Finance for non-finance

Nestle Romania
November 2013

Key Learnings
1. Key financial statements
2. How do we measure sales?
3. Definition and types of expenses
4. How do we measure profitability?
5. How do we optimize profitability?
6. How value is created by the business?
7. What is Net Working Capital and why it is so
important to optimize it ?
8. What is the planning cycle in our Company?

Financial Statements
Balance Sheet

Income Statement
Shows the
financial result
of the company
for the period

Shows the
Companys
financial position
at a point in time

Cash Flow
At 31st Dec 2013

Explains the
movement of
cash in the
company during
the period
Jan- Dec 2013

Jan- Dec 2013

Financial Statements
Balance Sheet

Income Statement
Shows the
financial result
of the company
for the period

Shows the
Companys
financial position
at a point in time

Cash Flow
Explains the
movement of
cash in the
company during
the period

Income Statement

Sales Costs = Profit

Sales
The Sales can sometimes be for immediate
cash, such as in retailing organization.
Most businesses allow some form of credit.
Thus, the sales figure shown in the IS will not
necessarily represent immediate cash inflow.

NNS is a measure of Sales Revenues

Gross Price reduction
(GPR)
Trade Allowances
Contractual rebates
Promotions for Trade

Quantity x List Price

Consumer price
reductions
Promotions for
Consumers

Gross Proceed of
Sales

Net Proceed of
Sales

(GPS)

(NPS)

Net Net Sales

(NNS)

What are the KPIs to measure

Sales Performance ?
Organic Growth (OG):
Growth excluding acquisitions and divestments
NNS Current Year
1
OG% =
NNS Last Year
Monthly OG calculated for a month
NNS May 2012 : 25 000 KRON
NNS May 2011 : 20 000 KRON

OG May 2012 : 25%

Cumulative OG - calculated for year-to-day period
NNS Jan-May 2012 : 110 000 KRON
NNS Jan-May 2011 : 100 000 KRON

Cum OG May 2012 : 10%

What are the KPI to measure

Sales Performance ?
Real internal Growth(RIG):
Growth at last year prices
RIG% =

NNS Current Year at prices of last year

NNS Last Year

OG% - RIG% = Pricing ( Price increases and

trade allowances
changes vs previous year)
OG May 2012 : 25%
RIG May 2012 :15%

Pricing = 10%

Price increase or Trade Spends reduction

Expenses (Costs)
The costs that appear in the Income
Statement must relate to what actually
happened in the period.

Costs
-only for incurred overheads
- only for services delivered
- only for materials consumed
Costs in the Income Statement are not
necessarily the same as the cash paid out on
overheads and materials.

Classification of Expenses

Expenses

Variable Expenses
Product related & increase proportional to quantity sold
Cost of Goods Sold
(COGS) :
- Raw Materials
-Packaging
-Labor
-Energy
Variable Distribution
- transportation

License Fee

Costs

37 500

25 000

1000

quantity =0
variable costs =0
quantity =1000
variable costs =25 000
quantity =1500
variable costs =37 500

1500

Quantity
Sold

Expenses

Product Related Fixed Expenses

Product Fixed Marketing Expences (PFME)
- Media
Costs
-Consumer Promotion
-Marketing Research
-Packaging design
5 500
5000

Factory Fixed Overheads

Depreciation of Factory
Assets
Bad Goods
Trade Assets Costs

1000

1500

quantity =0
Fixed costs =5000
quantity =1000
Fixed costs =5 000
quantity =1500
Fixed costs =5 500

Quantity
Sold

Expenses

Fixed Overheads
Fixed Distribution Costs
- 3rd party Warehousing services
- Cost of Logistic Department
- Cost related to own Warehouses

Costs

Marketing General Expenses

- Costs of Sales and CCSD Department
- Cost of Marketing Department
- 3rd Party Merchandising Services
Other General Expenses
- Costs of Corporate Depts (Finance, HR, SC)
Bad Debts

LGO cost

Quantity
Sold

Office
rent
Transport
of products
to
Fuel
BaciSalary
cost
sampling
of
KAMs
to
Factory
Salary
ofofemployee
Sales
Controller's
trip
customer
Cost
of
Kit
Kat
bar
sold
to
Cost
of
new
Energy
used
to
runof
Joe
line
Depreciation
of
consumers
car
Expired
Lion
bars
Manager
Exercise -to
Categorization
Expenses
on
Salary
packing
of
HR
line
specialist
in
the
factory
Vevey
Packaging
for
Joe
BIG
Cost
of
TV
campaign
Training
for
Finance
Team
distributor
packaging
design
Sugar
used
for
3in1
Warehouse
cost
computers

write of

Variable Expenses
COGS
Packaging for Joe BIG
Cost of Kit Kat bar sold to
distributor
Sugar used for 3in1
Energy used to run Joe line
Salary of employee
on packing line in the factory

Variable Distribution
Expenses
Transport of products to
customer

Product Fixed
Expenses
PFME
Cost of TV campaign
Baci sampling to
consumers
New packaging
design
cost
Bad Goods
Expired Lion bars
write of

Factory Fixed
Overheads

Salary of Factory
Manager

Fixed
Overheads
MOGE
Salary of HR
specialist
Trainings for

Finance
Sales
Controller's
trip to Vevey
Fuel cost of KAMs
car
Office rent

Fixed Distribution
Expenses
Warehouse cost

GLOBE
Depreciation of
computers

Profitability measures
Trade
Allowances
Variable
Expenses

Product Fixed
Expenses
Fixed
Overhead
Expenses
Net Proceed
of Sales

Net Net
Sales

Marginal
Contribution

(NPS)

(NNS)

(MC)
%of NNS

Product
Contribution
(PC)
% of NNS

Trading Operating
Profit
(OP1)
%of NNS

OP1 is the measure of the earnings of the business

NNS
PROFIT (OP1)

Variable
Expenses
Product
Fixed
Expenses
Fixed
Overheads

OP1 is the measure of the earnings of the business

NNS
LOSS (OP1)
Variable
Expenses
Product
Fixed
Expenses
Fixed
Overheads

Delivering Profitable Growth

Profitability Increase:
Increase Sales
Optimize Costs

Delivering Profitable Growth

Costs

NNS

Improve profit margins through:

Trade Spend optimisation

PFME investments optimisation (key brands focus)
Portfolio optimisation (less SKU, focus on profitability)
Cost improvements in all areas
Optimal set-up of supply chain (optimization of distribution and
warehousing costs)
Synergies between businesses (NIM scope, joined activities)
First time quality
Only adding value activities reduction of wastes

Benchmarking !

