Appunti business policy and strategy execution

CASH FLOW

The economic dimension is about revenues and cost, but then we have a financial dimension too. Revenues come after cost, so cash outflow comes before cash inflow, and it's a problem. Cash outflow generates cash inflow, so you don't have a cash inflow to cover cash outflow. It could be a problem because cash inflow could be lower than cash outflow. Another aspect is that often you have a credit but you have no money, because getting money takes time. You could have a wonderful strategic plan, a good operational plan where revenues are higher than cost, but you need to quit your operation until cash inflow covers cash outflow, so your strategic plan fails because you are not able to go ahead and so you have a financial problem that becomes a strategic problem too.

You can analyze this issue by trying to identify the cash inflow through the direct method that measures operating cash that you need = cash received from customers - cash paid to suppliers. If operating cash need is negative, you...

need to borrow money because you are not able to cover the cash outflow. it's a problem in the short run too, in fact even if you don't have money for just a short period, one month or less, you are not able to pay suppliers and they could quit the raw materials so you quit your production.

Cash received from customers. We calculate revenues for the next 12 months. You have a credit that came in February because a client bought a product, but the client pays for the product in March. So the credit of February will be paid in March, and you could estimate how many credits would be paid in March based on data from the past, for example, how many credits last year were paid in March?

You know the revenues thanks to the operational plan. You know the revenues of February but your clients don't pay all in March, so you have to review the revenues by the level of credit and cash of March. So for example, if in March of 200x the credit payment was 20% of February, so in 200x+1 you would expect 20% of

credit, but actually in 200x + 1 the credit paied are 10%, so you will review the revenues that you expected in the200x +2 too.If credit in february is higher than credit in march (march absorbe more credit than february), so the creditvariation is positive, so you have had a cash inflow. If you are able to sell products without credits or youreduce credit time (you have to be good in negotiate with clients), you have money immediate e yourstrategic is more succesfull.

Cash paid to suppliers. You can find The value of raw materials, so the cost of february, in operational plan.In march, First you need to pay the debt maturated in february and the debt that you haven’t paid infebruary. How You can define the february debts? You have february cost from operational plan, but toknow the debts in february and to know it you can apply a percentage to the cost (this percentage came byanalising data of last year : how much debit last year i have paid rispetto ai costi che avevo?). Some

rawmaterials in february you don’t pay, so it became a debts in march. if debt from february is higher than debts in march, you need to pay more. Negotiate with suppliers and enlarge your debt to pay more in april and so you can improve your money disponibility.

If debt from march is higher than debt in february, you need to pay less (because operating cash need is lower). Infact, You still have to pay the february debts, but if the march debt in march increase you keep money for company (so you have cash in flow in march), so is positive for financial dimension.

Financial problem is also about credit variation and debt variation.

If the borrowing capacity doesn’t cover the operating cash needed you have to do improvements for example reducing inventory (to buy stocks you have to pay it, so if you reduce them you keep money, so you can reduce product and working product in warehouse) reducing credit terms, increasing term of debts or you have to reformulate the plan, for example

enlarge your market share, innovate your processso they became more efficient. It’s necessary reformulate the plan in order to increase revenues or reviewscost.

ROE

Strategic plan → operational plan → net income → cash flow → roe

If net income or cash flow are negative you have to back in strategic plan and review it

If the ROE is low you have to change your strategic plan. Even if your net income (that became foroperational plan) is positive you have to change smthg because investors are crucial for your activity

ROE = net income / equity

ROE permits to calculate future investment, that cames by stakeholder in base a your plan.

You can split ROE in several ROCE that is return on capital employed. There is a ROCE for everyresponsibility centers in base a product lines (for example a ROCE for auto, a ROCE for moto…) orgeographic areas (ROCE in american site, ROCE in italian site…).

Althought a ROCE of a responsibility center is bad, if the other ROCE of

responsibility center are so good theROE will be positive and very good.

ROCE = net income /capital employed

Strategy is qualitative information about future scenario. Strategic plan provides information about the future of campany, for instance throught porter’s five forces, internal resources in particular intangible.

Operational plan is about next years, in particular define the target for every moment of the next year.

