate in December, 1990), we find that on the average these companies had a return on total assets about the same as the cost of money, whereas the ratio of return on equity to cost of money was about 1.35.

We can accordingly 'normalize' an average good performance as

•	Return on total assets = 1.0x(Cost of money), and

•	Return on equity = 1.35x(Cost of money)

Later on, we shall try to apply these to the distribution of returns of the sample of 57 companies in the UK.


Aggregated results

The following tables show the aggregated results of 57 top UK companies in 1990 (In ' 000,000,000 of UK Pounds):

NOTE: Widen the window until the numbers line up.

                      Balance Sheet

Liabilities:                   Assets:
------------------------------  ----------------------------------
Ordinary Funds          Fixed Assets
- Shares            19.2  - Intangibles            5.5
- Capital res.       8.8  - Net fixed assets   96.0
- Revenue res.   62.7  - Long-term inv.      14.0
                        90.7                            115.5

Long Term Loans       Current Assets
                        42.0  - Inventories           28.8
                                - Accounts rec.      31.6
Current Liabilities       - Cash                   19.2
- Accounts pay. 33.9  - Miscellaneous       0.6
- Loans (s.t.)     11.9                              80.2
- Miscellaneous 17.2
                        63.0
Grand total      195.7                            195.7

        Profit and Loss

Sales                                205.5
Costs                                177.7
------------------------------------------------
Profit before interest & tax    27.8
       Interest       4.6
Profit before tax                   23.2
      Tax             7.0
Profit after tax                     16.2
      Dividends     7.3
Retained earnings                 8.9

From the tables above, we can conclude that

•	The return on total assets was 100x(27.8/195.7) = 14.2 percent.

•	The return on equity was 100x(16.2/90.7) = 17.9 percent.


Performance drivers

The components of return on total assets

Return on total assets is a key tool that can help management in its day-to-day activities.  However, to be useful, it must first be broken down  into its component parts.  This will be done in two stages.

The first stage is that the  main ratio is divided into two subsidiary ratios

     - margin on sales percentage
     - sales to total assets ratio, or asset turn.

These two values, multiplied, always give the value of return on total assets. Later on, these ratios will be further broken down to expose greater levels of detail.  However, the formula for this first split is:

     Margin   X   Turn       =  Return on total assets

which is

     = (Profit b, i.& tax/Sales) x (Sales/Total assets).

The ratio on the left identifies profit as a percentage of sales and is often described as the margin on sales or sales margin.  It is almost universally used in the monitoring of company profit performance.

The ratio on the right, sales to total assets ratio, looks at the total sales achieved by the company in relation to its total assets.

A distribution type company typically has a relatively low margin and a high sales/assets ratio.  A telecommunications company, on the other hand would typically have a high margin with a low sales/assets ratio.  A third example would be a manufacturing company, with average values under both headings.

The aggregated sample of FT-SE companies has an average sales margin of 13.5 percent delivered at 1.1 times to produce a return on investment of 14.2 percent which would correspond to a manufacturing type business.

To normalize these values to be applicable to a wider range of economic conditions,  we divide the sales margin by the rate of interest paid on loans, 14 percent.  This gives an average normalized sales margin of 0.96 times the rate of interest.  delivered 1.1 times to produce a normalized return on investment of 1.0 times the rate of interest.  The asset turn is not affected by this normalization.

Based on the same FT-SE sample, Walsh concludes that  a rough rule of thumb would be that a margin slightly in excess of 10 percent. combined with an asset turn of 1.3 - 1.5 would be where many companies would find a comfortable and reasonably profitable position.  The normalized margin corresponding to this would then be 0.7 times the rate of interest paid on loans.  The conclusion as to the turn presumes that the assets are valued at their real value at the end of the accounting period, if the rate of inflation is high.

Drivers

Drivers on margin on sales

Drivers on sales/total assets

A model for operating profit

Model variations


Drivers on margin on sales

Costs

The margin on sales is the ratio of profit before interest and tax to sales income.  It follows that to improve the margin on sales, at a constant sales income, you will need to reduce your costs.  These can be broken down to the extent necessary for management in each case, but a rough, indicative breakdown would be:

•	Materials

•	Labour

•	Factory overheads

•	Administration, marketing etc.

The sensitivity of the margin of sales to variations in the cost components depends on the individual case and may vary considerably.  In some cases, the labour cost is a major one, in others it may be small.

Sales income

The sales income affect both the profit and the denominator of the expression for margin on sales.  The factors which drive sales income are by far more complex than in the case of costs and the major ones are:

•	Sales price

•	Sales volume

•	Product mix


Drivers on sales to total assets

The components that affect the sales/total assets ratio at constant sales income are all in the balance sheet.  The major ones are:

•	Fixed assets

•	Inventories (stocks)

•	Accounts receivable

Like in the case of margin on sales, the sensitivity of the ratio to variations in the components depends on the individual case.  However, the main variables which can be more easily controlled are inventories and accounts receivable.


A model for operating profit

We have now identified the drivers for margin on sales and for the sales to total assets ratio.  Since multiplication of the two gives the return on total assets,  we have identified the drivers which affect this ratio.

Looking at the various drivers for margin of sales and for sales to total assets ratio, gives a powerful insight into the parameters of good performance and also emphasizes the importance of teamwork in management.  In addition. it helps in delegation of authority and in setting of targets.  However, there are also some weaknesses in the model:

•	A business normally does not deal with only one product, but with a range of products.  It is not sufficient to work with averages, because favourable movements in one product may mask  adverse movements in another.

•	The cost to sales ratio, for instance for materials, may vary for two different reasons, that is, a change in unit cost of materials  and a change in unit selling price of the product.

•	The model does not cope very well with changes in  volume, which can be extremely important as a tool to improve performance.  A volume increase will show in the sales to assets ratio but, because of fixed costs, the change in volume will have an effect on the sales margin, as well.

•	The ratio depends on the valuation of the assets in the balance sheet.  It is therefore difficult to compare different businesses or divisions because of the age of the plant, different depreciation policies, etc.


Model variations

Two of the component ratios in the model may be given another name or shown differently:  Sales to accounts receivable and sales to inventories.

Sales to accounts receivable is commonly expressed in "day's sale".  To do this, the ratio is inverted to accounts receivable over sales and multiplied by 365.  The answer is the average number of days of credit the customers take before paying their bills.  This value is also referred to as debtor days and collection period.

Sales to inventories can be inverted and multiplied by 365 to give "inventory days".

The sample taken by Walsh from the FT-SE companies in 1990 exhibits the following values for the drivers for the sales to assets ratio:

•	Sales to fixed assets - the average is 2.3 with 25 percent below 1.3 and 25 percent above 3.3.  This ratio is heavily influenced by the nature of the industry.

