Samenvatting videoclips FPM
Introduction lecture
Financial management → about the money, involves planning, directing, monitoring,
organizing, and controlling of the monetary resources of an organization
• Finance: capital budgeting, financial ratios
• Management accounting: cost structure and calculations, budget and variance analysis
• Financial accounting: financial statements
Project management → is the practice of initiating, planning, executing, controlling and
closing the work of a team to achieve specific goals and meet specific success criteria at the
specified time (so team management, distributing tasks etc.)
• Project scope, stakeholders, work breakdown structure, cost & time estimation,
scheduling, project management methodologies
Financial management:
- Is gericht op het bereiken van de doelen en doelstellingen van de organisatie (goals and
objectives of the organization)
- Ernstige gevolgen zal hebben voor de groei en ontwikkeling van de organisatie, indien het
niet op de juiste wijze wordt aangepakt
1. Finance
• Selection of assets in which to invest
• An asset is anything tangible or intangible that is held to have positive economic value
Kan ook bv. new product development project zijn, je hebt fixed vs current assets
• And how these assets are to be financed
→ capital budgeting, working capital mangement, assessment of the financial structure
2. Management accounting
• Provision (verstrekking) of financial information to the management
• Purpose: support management in the decision-making process (internal reporting)
- Overview of the costs involved in running the business
- Report on whether or not the project or organization is performing according to
expectations and where interventions are needed
→ cost structure, cost calculations, budgeting and variance analysis
3. Financial accounting
- Openbaarmaking van informatie door het managment van de organisatie aan andere
stakeholders (employees, credit providers, governments) → external reporting
- Ook een ondersteunende functie bij besluitvorming (bv. bank kan deze info gebruiken)
- En ook een verantwoordingsfunctie: om beleid te beoordelen
→ financial accounting, financial statements
Finance, management accounting zijn dus internal, financial accounting is external
1
,FM 1 - lecture
1. Introduction to financial statements
- Debit side (left) → investments/assets
Assets:
• Resources required for running the organization
- Must be controlled by the organization
- Is expected to generate economic benefits for the organization
• Fixed/non-current assets: > 1 year
• Current assets (working capital): < 1 year
- Credit side (right) → financial resources/liabilities,equity
Liabilities:
• Capital made available by creditors
- Debts (long-term or short-term) → bv. bank loans
- Provisions
Equity:
• Capital made available by owners
• Residual item:
- Equity = assets – liabilities
→ change in equity over a period = profit/loss
Income statement – Profit & Loss account:
Revenues (turnover):
• Do not always coincide (vallen samen) with cash inflows
• Are booked at the moment of delivery and invoicing (facturering) of goods or services
(regardless of moment of payment)
Costs (expenses):
• Do not always coincide (vallen samen) with cash outflows (bv. depreciation)
• Worden toegewezen op basis van period or product matching
Profit (net income):
• Difference between revenues and costs
2. Capital budgeting
a. Capital budgeting, free cash flows and profits
- Capital budgeting (investment appraisal) = het proces waarin een organisatie bepaalt of een
investering de moeite waard is
- Bv. kijken of a particular project de moeite waard is/choosing between different projects
- Two types of investments → replacement vs. expansion investments
- Free cash flow vs. profit
Free cash flow:
- Cash inflows (receipts) → generated by sales and other income directly resulting from the
investment
- Cash outflows (expenses) → generated by purchasing of resources related to the investment,
rent, corporate taxes, etc.
