Understanding the risks and returns of a project MDDP, Surrey University – October 2004 Week 1. The plan Week 1. Why make projections? The basic accounting statements The mechanics of the model Week 2 Making sense of the results Measuring the value…and understanding the risks Why do we want to make projections? To establish: The “value” of a project or existing business and hence to compare it to other ways we can use the money The funding requirements The risks …and to integrate the work of accountants, markets specialists, engineers, investors – so that each can see the “whole” The way accountants see things Profit & loss account - revenues Cash flows - costs -before finance - profits & tax - after finance & tax Balance sheet -assets - liabilities - shareholders capital The profit and loss account The company’s performance over a particular period of time Costs and revenues are intended to be comparable or matching The different levels of profit Revenues (less) Cost of sales……….Gross margin (less) Overheads………….EBIT (less) Financial charges…..Pre-tax profit (less) Tax…………………Net profit (EBITDA = Earnings before interest and depreciation) The balance sheet The company’s position at a particular point in time …what we own (or, what we have spent our money on) … and how they were paid for (the “capital employed”). The five key categories and the way they balance Fixed assets ASSETS (plus) Current assets (less) Current liabilities (less) Long term liabilities LIABILITIES (equals) Shareholders funds But there are many different presentation….. Cash flows The actual money received from sales (less) the actual money spent on operating costs (less) the actual money spent on fixed assets such as new equipment Cash flows and the profit and loss account P&L Adjustments Cash flow Revenues - increase in debtors Money received from sales Cost of sales + increase in stocks Money spent on Overheads - increase in creditors operating costs Depreciation - depreciation Money spent on fixed + capital expenditure assets EBIT Net cash flow Working capital: the “float” of money needed to run the business Debtors (what our customers owe to us) (plus) Stocks (money tied up in the production and selling process) (less) Trade creditors (what we owe to our suppliers) Another look at working capital Creditors Materials paid for RM stocks FP stocks Debtors Materials bought Goods produced Goods sold Goods paid for Building a cash flow model Stage 1: cash flows before finance and tax Stage 2: cash flows after finance and tax Stage 3: adding the accounts Model 1. Cash flows before finance and tax Suppliers Money spent on operating costs and capital items The The “owner” company Difference Money received from sales revenues Customers The elements of the cash flows Sales revenues (less) Operating costs (less) Increases in working capital (less) Capital expenditure (equals) Net cash flow before finance and tax Revenues Sales volumes Sales prices Operating costs – a check list Mainly… Materials and energy (mainly variable) Labour (mainly fixed) But don’t forget… Maintenance (mixture of fixed and variable) Marketing and administrative overheads (mainly fixed) Note: Depreciation is an accounting concept – it is not a cash item. We shall deal with it later. Calculating working capital requirements Debtors D1 = X days of D2 = Y days of revenues revenues Stocks S1 = A days of S2 = B days of costs costs Creditors C1 = J days of C2 = K days of costs costs Total working W 1 = D 1 + S1 – W2 = D2 + S2 – C2 capital C1 Increase in W2 – W1 working capital Capital expenditure – a check list Mainly…. Plant and equipment Buildings and land But don’t forget… Design costs Pre-operating expenses Further capital expenditure after start up? Model 2. Cash flows after finance and tax Suppliers Operating costs Investments tax Government The The “owner” company Principal & Difference interest Sales revenues Banks Customers The elements of the cash flows Sales revenues (less) Operating costs (less) Increases in working capital (less) Capital expenditure (less) Tax (plus) Loan draw-downs (less) Loan repayments (less) Interest (equals) Net cash flow after finance and tax The net cash flow after finance will be smoother…. 20 15 10 5 0 -5 -10 -15 -20 -25 -30 1 2 3 4 5 6 Before finance After finance To calculate taxable profit… We need: Depreciation And interest payments Calculating depreciation…. Last year This year Fixed assets 100 O/bal (plus) 10 Investments (less) =10% x (100+10) = 11 Depreciation Fixed assets 100 = 100 + 10 - 11 = 99 C/bal Calculating interest…. Last year This year Loan O/bal 100 (plus) 10 Drawdowns (less) 0 Repayments Loan C/bal 100 = 100 + 10 - 0 = 110 Interest due =8% x (100 +110) /2 = 8.4 Calculating tax… Taxable profit = Revenues (less) operating costs (incl. depreciation) (less) Interest due And tax = (If profit is positive): profit x tax rate (If profit is negative): zero With negative profits carried forward… A simple way of calculating tax… Last year (0) This year (1) Cum. profit CP0 CP1 = CP0 + P1 Cum. Tax CT0 = If (CP0 > CT1 = If (CP0 > 0, due 0, CP0 x R, 0) CP0 x R, 0) Tax due this If (CT1 > CT0, year (CT1 – CT0), 0) Model 3. The real (accounting!) world – adding the accounts Suppliers Operating costs Investments Dividends tax Government Shareholders The company Equity Principal & interest Sales revenues Banks Customers The purpose of adding the accounts To communicate! To make sure we have included everything To allow the accounting aspects of the company or project to be understood, e.g.: – Interest cover – Gearing Next week! What do the results mean? How do we use them? Before then, please try to look at the sample model and make sure you understand it. We will have a time for questions.
Pages to are hidden for
"MDDP Slides Day 1 Mike Mytton"Please download to view full document