•	Inventory days - the average is 45 days with 25 percent below 26 days and 25 percent above 67 days.  The level of inventory required depends very much on the industry sector.

•	Debtor days - the average is 60 days with 25 percent below 43 days and 25 percent above 82 days, again with a strong sectoral influence.


Liquidity

Corporate liquidity

A company that  cannot produce cash to meet its day-to-day requirements has run out of liquidity, regardless of whether it shows a profit or not.  A business can survive without profit for some time, but not without cash.

When cash runs out, the company has lost control and can no longer make independent decisions.  An outside entity, an unpaid creditor or a bank whose loan is in default, will decide the fate of the company. Its management is likely to have little say in this.

The cash cycle

Cash is in continuous circulation, from a "cash box" to accounts payable, on to inventories, from there to accounts receivable and then back to the cash box.  If the box is about to run temporarily empty, it can be replenished through short-term loans (overdrafts, etc.).

Thus, the main cash outflows from the box are:

•	Payments to accounts payable, that is, suppliers of raw materials, utilities and main purchases;

•	Payments of salaries and wages and payments all other operating expenses of the business.

As goods are sold, cash flows to the accounts receivable and then back into the cash box.  Thus, at the completion of a full cycle, the cash is increased by the profit earned plus the depreciation charges (Depreciation is deducted in the calculation of profit and must be added back to show net cash).

Non-operating cash out-flows

•	Payments of interest, tax and dividends;

•	Loan repayments;

•	Capital expenditure for investment projects

Non-operating cash in-flows

•	New equity capital;

•	New long-term loans;

•	Sale of fixed assets.

Further details

Analysis of liquidity

Cash flow


Analysis of liquidity

Long and short analysis

When we look at a company's liquidity, we must distinguish between the long-term and short-term sections of the balance sheet.

Current assets and current liabilities both fall into the short-term area,  the remaining parts of the balance sheet, ordinary funds, long term loans and fixed assets into the long-term area.  There should be a certain balance between the long-term assets and funds on the one hand and the short-term assets and funds on the other.  Long-term assets in a company should be matched by corresponding long-term liabilities and vice versa.

Companies that are heavy in current assets will be adversely affected by an increase in the rate of inflation.  Companies which have borrowed heavily, are sensitive to changes in the rate of interest.

Short-term liquidity

Long-term liquidity


Short term liquidity

General

Short-term liquidity is usually analysed in four ways:

•	Current ratio = Current assets/Current liabilities

•	Quick ratio = (Current assets - Inventories)/Current liabilities.  This is also called the "acid test".

•	Working capital to sales ratio = (Current assets-Current liabilities)/Sales  (expressed as a percentage)

•	Interest cover = Profit before interest and tax/Interest payments.

The current and the quick ratio are widely used measures of short-term liquidity, but they are looking at the situation only at the time of  making the balance sheet.  Working capital to sales ratio is used to look at the situation in a near future.

The values of the above ratios for the sample of FT-SE companies were as follows:

Current ratio

The average current ratio for the FT-SE companies in 1990 was 1.3 with 25 percent below 1.0 and 25 percent above 1.6.  The value depends very much on the type of business.  Manufacturing businesses usually have a high value, whereas retail businesses have a low one.  In manufacturing companies the value should in general not be lower than 1.0.

Quick ratio

The average quick ratio was 0.8 with 25 percent below 0.7 and 25 percent above 1.1.  This ratio expresses the ability of the business to raise cash quickly.  A value of 1.0 is very good.

Working capital to sales ratio

Here the FT-SE sample showed an average of 11 percent, with 25 percent below 0 and 25 percent above 21. Some of the large companies in the sample held significant cash balances, with working capital to sales ratio over 41 percent.   The trend today, especially in the Just in Time (JiT) approach is towards low values, particularly in the form of reduced inventories.

Interest cover

The average for the FT-SE sample was 6.0 times with 25 - percent below 4.3 and 25 percent above 9.5 times.  Very few companies would be able to operate with a level below 3 times, whereas 4 times can be considered a prudent minimum value.

The inverse of this term is sometimes referred to as "financial leverage". If it is high - the proportion of debt is high - a small change in operating profit will be greatly magnified in its effect of return to the shareholders.  Such a company does well in boom times but falls into difficulty in recession.


Long term liquidity

Comparison of debt to other funding

The financial strength or the long-term liquidity is measured by the debt to equity ratio (D/E).  The purpose of this ratio is to measure the mix of funds in the balance sheet and to compare the funds  supplied by the owners (equity)  to those which have been borrowed (debt).

The principle seems simple, but difficulties arise

•	in the definition of "debt", and

•	in the way the comparison is expressed.

"Debt"

Debt can be interpreted to mean

1 	Long term loans only;

2 	Long- and short-term loans, including all interest bearing debt;

3 	Long term loans plus all current liabilities.

The first two concentrate on formal debt, usually from bank sources and they are often used by banks, who stand ahead of trade and other creditors in the queue for payments.  From the companies' standpoint, debt due to a supplier is equally important.  This is why definition 3 is used through-out in this presentation.

Methods of calculation

There are three ways commonly used for comparing debt to other funding:

1 	Debt over equity - this is the most common way of calculating it.

2 	Equity over total funds (not so common).

3 	Debt over total funds.  This is also commonly used and gives an instant picture of the balance sheet on the funds side.  This value can also be expressed as (Long term loans + Current liabilities)/Current assets.

Method 3 will be used in this presentation for evaluation of the financial strength of a company
.

The FT-SE sample

The average debt to total funds, as defined in the two sections above,  of the sample of companies was 47 percent, with 25 percent of the companies below 41 and 25 percent above 58.  Please bear in mind that this was at a financial  rate of interest on loans of 14 percent.  The rate of interest paid on loans puts serious constraints on the value of debt to total funds so that the acceptable value drops rapidly as the rate of interest increases.

There are also regional variations, due to attitudes and cultural and historical (and sometimes taxation) factors, which cannot be explained by financial factors alone. In the UK and in the US, the acceptable value  is usually around 50 percent. In  Continental Europe, values of  65 - 70 percent are common and in the Far East, the ratio may be as high as about 85 percent.

Leverage

Leverage is dealt with in more detail in a separate topic in this presentation, but suffice it to note that by increasing the proportion of debt (leverage), at constant rate of interest, the return on equity before tax increases substantially.


Cash flow

General

The cash flow statement is a very powerful tool for showing how the company has carried out its operations over the accounting period.   In addition to showing the movements of cash, it  explains what lies behind movements in various liquidity ratios.  It identifies how much cash has flowed through the company's accounts, where it has gone and where it has come from.

Sources and uses of funds

Relating the cash flow statement to changes in the balance sheet, the following rules apply as definitions of sources and uses of funds:

•	Source = a decrease in assets or an increase in liability.

