BUS100: Business Perspectives Course Role of the Financial Executive
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3/14/03
Both #1 in their Fields!
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3/14/03
Role of the Financial Executive
Robert E.Campbell Director Finance Leadership & Development Peg Forrestel, Marketing Finance Manager Robert Hillman, Sr. Cost Analyst Kevin Callaghan, Sr. Financial Analyst
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Agenda
Finance Vision Statement & Objectives 2002 J&J Financials What do you want to learn about Finance? The Role of the Finance Executive Case Studies - Your chance to be the Finance Executive
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Finance Vision Statement
Influence the right business decisions……. To exceed competitors’ growth in shareholder value and cash flow……….. By providing:
– Innovative and actionable information and performance reporting – Quality financial and information services
By being:
– Good business partners
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Finance Objectives
There are objectives that we have as a Finance organization in order to achieve our vision or mission? – Business Partnership – Organizational Excellence – Technological Leadership – Cash and Tax Management – Audit and Control
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CHIEF FINANCIAL OFFICERS’ LEADERSHIP MODEL
ORGANIZATION AND PEOPLE DEVELOPMENT CUSTOMER/ MARKETPLACE FOCUS
MASTERS COMPLEXITY
CREDO VALUES
INNOVATION INTERDEPENDENT PARTNERING
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Sales By Year (1998 - 2002)
5 Yr CGR 10.0%
36.3 $32.3 $27.4 $29.2
$ in Billions
$23.8
'98
'99
'00
'01
'02
% Change 5.8%
15.1%
6.6%
10.6%
12.3%
Sales By Region (2002)
$ in Billions
U.S. $22.5 61% 21% 6% 12% Europe $7.6
Latin America & Canada $2.0
Asia-Pacific/Africa $4.2
Total $36.3
Sales Results By Segment (2002)
$ in Billions
Pharmaceutical $17.2
47%
35%
Professional $12.6
17%
Consumer $6.6
Total $36.3
Net Income By Year (1998 - 2002)
5 Yr CGR 14.9%
$6.8
$ in Billions
$5.9 $5.0 $3.8 $4.4
'98
'99
'00
'01
'02
% Change 11.8%*
15.8%*
13.6%*
18.0%*
15.3%*
*Excludes restructuring and in-process R&D charges
Role of the Financial Executive Students What questions do you have about the role of the Finance Executive and are there other areas that you’d like to learn about or would like us to cover today!
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Role of the Financial Executive - Questions?
Does J&J pay taxes? What skills do finance professionals need? What type of work does a finance professional do? How does a shareholder get rewarded? How does J&J grow shareholder value?
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Role of the Financial Executive - Questions?
What is the difference between an Income Statement and a Balance Sheet? Is there a difference between cash and profit? What is a venture capital company? What is FLDP?
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What are some of the common themes that we as Finance people hear from our Business Partners?
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Common Themes From Our Business Partners Assume ownership of the business. Consider yourself an equal partner. Proactively engage in the business. Assume leadership in resolving issues. Encourage risk-taking, define the boundaries. Place value on cross-functional exposures. Educate us about Finance Take the complex and make it simple
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Role of the Finance Executive
Be Leaders as well as Managers Shape Aspirations of Business
Influence Agenda of Organization
Foster Innovation Execute Business Plans Drive Capital Efficient Profitable Growth Integrate P. E. into Fabric of Company Develop Leaders
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We work with our Business Partners supporting analysis and decision making in the following areas: Sales & Marketing Operations R&D Business Development/L&A Information Management Credit & Collections…….Other Admin. Areas
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Sales & Marketing
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Sales & Marketing Accounting
should the price be? What are some of the factors that should be considered when setting price? What is the most important factor in pricing? What is the right amount to invest in advertising and promotion?
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What
Sales & Marketing Accounting
is the market for the product? What image are we going to try to create? What products should be added or deleted? Should we invest in more sales reps? How much profit do we earn from the package size or the brand?
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What
Decision Making You’re the finance executive supporting sales & marketing. What is the number one factor that you’re going to consider in pricing your new product?
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Green
- The value of the product Red - The competition’s pricing Blue - Cost to manufacture plus a markup
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Decision Making You’re the finance executive supporting a brand or a product in sales & marketing. What financial measurement are you going to use to evaluate the success of the brand or product?
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–The $ value of the brands assets (buildings, inventory, receivables) Red – The $ amount of sales Blue – The amount of cash the brand generates Yellow – The Net Income contribution of the brand
Green
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Operations
Manufacturing Distribution Transportation
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Operations Accounting
should we produce? What are the factors that we should consider when deciding where to produce? Shall we make it or buy it? How much does it cost to produce? How do we reduce waste?
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Where
Operations Accounting
do we upgrade or replace equipment? What is the cost of idle capacity? How much inventory do we need? Where do we store it? What should we measure?