- Includes initial investment and disinvestment
• Residual value of the investment (restwaarde van de investering)
Period profit (accounting income, net income)
→ difference between period sales/income and costs associated with an investment
2
,Depreciation: to distribute costs of assets over economic life
• Straight-line depreciation
• Sum-of-the-years-digits method
• Declining balance method
→ sum-of-the-years-digits method & declining balance method ➔ accelerated depreciation
• Based on use
Provisions: to account for future obligations/expenses (om toekomstige
verplichtingen/uitgaven te dekken)
- Bv. bad debts, pending lawsuit (hangende rechtszaak)
Free cash flow = period profit after tax + depreciation – investments + disinvestments
- In practice:
• Start of the project: free cash flow = - investment
• During the project: free cash flow = period profit after tax + depreciation
• End of the project: free cash flow = period profit after tax + depreciation +
disinvestment
Free cash flow = sales revenue – (operating costs + taxes) – required investments in operating
capital
b. Assessment based on period profit: accounting rate of return
Accounting Rate of Return (ARR):
- Compare with weighted average cost of capital (WACC):
ARR > WACC → is goed voor project
→ gemiddelde kosten waartegen een onderneming kapitaal kan aantrekken
➔ Dit bovenstaande is een simpele manier maar het gaat voorbij aan the distribution of free
cash flows over duration of the project
c. Assessment based on free cash flows: payback period
Payback period: period between the original
investment and the cash inflows up to the amount of
the investment
➔ Dit is een simpele manier maar houdt alleen
rekening met timing van free cash flows, houdt geen
rekening met free cash flows after the payback period,
and no clear cut-off point
Not very suitable for assessing projects
d. Assessment based on free cash flows, taking into account time value of money: net
present value and internal rate of return
Time value of money
• Future value
- Compound (samengestelde) interest rate
- bv. 1,000 sparen voor 4 jaar met 5% compound interest
3
, → future value: 1,000 * (1,05)4
• Present value
- Discount rate
- bv. als je 1,000 wil ontvangen in 4 jaar met 5% discount rate
→ present value: 1,000 / (1,05)4
Net Present Value (NPV):
- Present value of all expected future free cash flows, including the initial investment & de
disinvestment is included in free cash flow of final year
- Discount rate: WACC
- If NPV > 0 → project is het waard om te overwegen & hoe groter NPV hoe beter het project
Internal Rate of Return (IRR):
- Discount rate where the NPV of a project equals zero
- If IRR > WACC (interest rate) → project is acceptable
- IRR bepaal je door trial and error OF met Excel
- IRR moet dus groter zijn dan WACC en hoe groter IRR hoe beter het project
→ dus 0 = investering + free cash flows / (1+i) en die kwadrateren met jaar
NPV and IRR sometimes give seemingly contradictory results
• NPV does not measure the rate of return (rendement) and tends to favor projects with
a longer duration
• IRR assumes that free cash flows received before the end of the project can be
invested during the remaining period with a return equal to the IRR (met rendement
gelijk aan de IRR) → voor hoge IRR’s is dit twijfelachtig
• In praktijk: voorrang geven aan NPV (>0) en dan IRR overwegen
e. Assessment of assessment techniques
Uncertainty:
• Future free cash flows are only estimates (weet je van te voren niet)
• Sensitivity analysis → analysis of the effect of change in sales/cost on profit and cash
flows, bv. optimistic and pessimistic scenarios
• Risk premium → adding a premium (premie) to the discount rate
FM 2 – lecture
1. Working Capital Management
Working capital → resource available to the organization for day-to-day operations
Working capital = current assets – current liabilities (current = < 1 year)
- Current assets → cash, accounts receivable, inventories of raw and finished goods
4
Introduction lecture
Financial management → about the money, involves planning, directing, monitoring,
organizing, and controlling of the monetary resources of an organization
• Finance: capital budgeting, financial ratios
• Management accounting: cost structure and calculations, budget and variance analysis
• Financial accounting: financial statements
Project management → is the practice of initiating, planning, executing, controlling and
closing the work of a team to achieve specific goals and meet specific success criteria at the
specified time (so team management, distributing tasks etc.)
• Project scope, stakeholders, work breakdown structure, cost & time estimation,
scheduling, project management methodologies
Financial management:
- Is gericht op het bereiken van de doelen en doelstellingen van de organisatie (goals and
objectives of the organization)
- Ernstige gevolgen zal hebben voor de groei en ontwikkeling van de organisatie, indien het
niet op de juiste wijze wordt aangepakt
1. Finance
• Selection of assets in which to invest
• An asset is anything tangible or intangible that is held to have positive economic value
Kan ook bv. new product development project zijn, je hebt fixed vs current assets
• And how these assets are to be financed
→ capital budgeting, working capital mangement, assessment of the financial structure
2. Management accounting
• Provision (verstrekking) of financial information to the management
• Purpose: support management in the decision-making process (internal reporting)
- Overview of the costs involved in running the business
- Report on whether or not the project or organization is performing according to
expectations and where interventions are needed
→ cost structure, cost calculations, budgeting and variance analysis
3. Financial accounting
- Openbaarmaking van informatie door het managment van de organisatie aan andere
stakeholders (employees, credit providers, governments) → external reporting
- Ook een ondersteunende functie bij besluitvorming (bv. bank kan deze info gebruiken)
- En ook een verantwoordingsfunctie: om beleid te beoordelen
→ financial accounting, financial statements
Finance, management accounting zijn dus internal, financial accounting is external
1
,FM 1 - lecture
1. Introduction to financial statements
- Debit side (left) → investments/assets
Assets:
• Resources required for running the organization
- Must be controlled by the organization
- Is expected to generate economic benefits for the organization
• Fixed/non-current assets: > 1 year
• Current assets (working capital): < 1 year
- Credit side (right) → financial resources/liabilities,equity
Liabilities:
• Capital made available by creditors
- Debts (long-term or short-term) → bv. bank loans
- Provisions
Equity:
• Capital made available by owners
• Residual item:
- Equity = assets – liabilities
→ change in equity over a period = profit/loss
Income statement – Profit & Loss account:
Revenues (turnover):
• Do not always coincide (vallen samen) with cash inflows
• Are booked at the moment of delivery and invoicing (facturering) of goods or services
(regardless of moment of payment)
Costs (expenses):
• Do not always coincide (vallen samen) with cash outflows (bv. depreciation)
• Worden toegewezen op basis van period or product matching
Profit (net income):
• Difference between revenues and costs
2. Capital budgeting
a. Capital budgeting, free cash flows and profits
- Capital budgeting (investment appraisal) = het proces waarin een organisatie bepaalt of een
investering de moeite waard is
- Bv. kijken of a particular project de moeite waard is/choosing between different projects
- Two types of investments → replacement vs. expansion investments
- Free cash flow vs. profit
Free cash flow:
- Cash inflows (receipts) → generated by sales and other income directly resulting from the
investment
- Cash outflows (expenses) → generated by purchasing of resources related to the investment,
rent, corporate taxes, etc.