•	Use = an increase in asset or a decrease in liability.

Please note that some movements in balance sheet values do not give rise to cash flow.  Revaluation or depreciation of assets are two examples, so the above rules apply strictly only at constant value of existing or acquired assets.

Components of cash flow

The cash flow statement should identify the following components of the flow of cash and its equivalents:

•	Operating activities

•	Servicing of finance

•	Taxation

•	Investing activities

•	Financing activities.


Corporate valuation

General

In the valuation of a company's assets there may be a need for adjustment of the values of both assets in the form of fixed assets and inventories and liabilities.  There are cases when the fixed assets have been over-valued, but in some very capital intensive industries, the assets may be worth much more than the book value.  There is also the difference between the value of assets in use and their break-up value.

The value of companies, whether they are quoted or not on the stock market, is greatly influenced by that market.  The important terms and ratios designed to evaluate a company from that stand-point are:

Share values

Earnings per share

Dividends per share

Dividend cover and  pay-out ratio

Share yield ratios

Price to earnings ratio

Market to book ratio

Different views

Summing up


Share value

•	The nominal value of shares is a notional figure, which, multiplied by the number of issued shares will give the value for the' issued ordinary shares' in the balance sheet.  New shares will hold the same nominal value, even when their issue price is much above it.  The difference between the issue price and the nominal value is the 'share premium' that forms part of the capital reserve.

•	Book value is the total of 'ordinary funds' divided by the number of shares. It thus takes into account issued ordinary shares,  capital reserves and revenue reserves.

•	Market value is the price quoted on the stock exchange for a public company or the estimated price for a non-quoted company.


Earnings per share

Earnings per share or EPS is the profit after tax divided by the number of ordinary shares.

Please note that the EPS value cannot be used to compare different companies, since it depends on the number of shares issued by each company.  However, its growth over time is used to assess the company's  progress as well as the stability of that progress.


Dividends per share

Dividends are only paid out from profit and from no other source.  However, the earnings do not need to come from the same year as the dividends.  The situation may therefore arise that dividends exceed earnings in a given year.  In such cases, the dividends are paid from earnings from previous years, retained in the business.

The total return from a share consists of the dividends received plus the growth in share price over a given time.  For some investors growth is important, others again may be more interested in a steady income.  The latter type of investor looks at the  dividend per share and for a history of stable but growing payments of dividends.  Payment of dividends is therefore important for the company in order to attract that type of investor.

Dividends per share (DPS) is simply the dividend paid in a year, divided by the number of shares.


Dividend cover and payout ratio

Dividend cover and pay-out ratio are reciprocals of each other and give the same information.  Thus

•	Dividend cover = Earnings per share (EPS) divided by dividends per share (DPS)

•	Pay-out ratio = DPS/EPS.

A high cover indicates that the dividend is fairly safe, because any expected downturn in profit will still leave the dividend well covered. A high cover also suggests a high retention policy, which suggests that the company is going for high growth.

 In the sample of the FT-SE companies from 1990, the average dividend cover was 2.5 with 25 percent below 2.1 and 25 percent above 3.2.  Only 10 percent had a cover below 1.9 and only 10 percent above 3.8.  Accordingly, most of the companies grouped very closely to the average.


Share yield ratios

The yield on a share expresses the return to the shareholder as a percentage of the current share price.  This calculation is used for both earnings and dividends.  Thus there is

•	Earnings yield = Earnings per share (EPS) divided by share price, and

•	Dividends yield = Dividends per share (DPS) divided by share price.

The earnings yield can be interpreted as the cost of the company of attracting investors.  Companies with low yield values are favoured.

The FT-SE sample of companies had an average earnings yield of 9 percent (8-11 percent) and the dividends yield was 4 percent (3-5 percent).  These yields are inversely related to the level of the FT-SE 100 share index, which was at about 2100 when these values were calculated.


Price to earnings ratio

The price to earnings ratio is the inverse to earnings yield, that is, the share price divided by the earnings per share.  This ratio is determined by the market and the company has little control over it.  It is, however, a very important ratio, because there are considerable advantages from a high price to earnings ratio:  New funds can be raised at a favourable price and the company has the possibility of making acquisitions on favourable terms.


Market to book ratio

The market to book ratio summarizes the view of the investing public of the company, its management, its profits, its liquidity, stability and future prospects.  It compares the present stock-market value with the shareholders' investment in the company.

Market to book ratio = (Number of ordinary shares X Market value per share)/(Total ordinary funds).

To deliver satisfactory performance, the company must achieve a value of at least 1.0 and preferably 1.5.  In the sample of FT-SE companies, the average  value was 2.0 with 25 percent below 1.3 and 25 percent above 2.8.


Different views

General

Market to book ratio can be expressed in different ways to reflect different ways of looking at it:

•	Total company view - this is the standard market to book ratio obtained by dividing the market value of all shares by the total ordinary funds.

•	Single share view - this is the market to book ratio as it applies to one individual share and is obtained by dividing the share price by its book value.

•	Internal return vs. required return relates the return on equity of the company to the earnings yield on the share and is equal to Return on equity divided by Earnings yield.

Importance of the return on equity ratio

The earnings yield is the earnings per share divided by the market price of the share.  Thus, when the share price increases, the earnings yield decreases.  The yield is therefore determined by the market. A high earnings yield implies that the company is not favoured by investors.  There is accordingly a certain value of this that is required by the investors to stay with the company.

The return on equity, on the other hand is the rate of return provided by the company to its investors.  Any difference between the return on equity and the required value for the earnings yield, determines how the investors judge the desirability of investing in the company.  Usually the ratio of the two values should be between 1.5 to 2.5.  The earnings yield changes, of course, with variations in the stock exchange indices, but some 'normal' value should be selected as a reference.


Summing up corporate value

The corporate value of a company can be evaluated in three different ways:

•	Based on its operating performance as measured by sales margin and sales/total assets, the product of which is the return on total assets.

•	Based on its financial gearing, looking at its debt to equity ratio and its interest and tax percentages.

•	Using stock market ratios, such as the market to book ratio.

The independent variables that can be influenced by management in these models of evaluation are:

•	The cost percentages in the profit and loss statement, mainly material, labour and overheads.

•	The main asset groups in the balance sheet, that is, fixed assets, inventories and accounts receivable.

•	Debt to equity ratio.

•	Interest.

•	Tax.


Financial leverage

The diagram above can be looked at in several ways, but it shows how the proportion of debt and the average interest paid on all credit (including accounts payable) affect the returns on total assets and on equity:

•	At constant interest paid, an increase in total debt (accounts payable), - push the red support to the left - drives up the return on equity.

•	At constant total debt, a decrease in interest paid tilts the return on equity upward.