Future profit, future cash flow and ROE if smthg doesn’t work you change smthg in short run or last chance is changing strategic plan

If you realize the operational plan you realize also the strategic plan. Infact operation plan came from the strategic plan. If smthg in operational plan doesn’t work you came back in strategic plan and change smthg in it. If you get the operational plan target you also get the strategic target.

responsibility center Throught you push all the company and the financial unit to get the target. They guarantee execution of strategy.

Se si ottiene il ROE a breve termine, si ha anche il ROE a lungo termine. Attraverso il centro di responsabilità si ha il principio di controllabilità. Il manager non può raggiungere l'obiettivo perché non controlla l'azione che porta all'obiettivo, quindi questo è un motivo che demotiva/scoraggia i manager. Si assegna un obiettivo in modo da poter controllare l'esecuzione dell'obiettivo. 1. Centri di ricavi Abbiamo dove i manager controllano le vendite, i manager muovono leve che influenzano le vendite, in particolare il volume e il prezzo attraverso la pubblicità, quindi alla fine i manager influenzano i ricavi. 2. Centri di spesa Abbiamo che sono collegati ai costi. I manager possono controllare i costi, controllano le risorse che vengono assorbite dalle diverse aree. Abbiamo 2 sottogruppi di questo: - Centro ingegnerizzato dove i processi sono molto regolari, sono standard/uguali, non cambiano. Quindi puoi definire una relazione tra output e input che è costante nel tempo. Ad esempio, produci una scrivania e usi gli stessi input, quindi puoiwatch tha prodcution, mesure input that you need, and they will be always the same, so it's constant. so you are able to define output/input and this division is constant. So you can control output and input in the same time beacuse the rapporto is constant , the goal is maximize the output and minimize input ●discretionary center where you cannot identify this type of costant relationship. The activities are not made by "routine", for example in r&d you try to innovate, but innovate is always different, so the input and output always change. Some time you are not able to identify output also, because you don't know what the r&d activity will lead you. So it's impossibile identify a relationship between output and input. You need to identify an expense roof, for example you want do r&d but you don't spend more than a target fixed before, that is an expense roof. So the expense roof moderate the behaviours, you can innovate but you have to know

that you can't spend more than that roof, that is discretionary but it moderate cost and it permits to not go in bankruptcy.

The best option is the engineered center, but if you can't adopt it you can use discretionary center, in fact it still improve and you can control the behaviours from the angle of input, in order you can't control the output because you are not already able to define it.

profit center: head of unit has the levers to control profit and cost. so you assign to it a target of cost and revenues too. Revenues depend from volume and price.

investment centers. Manager can control it and he makes very important decision, in particular in short run he controls sales and so he controls profit. The cost are controlled by the head of unit. Investment, forex. buy a plant, are the cost of assets and it affect the capability of the company, what company can do and not in long run. Head of unit controls revenues that affect the sales, raw materials, investment.

Aninvestment target is ROI. It's important choose the right assets and investment, because throught them thecompany generates profit in long run.Company's structure:

1. CEO that it's the very top of company.CEO controls all division and their decision, throught each head of division. Target of CEO is ROI, thatincludes also the ROI of the different division. The goal of CEO is create synergies between the differentdivision, in order to maximize the result of company. You need a CEO, because it coordinates the work ofdivision and it makes it more profitable.CEO is head of corporate strategy, and the goal is create synergies.
2. We have assign a target for CEO that includes revenues and cost of the different division. Infact the head ofa division can't control revenues and cost of another division, so it's necessary coordination and synergiesbetween them throught CEO. ROI is profit/investment, but it's useful use net income/equity that is ROE(sub-category of ROI,

special kind of ROI), infact we have a special category of profit that is net income and we have a special category of investment that is the equity (infact investment came from resources that are equity that came from investors and debt that came from bank (investement = debt + equity)). Interest is cost of debt. If net income minus interesting is higher than interest itself, you can borrow money from bank. The shareholder don't invest money but they still make money and so it's so profitable for investors. This is a decision of CEO. So, it's important individue a good balance between equity and debt. If you borrow a lot money from banks, the price increase and interest too, so net income start to become negative. So it's more challenging that the net income minus interest is higher than the interest itself. So if this happen it's not convenient borrow money. In this case the shareholeder will waste money. So this decision is important to define debts, if it's

It is convenient to borrow money or quit. The goal is to maximize Return on Equity (ROE), so you have to identify the right level of equity and debt in order to not waste money.