Finance and Administration - Summary

Beware of little expenses; a small leak will sink a great ship. - Benjamin Franklin
References Back

Financial Planning and Control

  • Organization Level Control Model
  • Department Level Control Model
  • Financing
    • Equity
    • Debt
    • Credit
  • Investment
    • Internal
    • External
  • Risk Management
  • Legal Requirements

Organization Level - Double Entry Accounting

Model: Assets=Liabilities + Equity

Assets

  • Current Assets
    • Cash
    • Accounts Receivable
    • Inventory
  • Noncurrent Assets
    • Depreciable Assets
    • Amortization
    • Subscriptions
    • Prepayments
    • Buildings
    • Land
Liabilities
  • Accounts Payable
  • Notes Payable
  • Taxes Payable
  • Long-Term Debt
Equity
  • Stock/Owners Equity
  • Retained Earnings

Example: Start-up company balance sheet
Assets=Liabilities +Equity Comments
0=0+0Preincorporation
1,000,000=0+1,000,000Initial Stock Subscription
1,100,000=100,000+1,000,000Purchase $100K of Inventory, Payment Net 30 Days
1,050,000=50,000+1,000,000Reconcile $50,000 of Accounts Payable
1,300,000=300,000+1,000,000Purchase Land/Building with Long Term Debt
1,300,000=300,000+1,000,000Buy $50K of Furniture with Cash (Current to Noncurrent Asset)
Artifacts

  • Balance Sheet
  • Income Statement
  • Cash Flow
  • Changes in Shareholder's Equity
  • Supplementary Notes

    Balance Accrual Model Rules and Assumptions:

  • Immediate Revenue/Cost Realization
  • Revenue/Expense Matching
  • Conservatism
  • Consistency
  • Full Disclosure
  • Historical Cost
  • Stable $
  • Going Concern

    Ratio Analysis

  • Liquidity - Indicates short-term ability to pay bills
  • Current Ratio
  • Acid-test
  • Leverage - Indicates level of debt
  • Debt-to-Assets
  • Debt-to-Equity
  • Activity - Indicates the pace of business transactions
  • Inventory Turnover
  • Asset Turnover
  • Receivables Turnover
  • Profitability - Indicates long-term viability
  • Profit Margin
  • Return on Assets
  • Income-Equity
  • Income-Interest
  • Earnings per Share
  • Market - Useful for comparison to other organizations
  • Earnings Yield
  • Dividend Yield
  • Price-Earnings
  • Payout Ratio
    Example: As vice-president of Finance, two divisions have asked you for loans of $20,000 each. There is only $20,000 available to loan. Based on the balance sheet, which division should you loan the money to? What information would be useful in addition to the balance sheet?
    Division A Division B Assets
    25,00010,000Cash
    45,00020,000Accounts Receivable
    10,00020,000Inventory
    100,00050,000Land
    100,000150,000Building
    50,00080,000Equipment
    330,000330,000Total Assets
    Division A Division B Liabilities and Equity
    30,00060,000Accounts Payable
    10,00020,000Long-Term Debt
    310,000200,000Capital Stock
    (20,000)50,000Retained Earnings
    330,000330,000Total Liabilities and Equity
    Solution:
    Division A Division B Ratio
    80,000/30,00050,000/60,000Current
    70,000/30,00030,000/60,000Acid-Test
    40,000/330,00080,000/330,000Debt-to-Assets
    40,000/310,00080,000/200,000Debt-to-Equity
  • Based strictly on the balance sheet, you would loan the money to Division A. Division A is more liquid (Current Ration; Acid-Test Ratio) and has less leverage (Debt-to-Assets Ratio; Debt-to-Equity Ratio).
  • You would also like to have an income statement in order to calculate activity, profitability and market ratios. An earnings history would also be desirable to determine trends in retained earnings. Refer to the strategic plan to see whether the products produced by A and B are characterized as "stars" or "cash cows" .

    Engineering Economic Investment Analysis
     Investments are analyzed in the context of the Time Value of Money

    P - Present Value (Principal); F - Future Value; A - Annual Value (Annuity)

    Figure illustrating Relationship between Present and Future Values

    Figure illustrating Relationship between Annuity and Future Values

    Figure illustrating Relationship between Present and Annuity Values

    Compound Interest Factors:

    5%

    YRS	 F/P	 P/F	 F/A	 A/F	 A/P	 P/A
01	1.050	.9524  1.000	1.000	1.050   .952
02	1.102	.9070  2.050	.4878	.5378  1.859
03	1.158	.8638  3.152	.3172	.3672  2.723
04	1.216	.8227  4.310	.2320	.2820  3.546
05	1.276	.7835  5.526	.1810	.2310  4.329
10	1.629	.6139 12.578	.0795	.1295  7.722
15	2.079	.4810 21.579	.0463	.0963 10.380

    10%

    YRS	 F/P	 P/F	 F/A	 A/F	 A/P	 P/A
01	1.100	.9091  1.000	1.000	1.100   .909
02	1.210	.8264  2.100	.4762	.5762  1.736
03	1.331	.7513  3.310	.3021	.4021  2.487
04	1.464	.6830  4.641	.2155	.3155  3.170
05	1.611	.6209  6.105	.1638	.2638  3.791
10	2.594	.3855 15.937	.0627	.1627  6.145
15	4.177	.2394 31.772	.0315	.1315  7.606

    Department Level - Single Entry Accounting

    Model: Budget is like a checking account - Don't overdraw!
    Cost Types
  • Direct Costs
  • Salaries
  • Training
  • Travel
  • Equipment
  • Tooling
  • Fixtures
  • Supplies
  • Cost Allocations
  • Cost Accrual
  • Allocation Basis
  • Examples:
  • Facility
  • Information Services
    Artifacts:
  • Periodic
  • Budgets
  • Expense Reports
  • Activity-Based
  • Appropriations
  • Requisitions
  • Purchase Orders
  • Invoices
    Additional References
    • --- , How to Read a Financial Report, 6th ed., Merril Lynch, 1991.
    • Babcock, D.L. Managing Engineering and Technology, 2nd ed., Prentice Hall, Upper Saddle River, 1996.
    • Dhillon, B.S., Engineering Management: Concepts, Procedures and Models, Technomic, Lancaster, 1987.
    • Glos, R.E. Steade, R.D., Lowry, J.R., Business: Its Nature and Environment, 8th ed., Southwestern, Cincinnati, 1976.
    • Lusk, H.F. Hewitt, C.M., Donnell, J.D., Barnes, A.J., Business Law: Principles and Cases, 4th ed., Irwin, Homewood, 1978.

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