This is leverage at work.


Sustainable growth

Growth

Growth is beneficial to a company up to a certain level.  Beyond that, it can become fatal.  There is accordingly a certain optimum level at which the opportunities and dangers of growth are in equilibrium.

Growth equilibrium - a first model

The growth equilibrium, E, is given by this equation, where
R = retained earnings to sales, T = current assets to sales and G = growth in sales, all expressed as fractions. The value of E shows the part of the existing growth which is funded by retained earnings. To obtained balanced growth, the value of E should be around 1, which represents neutral cash flow.

This model is suitable for a situation where the company uses very little of its fixed assets and relies heavily on borrowing.  It has, however, also serious limitations:

•	It looks only at current rather than total assets.

•	It ignores the ability of most companies to supplement retained earnings with funds from other sources.

Growth equilibrium - a general model

A more generally applicable model that can be derived from the first is shown here, where G = self-funding growth in sales, RE = retained earnings and OF = ordinary funds.  The opening, not the closing figure for OF should be used here.

In the sample from the FT-SE companies, the average self-funding growth in sales was 12 percent, with 25 percent of the companies below 9 and 25 percent above 20.  Capital intensive industries usually have fairly low growth rates.


Investment ratios

Time value of money

All the ratios referred to so far refer to the situation in a given point of time, whether past, present or future.  This is fully acceptable when the ratios are calculated for an existing company, to evaluate its performance or desirability as an investment object.  The principle of time value of money will be covered very briefly here, since it is not applied in the program.  The reason for the latter is that the program does not deal with evaluation of investment projects.  The subject is covered, however, because it is an important one to be understood in general.

In the case of a project for investment into new production facilities in an existing or new company, neglecting the time value of money is unsatisfactory.  This is because in that case we are talking about expected performance of the project in the future, usually over a number of years.  The flow of cash, which is expected to generate returns to the investor is not yet there.  Although we invest today and possibly undertake to invest some more in the next 2 - 3 years into the project, our returns will be paid to us  in the future over so many years.

If you invest 1,000 monetary units today and obtain 10 percent interest, you will have about 1,610 units five years later, at compounded interest.  Conversely, 1,000 units obtained five years from now, would only be worth 1,000x1,000/1,610 = 621, assuming the same rate of interest.  In other words the present value of 1,000 monetary units obtained five years hence, is 621 at 10 percent interest.  Its future value is 1,000.

Discounting

Net present value

Internal rate of return


Discounting

When the future value of 1,000 monetary units is converted to its present value of 621, we call it discounting.  The rate of interest applied in this calculation is referred to as the rate of discounting.

The mathematical expression for discounting is this formula, where  PV = the present value, FV = the future value, i the rate of discounting (expressed as a fraction, not a percentage) and n is the number of years or periods over which the funds are discounted.  To discount a stream of cash flow, the funds for each year  in the future are discounted one by one, using the same rate of discounting.


Net present value

The net present value of a stream of cash flow is the sum of the present value of all expected future investments and net cash for each year of the life-time of the project.  Depending of the project, its life-time may be 5 - 20 years.  The rate of discounting used is the rate of interest one expects to obtain on the investment.

If the net present value of the project is less than zero, it shows that the predicted cash flow would not be sufficient to give the expected return.  If it  is greater than or equal to zero, the project meets the requirement on returns

Tables with monetary units discounted over time at different rates are usually used to carry out the calculation of net present value.  The present value of the funds in each year is obtained by multiplication by a factor obtained from the table.


Internal rate of return

If the calculation of net present value is repeated for different values of the rate of discounting and the result is plotted against the rate of discounting, the result is a curve with decreasing values for increasing rates.  The rate at which the curve intersects with the x-axis (Net present value = 0) is called the internal rate of return.

It is determined by calculating the net present value at two different rates of discounting, assumed to be lower and higher, respectively, than the internal rate and interpolating between these to a net present value equal to zero.


Planning cash flow

The starting point

Planning cash flow is not only a forecast of what the cash flow is expected to look like over the next few weeks or months.  It is an intellectual exercise which involves careful consideration of production programmes and foreseen orders,  rates of collection (accounts receivable), the possibility of bank overdrafts, credits in general (with collateral), payment of bills (accounts payable), the size and value of inventories, wages and salaries, taxes and duties, contracts, insurance fees, etc.  The financial manager must not only try to visualize passively what the situation will be over a certain planning period, but also how he will be able to influence and control it.

For instance, can the rates of collection be speeded up?  Or, if the cash inflow is uneven, can it be made less variable?  Can inventories be reduced?  How much spare cash should be kept on hand?  What kind of short-term credits can be obtained?  What can be offered as collateral for such credit?  These are questions which need to be answered long before the cash flow planning process starts.

Planning period and planning interval

The planning period should usually be fairly short to be practical.  Cash flow predictions for investment projects can be drawn up for twenty years, but mainly serve to show how the initial investment is recovered.  A cash flow plan, on the other hand, tells you what obligations you foresee for your planning period and how you intend to raise the cash necessary for meeting them.  Your plan is the more realistic the shorter your planning period and the closer it is to today.  You may,  however, want to prepare a long-term plan for,  say,   6 months or a year, to have an overview of what obligations are likely to arise.  This may then be complemented by short-term plans for the next 4 to 6 weeks, where you really get into the details of how you are going to provide the cash needed.

The planning interval depends on the general setup.  Is the cash flow very predictable in size and/or timing?  In that case an interval of one month is usually sufficient.   If the cash flow is variable or unpredictable, the plan needs a shorter interval, perhaps a week.  How important is it?  Perhaps rasing cash is no problem.  Last but not least,  can the financial manager spend his time more productively, doing something else?

Steps in preparation of the plan

Once the planning period and its interval have been settled, the steps for each interval are as follows:

•	Identify all payments of fixed costs in your planning interval.

•	Identify all payments of variable costs in your planning interval, taking into account the expected orders and  production, as regards  quantity,  quality and type.

•	Identify payments of contracts, advertising, sales promotion, travel, insurance, taxes and duties during your planning interval.

•	Identify the need for debt servicing during the planning interval.

•	Add up all these expenditures for each planning interval.

•	Identify sources and amounts of funds for each planning interval, taking into account the opening cash balance,  and ensure that they are sufficient to cover the requirements for that interval.  It is also likely that funds must be accumulated to meet requirements in later intervals of the same planning period.

The program cannot help you in the identification of requirements or sources.  However, it assists you in ensuring that you include all important items and in the arithmetics of the exercise.  Once all inputs have been made for the planning period, the program gives you a cash flow plan for up to six intervals.  Any adjustments needed can be made by editing the input data.