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When
Decision Making
The cost of manufacturing a product includes the following:
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The cost of manufacturing a product includes the following: Green – Material, selling expenses and overhead Red – Material, manufacturing labor and overhead Blue – Material, inventory and overhead Yellow – Material, selling expenses and research and development
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Decision Making
For a free J&J sample……What
are some of the factors that you are going to consider in determining where you’re going to manufacture your product?
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Factors to consider in determining Mfg. Location – If outside U.S., how much risk do you want in the country? » Ex: Wholly owned subsidiary, Joint-venture, licensee etc. – Import Prices / Transfer Prices – Cost of Labor – Cost of Raw Materials – Are you leveraging available capacity – What capital investment is required? – Taxes - Is the tax rate high or low in the country? – Cash Dividends - can you get the cash out of the country and at what cost?
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The Value Creation Challenge
What is the key to J&J’s stock value going up?
Generating Free Cash Flow
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The Value Creation Challenge
“Free Cash Flow”
The cash leftover for shareholders and creditors after maintenance of the business. It is the cash available to be invested in new businesses or returned to investors by way of a dividend.
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The Value Creation Challenge
How can we increase free cash flow in the future? …… 3 areas …... Grow the top line…increase sales
– Volume (making businesses larger, new products, acquisitions) – Price
Increase our margins (Sales less cost)
– Reduce our expenses or costs required to run the business (ex: manufacturing, operating expenses) Both of these impact profits or the P&L 35
The Value Creation Challenge
The third area in order to increase free cash flow?
– Become more capital efficient or increase our capital efficiency.
How do we do that?
– Reduce working capital - inventories and accounts receivable – Reduce fixed capital investment - buildings, equipment etc. – Convert assets into cash 36
WHAT DRIVES
Free Cash
Grow Profits
Increase Capital Efficiency
Increase Sales
Increase Margins
Reduce Fixed Capital
Reduce Working Capital
Growth Measure
Efficiency Measures
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Decision Making
True (Blue) or False (Red)
Cash is the same as profit?
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Cash vs Profit
Is cash the same as profit? Ask Enron…ask WorldCom! False - A profitable company can be a bankrupt company!
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INCOME STATEMENT
An Income Statement or Profit & Loss Statement (P&L), covers a period of time…month, quarter or year What’s it look like? Sales Minus Expenses Equals Profits Income Statements come in a lot of sizes shapes and flavors 40
BALANCE SHEET
Shows the financial condition of a business as of a specific date or point in time.
– Ex: as of 12/31/xx, as of 6/28/xx
Three components of a Balance Sheet
– Assets (everything we own) – Liabilities (everything we owe) – Stockholders Equity (owners equity, net worth)
Assets = Liabilities + Stockholders Equity
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BALANCE SHEET
What are some of the ASSETS that J&J owns? What are some of the LIABILITIES that J&J owes?
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FLDP Mission
Develop future leaders ……..Controllers and CFO’s who influence the right business decisions and exemplify the standards of leadership.
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FLDP
2 Years 3 Rotations (8 months each) to 3 different operating companies 10 weeks of training (classroom & e-learning)
– 4 weeks of training to start the program – 6 days of training every 4 months
Corporate and operating company leaders in the classroom, in addition to outside consultants 44
Johnson & Johnson Development Corporation
Mission – JJDC directly invests in start-up & early stage venture companies in the health care field where promising new technologies are under development Founded in 1973 Global scope of technology evaluation Investments in over 200 young companies
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Johnson & Johnson Development Corporation
Why does JJDC exist? Growth - $34B business Evaluation of new technologies Unlimited scope within health care In-house acquisition & technical expertise Partnership with entrepreneurs & management
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Johnson & Johnson Development Corporation
What do we look for ? Early stage companies in rapidly growing markets - $200M potential Transformational innovation – unique products – ability to change the way healthcare is delivered/practiced Experienced management team
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Johnson & Johnson Development Corporation
How do we evaluate opportunities ? Product/service underlying technology Target market – size and potential Unmet need Competitive strategy Major risks Current & projected financials
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Case Studies Your chance to be the
Finance Executive!!
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Exercise # 1
It is important to invest in projects that drive top line (Sales) growth. Green - True Red - False
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Exercise # 1
It is important to invest in projects that drive top line (Sales) growth. Red - False You need to invest in projects that drive profitable top line (sales) growth!
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Exercise # 2
Johnson & Johnson is evaluating several investment alternatives. One of three financial measures that J&J uses is Payback ( the # of years to recover the initial investment). Which of the 3 projects on the following page should J&J accept?
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Exercise # 2
Year 0 1 2 3 4 5 A (2000) 1700 300 0 0 0
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B (2000) 1000 500 500 250 100
C (2000) 200 400 800 1600 3200
Exercise # 2
Blue - Project C is the answer
Project A has the lowest payback….2 years! However, the #1 problem with payback is that it does not tell you anything about what happens after the payback period. Project C has significant cash in-flows after the payback period. J&J also looks at Net Present Value (NPV - $) and Internal Rate of Return (IRR - %) to evaluate investment proposals.
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LaSalle University BUS100: Business Perspectives Course
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The End!! Have a Great Weekend!
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