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Financial Management

A Review
Topics
•* Capital Budgeting
•* EVA
•* Goal of the Firm
•* Investment Decisions
•* Management of Current Assets
•* Management of Current Liabilities
•* Management of Long-Term Assets
•* Management of Compensation
Topics

•* Management of Other Income


•* Management of Salary
•* Unit Costs
•* Value of an Individual
GOAL OF THE FIRM
Maximization of Wealth

SUPPORTIVE TOOLS
Analysis, planning and control

WORKING CAPITAL LONG-TERM ASSETS FINANCIAL STRUCTURE


Management Decisions External Growth Decisions Long-term financing decision

Risk Return/Trade Off

Financial Decisions

Value of the Firm


OBJECTIVES OF THE FIRM

Maximize profits
to the
Maximize
satisfaction of
Maximize the profits while Maximize
such other
wealth of the playing an the value
goals as target
Maximize owners as active role of the
market share,
Corporate reflected in as a institution
clientele,
profits the perception participant to its
service and
of the in society’s present
minimum risk
clientele current owners
of bankruptcy
concerns
and other
such goals
Economic Value-Added
Why Shareholder Value,
And
Why Now?
Major Developments

• *Globalization and deregulation of capital


markets
• *End of capital and exchange controls
• *Advances in information technology
• *More liquid securities markets
• *Improvements in capital regulations
• *Generational changes in attitudes
toward savings and investments
• *Expansion of institutional
investments
Value creation

• *Product and service quality


• *The ability to attract, develop, and
retain talented people
• *Community and environmental
responsibility
Strategic Architecture
Creating
Strategic
Leverage
Understanding strategic
leverage
• *How industry structure affects
leverage
• *How competitive position restricts
leverage and limits choices
• *Understanding the rules of
competition in your industry
• *Learning where your strategic
leverage is in any business
Exploiting strategic leverage
• *Why channels can become industry
“fault lines”
• *How to use leverage to change the
rules of the game
• *How to predict competitors’ likely
reaction to your strategic moves
• *How successful new products
capitalize on leverage
Creating the one-page plan

• *How to use it to focus the


organization on the right issues
• *How management can use it to
increase margins and profits
• *How to use it to plan relevant
performance measures
Differential advantage

• *Quantifying where the leverage is


• *Determining competitors’ likely
strategies and intent
• *Determining where and how much
investment is needed to gain share
Framing your industry

• How to define the game you are


playing to avoid being blindsided
• *Strategic mapping and
understanding your real choices
• *Communicating strategic direction
Investment Philosophy &
Process
Investment Philosophy

The Investment Process

Equity Investment Policy

Company Analysis

Portfolio Construction
Fixed Income
Domestic
Global
Equity markets

Portfolio:
General Funds
Long-Term Funds
Short-term
Middle-term
Long-term
Management
Compensation
Value-Based Approach
Value-Based Performance

Work Performance

Value-Based Rank

Value Performance
Work Performance (For employees to be considered for permanency)

Preparation/Skills

Continuing training/development Starting Rank

Social/Environmental Involvement
Work Performance ( For regular employees)

Incremental Increase in
Skills

Incremental Increase in Continuing


New Rank
Training/Development

Incremental Increase in
Social/Environmental Responsibility
Value Performance*

Community Involvement (%)

Value
Performance
Quality Assurance Circle
Involvement (%)

* A Necessary Condition for a New Rank


Unit Costs/Unit Revenues
Economic Value Added
Drivers
Asset Utilization
Asset utilization refers to the use of an asset
to generate revenue
Cost per employee

TSPE
CPE = ( ------------- ) X TFTE
TFTEE

CPE cost per employee


TSPE total salaries paid to employees
TFTEE total FTE rendered by all employees
TFTE total FTE rendered by a particular employee
Cost per administrator

TSPA
CPA = ( ------------- ) X FTEA
TFTEA

CPA cost per administrator


TSPA total salaries paid to administrators
TFTEA total FTE rendered by administrators
FTEA total FTE rendered by a particular administrator
EVA for Employee

TSE
EVAE = ( ------------ ) - CPE
FTE

EVAE economic value-added of employee


TSE total salary of employee
FTE actual number of hours rendered by employee
CPE cost per employee

NOTE: EVAE > 0 for the employee to be productive


EVA for Administrator

TSA
EVAA = (------------) - CAP
FTE

EVAA economic value of an administrator


TSA total salary received by an administrator
FTE actual number of hours rendered by administrator
CAP cost of an administrator

NOTE: EVAA > 0 for an administrator to be productive


Value of an Individual
A
Value-Based
Model
Supporting Variables

Individual

Where: I ۸ O = O

Organization
HR
Conditional
HR costs Performance Value

I
N
D
I Training
V Development Promotability Expected
I Continuing Transferability Conditional
D Education Productivity Value
Maintenance
U
A
L
O
R
G
A
N Probability Expected
Motivational
I Of Realizable
Costs
Z Stay Value
(MC)
A (POS) (ERV)
T
I
O
N
Value of an Individual

I HRC Performance HRCV

Expected
Value
Of
Motivational Probability of Individual
O ERV
Costs Stay

Note: The value of an individual is positive when ERV > HRCV