Note

Please note that the terminology used in the program itself is not the same as here in this particular context.  The program refers to 'Period' which should be interpreted as 'Interval'.  The reason for this choice is that 'Period' is more easily understood by those who do not bother reading this part of the on-screen manual.


What FinMan is

FinMan is short for Financial Manager and is a program for financial evaluation of your company and for planning of its cash flow, so that the company can meet its obligations when they are due.

The program evaluates how well your company is doing, compared with a sample of 57 of the top 100 companies in the UK in 1990, using financial statements and other management ratios.

It also helps you plan your company's need for cash in the near future and to identify sources from where  the cash required can be raised.


How FinMan works

General

The program consist of two parts:

•	Evaluation of your company's (or of  any company, for that matter) operating performance, and valuation of its shares, based on the balance sheet for a given accounting period and the profit and loss statement for the same period.

•	A means for preparing cash flow plans for the immediate future, so that the requirements of cash and how they can be met are identified.

Performance and valuation

The performance of the company as well as the valuation of its shares is based on information contained in the balance sheet and the profit and loss statement for a given period.  Please note, however, that the 'period' here is not to be understood as the fiscal year, but rather as statements made from time to time for internal, management purposes, for instance, once a month.  This allows the financial manager to follow the development of the company's performance and to suggest changes in strategies when required.

From the data provided in the balance sheet and in the profit and loss statement, the program calculates a number of financial ratios and ranks the results on a scale from 0 to 5, based on a sample of 57 top companies from eight different sectors in the UK in 1990 (Walsh, 1993).  Since the results and their interpretation depend on the sector in which the company is active, a presentation is also made of how  successful companies in various sectors score according to the same criteria.

Ratios are calculated in the same manner for valuation of the shares of the company.  Again, the results are ranked according to a scale of 0 to 5, using the same companies as a reference.  The scores of successful companies in various sectors are again used as a reference.  The result of this valuation does not only give an indication of how valued the shares are as such, but, and more importantly, it gives a direct measure of how easy or difficult it may be to attract new investors.

The results of the evaluations can be viewed on-screen, stored in a file or printed.  All data used for these evaluations are stored in a file for easy retrieval, so that the progress made by the company can be followed over time.
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Planning cash flow

Whereas the data for evaluation of performance and valuation of the company are stored each time and added to the data of previous evaluations, the data for cash flow plans consist of one set only.  This is because in this context we are not interested in how the plans have 'progressed'.  We only want to create and study the plan we have prepared for the immediate future.  'Immediate', because we want to know how we are going to meet the company's obligations for cash in the next few weeks or months.  We are not interested in this context in investment studies or in preparing a business plan for financing of the company by a bank.   We are not trying to impress anybody with our cash flow plan, but to solve the immediate problem of finding cash when it is needed in the next few weeks.

To do this, the program can be used for 'what if' analysis of the expected cash flows, for instance, week by week for up to six weeks.  The length of each planning interval used, a week, a fortnight or a month, can be set by the user.  The first step is to input the expected cash outflow for each interval followed by identification for each interval of where the cash is coming from - accumulation of cash, non-trade income, short-term or long-term loans.

The result is a cash flow statement with identifiable sources of funds.  This can be viewed on-screen, saved to a file or printed.  In this way, several proposals can be made for discussion at management meetings, or the financial manager can use them for optimization of his planned cash flow, so that the cost of obtaining cash is minimized.

The program  can of course also be used for preparing a number of cash flow statements for review, to show changes over a given time.  In that case, each cash flow statement is entered as a planning interval.

Utilities

The program also includes some utilities.  For instance, it uses the Windows Notebook for browsing of files generated in the performance evaluation or in preparing cash flow plans.  Other utilities called by the program are the Windows calculator and its calendar.


Glossary of terms

A

Accounts payable

Accounts receivable

assets

C

Capital reserves

Cash

collection period

corporate liquidity

corporate value

Current assets

Current liabilities

D

debtor days

depreciation charges

discounting

F

financial strength

Fixed assets

future value

I

Intangibles

internal rate of return

Inventories (stocks)

inventory days

Investments

Issued ordinary shares

L

liabilities

liquidity

Long-term liabilities

Long-term loans

M

management decisions

margin on sales

Miscellaneous assets

Miscellaneous liabilities

N

Net fixed assets

net present value

net profit margin

O

operating performance

Ordinary funds

P

planning interval

planning period

present value

R

rate of discounting

Return on equity

Return on total assets

Revenue reserves

S

sales to total assets ratio

short-term assets

Short-term loans

T

Total assets

total costs incurred

total revenue earned

W

Walsh


System requirements

Hardware requirements

•	Personal computer using 286 type microprocessor or higher (386 type or higher recommended).

•	2 MB of memory (5 MB recommended).

•	EGA, VGA, Super-VGA, XGA, 8514/A or compatible video card with corresponding monitor.

•	Mouse

Software requirements

•	Microsoft DOS version 3.1 or higher.

•	Microsoft Windows version 3.0 or higher (Version 3.1 or higher recommended).


Help on Help

You have access to Help in three ways:  As  a specific menu item in the Help menu, by pressing the [F1] key or from the Help button in the dialog boxes.

Help as a menu item

The Help menu has two options for calling Help.  First, 'Help on FinMan' which gives you the Contents screen of Help.   From this you can access all the other screens and read them as a manual for FinMan.  Second, there is the 'Help on Help' option, which calls this screen.

Help from F1

Help obtainable by pressing the [F1] key is context-sensitive, that is, the Help screen displayed depends on what menu option has been selected before [F1] was pressed.

If no menu selection has been made,  Help displays its Contents screen.  Please note that Help cannot be accessed by pressing [F1] when a dialog box is displayed.

Help for dialog boxes

The only way to access Help when a dialog box is displayed is by clicking on the Help button of the box.  This displays the Help listing for dialog boxes


Limited warranty

This program is provided "as is", without representation or warranty of any kind, either express or implied, including without limitation, any representation or endorsement regarding the use of, the results of, or the performance of the program, its appropriateness, accuracy or reliability.   The entire risk as to the use of this program is assumed by the user.  In no event will the author be liable for any damages, direct or indirect, incidental or consequential, resulting from the use of this program.


Getting started

Opening a new file

Setting date format

Creating new data

Deleting data

Saving your work

Loading data


Opening a new file

If you are using the program for the first time, or if you want to start a new file, say, for a subsidiary company of yours, you need to initiate a new file with main data and supplementary information.

To do this, simply click on 'New' in the File Menu.  This clears the memory of any previous work and sets the defaults.  You are now ready to create your new set of data.


Setting  date format

The international date format (dd/mm/yy) is the default of the program.  To change this to the US format, mm-dd-yy, or ISO, yy.mm.dd, click on 'Preferences' in the File Menu.