- Includes initial investment and disinvestment
• Residual value of the investment (restwaarde van de investering)
Period profit (accounting income, net income)
→ difference between period sales/income and costs associated with an investment
2
,Depreciation: to distribute costs of assets over economic life
• Straight-line depreciation
• Sum-of-the-years-digits method
• Declining balance method
→ sum-of-the-years-digits method & declining balance method ➔ accelerated depreciation
• Based on use
Provisions: to account for future obligations/expenses (om toekomstige
verplichtingen/uitgaven te dekken)
- Bv. bad debts, pending lawsuit (hangende rechtszaak)
Free cash flow = period profit after tax + depreciation – investments + disinvestments
- In practice:
• Start of the project: free cash flow = - investment
• During the project: free cash flow = period profit after tax + depreciation
• End of the project: free cash flow = period profit after tax + depreciation +
disinvestment
Free cash flow = sales revenue – (operating costs + taxes) – required investments in operating
capital
b. Assessment based on period profit: accounting rate of return
Accounting Rate of Return (ARR):
- Compare with weighted average cost of capital (WACC):
ARR > WACC → is goed voor project
→ gemiddelde kosten waartegen een onderneming kapitaal kan aantrekken
➔ Dit bovenstaande is een simpele manier maar het gaat voorbij aan the distribution of free
cash flows over duration of the project
c. Assessment based on free cash flows: payback period
Payback period: period between the original
investment and the cash inflows up to the amount of
the investment
➔ Dit is een simpele manier maar houdt alleen
rekening met timing van free cash flows, houdt geen
rekening met free cash flows after the payback period,
and no clear cut-off point
Not very suitable for assessing projects
d. Assessment based on free cash flows, taking into account time value of money: net
present value and internal rate of return
Time value of money
• Future value
- Compound (samengestelde) interest rate
- bv. 1,000 sparen voor 4 jaar met 5% compound interest
3
, → future value: 1,000 * (1,05)4
• Present value
- Discount rate
- bv. als je 1,000 wil ontvangen in 4 jaar met 5% discount rate
→ present value: 1,000 / (1,05)4
Net Present Value (NPV):
- Present value of all expected future free cash flows, including the initial investment & de
disinvestment is included in free cash flow of final year
- Discount rate: WACC
- If NPV > 0 → project is het waard om te overwegen & hoe groter NPV hoe beter het project
Internal Rate of Return (IRR):
- Discount rate where the NPV of a project equals zero
- If IRR > WACC (interest rate) → project is acceptable
- IRR bepaal je door trial and error OF met Excel
- IRR moet dus groter zijn dan WACC en hoe groter IRR hoe beter het project
→ dus 0 = investering + free cash flows / (1+i) en die kwadrateren met jaar
NPV and IRR sometimes give seemingly contradictory results
• NPV does not measure the rate of return (rendement) and tends to favor projects with
a longer duration
• IRR assumes that free cash flows received before the end of the project can be
invested during the remaining period with a return equal to the IRR (met rendement
gelijk aan de IRR) → voor hoge IRR’s is dit twijfelachtig
• In praktijk: voorrang geven aan NPV (>0) en dan IRR overwegen
e. Assessment of assessment techniques
Uncertainty:
• Future free cash flows are only estimates (weet je van te voren niet)
• Sensitivity analysis → analysis of the effect of change in sales/cost on profit and cash
flows, bv. optimistic and pessimistic scenarios
• Risk premium → adding a premium (premie) to the discount rate
FM 2 – lecture
1. Working Capital Management
Working capital → resource available to the organization for day-to-day operations
Working capital = current assets – current liabilities (current = < 1 year)
- Current assets → cash, accounts receivable, inventories of raw and finished goods
4