Profit & Loss Account

Variable allowances
directly allocated to a product.
GPS Variable allowances = NNS

Variable Part
(linear to volume
changes)

Variable Expenses
directly allocated to a product

Product fixed expenses

directly allocated to a product
Fixed Part
(non-linear to
volume changes)
Overheads
No pragmatic link between the expense

Financial Statements
Balance Sheet

Income Statement
Shows the
financial result
of the company
for the period

Shows the
Companys
financial position
at a point in time

Cash Flow
Explains the
movement of
cash in the
company during
the period

Balance Sheet
The use of funds (Resources
to run the business)

The origin of
funds

ASSETS

LIABILITIES

Debtors

Suppliers

Inventory

Fixed Assets

3rd Party Debt

Equity

 Net

Not collected
Receivables
from our
customers

Finish
goods

Raw &
Packagin
g
materials

Working Capital

ASSETS
Debtors

Inventory

LIABILITIES

Un paid
invoices
from our
suppliers

Payables
accrued
for
services
delivered

Suppliers

Trade
accruals

3rd Party Debt

Semi
finish
products

Fixed Assets

Equity

Net Working Capital = Debtors + Stocks - Suppliers

Invested Capital
ASSETS

LIABILITIES

Debtors

Suppliers

Inventory

Factory
buildings

Machiner
y

Cars
Trucks

Freezers

Vending
Machine
s

Fixed Assets

3rd Party Debt

Equity

Invested Capital = Net Working Capital + Fixed Assets

Sources of funds - Capital

A lot of money is required to be invested in the
business for Fixed Assets and Working Capital
Where does the money come from?
Bank loans (Borrowings)

ASSETS

LIABILITIES

Shareholders (Investors)

Debtors

Suppliers

Inventory
Fixed Assets

3rd Party Debt

Equity

Financial Statements
Balance Sheet

Income Statement
Shows the
financial result
of the company
for the period

Shows the
Companys
financial position
at a point in time

Cash Flow
Explains the
movement of
cash in the
company during
the period

Cash drives the business

Sales

Profit
INVOICE

$
500.-

Taxes
Retained
Profit
Dividends

Fixed
assets
Current
assets

Shareholders

Debt

Cash Flow versus Profit

Sales and costs and, therefore, profits do not necessarily coincide with their associated cash
inflows and outflows.
The net result is that cash receipts often lag cash payments and, whilst profits may be
reported, the business may experience a short-term cash shortfall. For this reason it is
essential to forecast cash flows as well as project likely profits.
Income
Statement

Month
1

Sales

$75,000

Cost

$65,000

Profit

$10,000

Cash Flow relating to

Month 1

Month 1

Month 2

Month 3

Total

Receipts from sales

$20,000

$35,000

$20,000

$75,000

Payment to suppliers

$40,000

$20,000

$5,000

$65,000

Net cash flow

($20,000)

$15,000

$15,000

$10,000

Cumulative net cash flow

($20,000)

($5,000)

$10,000

$10,000

cash short- fall

Profit mth 1 generates cash

How do we measure Value Creation?

Income Statement
NNS
Variable Costs
Marginal contribution (MC)
Fixed Product Costs
Product contribution (PC)
Fixed Overhead Expenses
Operating Profit (OP)
Taxes
OP after Taxes (TOPAT)

Balance Sheet

Return on Invested Capital

(ROIC)

ASSETS

LIABILITIES

Debtors

Suppliers

Inventory

Fixed Assets

ROIC

TOPAT
IC

Value is created if:

ROIC > Cost of Capital

3rd Party Debt

Equity

IC (Invested Capital )=
Net Working Capital +
Fixed Assets

Return on Invested Capital

I. Assume 2 companies (A and B)
with identical Income Statement...
A and B

ROIC
ROIC

A:
A:16%
16%
B:
B: 32%
32%

divided by

Profit
Profit

Inv.
Inv.Capital
Capital

Mio CHF

NNS

100

100

Operational Expenses

-90

-90

OP 1

10

10

less taxes

-2

-2

TOPAT

II. ... but different Invested Capital

A

Mio CHF

Mio CHF

Fixed Assets

40

17

New Working Capital

10

Invested Capital

50

25

Linking management action with

value creation
RIG
Revenue
Pricing
ROIC
COGS
Margin

Value

MOGE
Cost of Capital

Capex
DSO
DPO
Inventory

Asset Turn

ROIC: Nestl vs peers

Source: Citigroup

Strategic Performance Framework 4x4

Planning Process
MBS
MBS
Operational
Planning

Investment
Strategies

Integrated Commercial
Integrated
Commercial
Planning
Planning

Strategy
Portfolio
Management

Market and Business Strategy

(3 years plan and 10 years vision)

Demand Shaping

Execution

Drive
Drive
Operations
Operations

Profitable Growth &

Free Cash Flow

Dynamic Forecast &

Opportunities Identified
Dynamic Forecast 18 moth scope rolling plan