Click on the down arrow in the dialog box and select the date format of your preference.  Your choice will be retained in your system when you save the data.

Please note that  in addition to accepting three different orders of entry of day, month and year, the program also accepts three different separators, a slash (/), a dash (-) and a dot (.).

 An important point on entering the date in your sets of data is that if there are less than two digits in the entries for day and month, you must enter leading zeros.  For instance, enter 05/08/94,  NOT 5/8/94.  The program will not accept the latter.

If you wish to use a format different from the default, you must make your selection of format at the beginning of establishing the database.  If the format is changed later, some of your date entries may need to be revised.


Creating new data

Introduction

There are three main sets of data used by the program.  Firstly,  the  general (miscellaneous) information, such as unit of currency, the name of the company, etc.  which is used  in the evaluation of performance and  in the valuation of the company, on the one hand, and in the generation of cash flow, on the other.  Secondly, the 'main' data specifically for calculation of financial ratios and thirdly, the data for generating cash flow plans.  Although the program accepts input of 'miscellaneous' and 'main' data in whatever order, it does not accept input of cash flow data before these two have been entered.

Please also note that several sets of data on balance sheets and profit and loss statement can be entered in the same file, provided they also share the same 'miscellaneous' data.  They are distinguished on the basis of the date of the balance sheets and profit and loss statements  As regards the  miscellaneous data, two items are likely to change over time: the market value of shares and the rate of interest on loans. These  accordingly need to be updated as required for each set of data.
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New  miscellaneous  and main data

If you have no previous data in the set you are going to create, start by clicking on 'Miscellaneous' in the Main data menu.  Enter the data requested in the input box.  If you need to modify them later, the same menu selection provides you with this possibility.  To move between the different input fields, press the 'Tab' key.

In selecting the amount of currency used for inputs and display of balance sheet and profit and loss statement data, bear in mind that the purpose is not to use the data for strict accounting purposes.  Accordingly, avoid using data with more than 3-5 digits in the inputs.  This is sufficient to calculate the financial ratios with acceptable accuracy.

Once you have entered the 'Miscellaneous' data, or if you want to add a new set of 'main' data, click on 'New main data' in the Main data menu.  This displays a box for input of inventory data.  When you have finished entering the required data, click on 'OK' or press 'Enter'.  This displays a box for input of liabilities.  Today's date is already entered, but if you want to change it, move the cursor  with the mouse to the date box and change the date as required.

Once you have filled in the data on liabilities, click on 'OK' to display the box for input of assets.  The total for inventory is already entered for you.  Finally, the program displays a box for input of the profit and loss statement.  Fill in the data, moving between input fields by pressing the 'Tab' key.  When you have finished, click on 'OK' or press the 'Enter' key.

If you have other sets of data for the same company but of a different date, repeat the steps above for entry of 'New main data'.  The program has no limit for how many sets of cash balance and profit and loss data it  can accept.

Note

A set of data does not necessarily refer to the official accounting period.  In fact, it is desirable to prepare balance sheet and profit and loss data with regular intervals for internal management purposes, for instance, every month.  This allows monitoring of the development of performance of the company over time.  One set of data only provides information that relates to a specific time frame.

New cash flow data

Once you have entered one set of main data, you can also enter data for planning cash flow.  The program will only accept one set of cash flow data at  a time.  Accordingly, if you want to save old data before entering a new cash flow input, you will have to do it by saving the cash flow, not the data itself.  This will be explained further on.

The unit amount of currency used in the cash flow inputs should preferably be such that the numbers do not have more than 5 digits.

To enter new data for a cash flow plan, click on 'New data' in the Cash flow menu.  This will display first a box for input of general information about the cash flow. Once this has been entered,  a number of input boxes are displayed for cash disbursement, followed by an input box for sources of cash,  for each planning interval, referred to here as 'Period'.  To make it easier to overview how much cash is needed in each planning interval, the program displays the total cash disbursed. It also calculates the opening cash balance for all intervals, except the first one, which you will have to enter yourself.

If you need to edit some of the inputs, this can be done by clicking on the 'View/Edit' option in the Cash flow menu.


Deleting data

In addition to deleting data by erasing a file, a specific set of main data can be deleted by clicking on the 'Delete data set' option in the Main data menu.  This displays a selection box, listing the data available by date of the balance sheet and profit and loss statements.  Select the date for the data to be deleted.  A warning will be displayed.  Confirm the deletion and the corresponding set of data is deleted.

Since there is only one set for cash flow data held by the program at a time, any such data is deleted by clicking on 'New data' in the Cash flow menu.  This is why a warning is displayed each time you select this option.


Saving your work

Save as...

Use this option in the File menu when you have started a new database or if you want to save your work in a file separate from the work included in the file you originally loaded into the program.

A dialog box will display the default directory of files with the extension '*.prf'.  If you want to store the data in a different directory, double-click on the symbol for the root directory (shown as [..]) until the directory of your choice is displayed.

Double-click on the name of your choice for the file, if it is an existing file, or type a name for your file, without extension.  FinMan will add the extension for the set of files stored under the name or your choice.  It is important that you do not attempt to change the extensions, since the program will then not be able to retrieve the data.

Save

If you use this option in the File menu for saving a new file, FinMan will automatically redirect you to Save as....Otherwise, if you are using file which you have already saved during the course of your work, or if you have loaded the data from an existing file, your data will be saved in the required files without further ado.

Related topics

Data files


Data files

FinMan automatically stores the data you have entered in seven files with the same name but different extensions.  For instance, if you have named the file for your data 'MYDATA',  the data will be stored in

          MYDATA.PRF
          MYDATA.MSC
          MYDATA.BAL
          MYDATA.STK
          MYDATA.PLS
          MYDATA.CFO
          MYDATA.CFP.

The first time you save your data, you will be prompted for a name for the file.  The dialog box will display the extension '*.prf'.  You must not add an extension to the filename.  FinMan will do it automatically for all seven files.

Similarly, to load data, simply load the file MYDATA.PRF, and all the other files will be loaded, as well.


Loading data

Loading  data

To load existing data already saved in a set of files, click on 'Open' in the File Menu.  If the dialog box does not display the directory in which you have stored the data, double-click on the root directory symbol until the directory is displayed and select it by double-clicking.

Select your data file from the list of files and click on 'OK' to load the data.  This will load seven files with the same name and the extensions *.prf, *.msc, *.bal, *.stk, *.pls, *.cfo and *.cfp.

Related topics

Data files


Menu commands

File menu

Main data menu

Performance menu

Valuation menu

Cash flow menu

Utilities menu

Help menu


File menu

The File menu has seven commands:

•	New - to clear memory and start a new set of data.

•	Open - to load an existing set of files

•	Save as - to save a new file or to save a file under a new name.

•	Save - to save your work on an existing file.

•	Preferences - to select your preferred date format.

•	Printer setup - to select printer or change its setup.

•	Exit - to exit from FinMan.

Related topics

Opening a new file

Loading data

Saving your work

Setting date format


Main data menu

There are four options under this menu heading:

•	New main data - to enter a new set of data for balance sheet and profit and loss statement.

•	View/Edit main  data - to view or edit an existing set of data.

•	Miscellaneous - for miscellaneous inputs to define certain parameters in a set of data.  The same option is selected for a new set or to edit or view and existing set.

•	Delete data set - to delete a set of data

Related topics

Creating new data

Editing data

Deleting data


Editing data

To edit or view data  proceed as follows:

•	Click on View/Edit main data in the Main data menu and select the set of balance sheet and profit and loss data according to its date.  If you want to edit cash flow data, select instead the View/Edit data option in the Cash flow menu.

•	If some data need to be modified in the displays, move the cursor to the entry windows by pressing the [TAB] key.  Modify the data as required.  Click on 'OK'` when you are finished.

•	Repeat the procedure with all the input boxes for the set as they are displayed.  All your changes will be stored in memory.  If you change your mind, click on 'Cancel' and the program will ignore any changes you have made.


Performance menu

This menu is used to create a report on the performance of the company, based on a given set of balance sheet and profit and loss statement data.  The three options are:

•	Display of the report on screen.

•	Printing a hard copy of the report.

•	Storing the report to a file.

Related topic

Reports


Reports

General

FinMan provides reports on the performance of the company, its valuation and a cash flow plan, based on the set of data selected.  These can be displayed on the screen, printed or saved to a file.

Display on the screen obviously serves the purpose of allowing a quick look at the report.  Printouts on the other hand, are more useful as documentation for discussion at a meeting.  Files are a means for saving reports for future reference.  This is especially useful if you want to use the cash flow option for creating a cash flow report, rather than a plan.

 As already mentioned, only one set of cash flow data can be saved in a set at a  time.  However, there is no limit to how many cash flow plans or reports can be saved to a file for retrieval later (see Utilities menu).

Clearing the display of a report

If you do not clear the display after you have viewed a report, you may find interference with subsequent displays of the same type of report.  It is therefore important that you clear the display window each time.  This can be done in two ways:

•	Click on the screen with the left button to activate it and then click on the right button to clear the window.  It there are two windows (cash flow) repeat this with the other window.

•	Press any key (except the Alt key) to clear the active window.

Saving a report to a file

When you choose to save a report to a file, the program prompts you for the name of the file.  Extensions are already provided and they are:

•	*.fpr for a performance report.

•	*.fvl for a valuation report.

•	*.fcf for a cash flow plan or report.

Contrary to the case when you save data, you may change these extensions if you so wish.  If you do not, just enter a name for the file (maximum 8 characters), without extension.

Viewing a filed report

A filed report is most conveniently viewed by using one of the utilities of the program.  Click on 'View report files' in the Utilities menu.  This displays the Notebook of Windows.  Click on 'Open' in the File menu of the Notebook and enter or select the name of the file to be viewed.

You can now browse the report and, if need be, edit it and print it.


Valuation menu

This menu is used to create a report on the valuation of the company, based on a given set of balance sheet and profit and loss statement data.  The three options are:

•	Display of the report on screen.

•	Printing a hard copy of the report.

•	Saving the report to a file.

Related topic

Reports


Cash flow menu

There are three main options in this menu:

•	New data - to enter a new set of cash flow data.  This will erase previous data from memory, so if you want to save them, you will have to do it as a report (see below).

•	View/Edit data - to view and edit an existing set of cash flow data.

•	Report - this has three options:  The report or plan  can be displayed on screen, printed or saved to a file.

Related topics

Creating new data

Editing data

Reports


Utilities menu

The Utilities menu provides certain convenient features, mainly based on what Windows as such has to offer.  The options under this menu are:

•	Calculator - this is the Windows calculator, either a basic one or a scientific one.  Switch between the choices using the View option of the calculator's menu.

•	Calendar - this is the Windows calendar.  Switch to a monthly display, using the View option in the calendar's menu.

•	View reports - this is using the Windows Notebook as a  browser for reading , editing or printing a report or plan  which has been stored to a file.

•	Order FinMan - displays the order form for a registered version of FinMan.  Complete the form on screen, print it, sign it and send it.

•	Register FinMan - displays the registration form.  Complete the form, print it and send it.  If you do not yet have a registered version, you do not need to enter the serial number  (Obviously, since you do not have one).  This will be done for you when the registered copy is sent to you.

•	Readme.1st - provides a display of the Readme.1st file.


Help menu

This menu has three options:

•	Help on FinMan - this file.

•	Help on Help - how to access help

•	About FinMan - some information on FinMan


Procedures

Setting date format

Viewing /Editing data

Deleting data

Creating new data

Reports


Dialog boxes

A number of commands or activities are controlled by dialog boxes, the most important of which are:

•	Input boxes for balance sheet, profit and loss statement, cash flow and other relevant data required by the program.

•	Selection boxes for selection of a set of balance sheet and profit and loss statement data.  The selection criterion is the date of the balance sheet and profit and loss statement.

As to the data input boxes, they all work according to the same principle:  For normal inputs move from one input window to another by pressing the
'TAB' key.  You do not need to enter zeros for blank inputs.  The program will do that if it is necessary.

In some cases, the cursor avoids certain input windows, since they do not normally require any change in input.  However, to access these windows, use the mouse and click on the desired input window.

For explanation of terms or what is required for certain inputs, consult the 'Glossary of terms' or relevant sections of the on-screen manual.

Related topics

Creating new data

Editing data

Deleting data


Copyright

Financial Manager (FinMan)

Copyright © 1994
Borje Kyrklund
All rights reserved


Registration

It is in your interest to register your copy of FinMan as soon as possible.  As a registered user, you will be notified of future upgrades and you will also have access to technical support.

Registration by mail or fax

Registration by E-mail


Registration by mail or fax

In the Utilities menu, click on 'Print registration form' to display a copy of the form.  Complete the form, print it and either

•	send it by mail to:

          Borje Kyrklund
          Via dei Radiotelegrafisti 28 B 3
          00143 - Rome, Italy

•	or fax it to +(39-6) 592-0773.

Note that 39-6 is the IDC for Rome, Italy


Registration by E mail

Click on 'Print registration form' in the Help menu and send the information requested in the form by E-mail on Compuserve to Borje Kyrklund, CIS 100013,375.


Technical support

Technical support is available by mail, fax and E-mail by stating the serial number of your copy of FinMan.

•	By mail:       Borje Kyrklund
                   Via dei Radiotelegrafisti 28 B 3
                   00143 - Rome, Italy

•	By fax:       +(39-6) 592-0773

Please note that (39-6) is the IDC for Rome, Italy

•	By E-mail:   Borje Kyrklund
                  Compuserve ID 100013,375


Support by mail or fax


Accounts payable

Trade creditors - amounts due to suppliers arising from normal business.


Accounts receivable

Accounts receivable  or 'trade debtors' is the money that the company's customers owe in bills that have not yet been paid.


assets

The assets  are mainly shown in the accounts at their cost (or unexpired cost).  Therefore the 'Assets' column is a list of items (things) of value owned at their cost to the company.  It is a list of items for which money has been spent.


Capital reserves

This is used to cover all surpluses that accrue to the ordinary shareholder and has not arisen from trading.  The main sources of such funds are: a) revaluation of fixed assets, b) premiums on shares issued at a price in excess of nominal value and c) currency gains on balance sheet items, some non-trading profits, etc.


Cash

This also includes all cash equivalents, such as bank short-term deposits and other liquid securities.  However, the amount of cash held should be small, because it is not the function of the company to hold cash, unless there is a very specific reason for this, such as a planned acquisition.


collection period

The average number of days the customer takes before paying his bill.


corporate liquidity

A company may be able to operate without profit, but it cannot operate without cash.  If it  cannot meet its day-to-day requirements on cash it has run out of liquidity.   Day-to-day liquidity  depends on the balance between cash inflows from accounts receivable and outflows to accounts payable, wages, salaries, etc.


corporate value

The corporate value is evaluated by nine different ratios,  such as market capitalization, share values (nominal, book and market), earnings per share, dividends per share, yields, price  to earnings ratio and market to book ratio.


Current assets

Consists of inventories, accounts receivable. cash and miscellaneous short-term assets.


Current liabilities

Consists of accounts payable, short-term loans and miscellaneous liabilities.


debtor days

The average number of days of credit the customer takes before paying the bill.


depreciation charges

Depreciation is often referred to as a source of cash.  However, it is really the avoidance of cash outflow.  Since depreciation is deducted from the profit, to compensate for the consumption of an asset, it must be added to the profit again to give the cash inflow.


discounting

Reduction of the future value of an amount of funds to its present value.


financial strength

This is equal to the long-term liquidity of the enterprise.


Fixed assets

Includes intangibles, net fixed assets (physical items used in the operation of the business, such as land, building, equipment, etc.) and long-term investments.


future value

The value of a certain amount of funds after a certain time from now at an assumed rate of interest.


Intangibles

This includes all assets that do not have a physical presence. The main one is goodwill, but other items which would be included here are foreign currencies, pensions, deferred tax, leases, revaluation of fixed assets, etc..


internal rate of return

The rate of discounting at which a discounted stream of cash flow is equal to zero.


Inventories (stocks)

'Inventories' includes raw materials, semi-finished goods (at cost),  finished goods (at cost) and maintenance spares.


inventory days

The number of days stocks are held before the products are sold.


Investments

'Long-term investments' are usually long-term holdings of shares in other companies for trading purposes.   In group accounts, those companies over which the parent has dominant influence are totally consolidated.  This means that the separate assets and liabilities are shown in the main balance sheet.  The holdings in other associated companies are shown simply as investment.


Issued ordinary shares

Three different values are associated with these shares: a) nominal , b) book and c) market value.  Different financial ratios can be developed using these values.


liabilities

Liabilities are amounts due to parties external to the business and shows where the same sum of money as in 'assets' came from.  The company is a legal entity separate from its owners and, therefore, amounts due from the company to its owners is a liability.


liquidity

The capability of a company to raise cash to meet its day-to-day requirements.


Long-term liabilities

This is essentially the sum of ordinary funds and long term loans.


Long-term loans

Loans which have been taken for a period of more than a year, usually several years.


management decisions

The way in which the management accounts are presented to managers is often not helpful for making management decisions. For instance, costs may be classified in a way that does not allow their recalculation on the basis of an alternative course of action.  Powerful tools are therefore used to enable managers to tread their way through the difficulties in safety.  These relate to costs, prices, volume and investment ratios.


margin on sales

The ratio of profit before interest and tax to sales income, usually expressed as a percentage.


Miscellaneous assets

This covers all other short-term assets, such as pre-payments and amounts due to the company of a non-trading nature.  It is usually insignificant.


Miscellaneous liabilities

This includes all other short term liabilities, such as accrued payments, interest, current tax and dividends due.


Net fixed assets

Large, expensive physical items used in the operation of the business are included under this heading.  They nearly always include land, buildings, machinery and mobile and office equipment.  The standard value used for each item is original value less depreciation.  In the case of property, adjustments may be made to reflect current values.


net present value

The sum of a predicted stream of investments and cash flow, discounted to its present value using a rate of discounting equal to the expected rate of interest to be earned on the investment.


net profit margin

The ratio of profit before interest and tax to sales, expressed as a percentage.


operating performance

Operating performance is usually defined as profits against the total assets,  the capital employed or the net worth of the company.  Taking into account that profit can be expressed before or after interest and/or tax payments, there are up to nine possible measures of performance.


Ordinary funds

This consists of issued ordinary shares, capital reserves and revenue reserves.


planning interval

The time unit for preparation of a cash flow plan.  For instance, the plan may cover a period of six months, with each interval being one month.


planning period

The period for which the cash flow plan is prepared, for instance, a few weeks or months.


present value

The value today of a certain amount of funds obtained after some time in the future.


rate of discounting

The rate of interest assumed to be obtained on funds when discounting a future value of funds to its present value.


Return on equity

equals profit after tax/ordinary funds.  This, again, is equal to profit after tax/net worth.


Return on total assets

equals profit before interest and taxes/total assets.


Revenue reserves

These are amounts that have come from normal trading profit and have been retained in the company.  They are also referred to as 'revenue reserves', general reserve'  or  'retained earnings'.  They can be distributed to the shareholders at the will of the directors.


sales to total assets ratio

The ratio of sales to total assets, which expresses the sales in units of total assets, for instance, 200/100 = 2 times.


short-term assets

They are equal to current assets, which can be converted  into cash with fairly short notice.


Short-term loans

This includes bank overdrafts and all other interest-bearing short-term debt.


Total assets

The sum of fixed and current assets which is also equal to the sum of all liabilities.


total costs incurred

Includes those costs that relate directly to the revenue and those which relate to accounting period, such as salaries. See the  more detailed explanation of this in the separate topic of this name.


total revenue earned

Generally equal to the amount invoiced but may also be interpreted to include revenues from, for instance, sale of property or equipment.


Walsh

Ciaran Walsh: "Key Management Ratios", Financial Times/Pitman Publishing, London, 1993.  The presentation here follows in general the principles used in  Mr. Walsh's book.