Review Fin Man

Financial Management A Review

Topics •* •* •* •* •* •* •* •*

Capital Budgeting EVA Goal of the Firm Investment Decisions Management of Current Assets Management of Current Liabilities Management of Long-Term Assets Management of Compensation

Topics •* •* •* •*

Management of Other Income Management of Salary Unit Costs Value of an Individual

GOAL OF THE FIRM Maximization of Wealth

SUPPORTIVE TOOLS Analysis, planning and control

WORKING CAPITAL Management Decisions

LONG-TERM ASSETS External Growth Decisions

Risk Return/Trade Off

Financial Decisions

Value of the Firm

FINANCIAL STRUCTURE Long-term financing decision

OBJECTIVES OF THE FIRM

Maximize Corporate profits

Maximize the wealth of the owners as reflected in the perception of the clientele

Maximize profits to the satisfaction of such other goals as target market share, clientele, service and minimum risk of bankruptcy and other such goals

Maximize profits while playing an active role as a participant in society’s current concerns

Maximize the value of the institution to its present owners

Economic Value-Added Why Shareholder Value, And Why Now?

Major Developments • *Globalization and deregulation of capital markets • *End of capital and exchange controls • *Advances in information technology • *More liquid securities markets • *Improvements in capital regulations

• *Generational changes in attitudes toward savings and investments • *Expansion of institutional investments

Value creation • *Product and service quality • *The ability to attract, develop, and retain talented people • *Community and environmental responsibility

Strategic Architecture Creating Strategic Leverage

Understanding strategic leverage • *How industry structure affects

leverage • *How competitive position restricts leverage and limits choices • *Understanding the rules of competition in your industry • *Learning where your strategic leverage is in any business

Exploiting strategic leverage • *Why channels can become industry “fault lines” • *How to use leverage to change the rules of the game • *How to predict competitors’ likely reaction to your strategic moves • *How successful new products capitalize on leverage

Creating the one-page plan • *How to use it to focus the

organization on the right issues • *How management can use it to increase margins and profits • *How to use it to plan relevant performance measures

Differential advantage • *Quantifying where the leverage is • *Determining competitors’ likely

strategies and intent • *Determining where and how much investment is needed to gain share

Framing your industry • How to define the game you are

playing to avoid being blindsided • *Strategic mapping and understanding your real choices • *Communicating strategic direction

Investment Philosophy & Process

Investment Philosophy The Investment Process Equity Investment Policy Company Analysis Portfolio Construction Fixed Income Domestic Global Equity markets Portfolio: General Funds Long-Term Funds Short-term Middle-term Long-term

Management Compensation Value-Based Approach

Value-Based Performance

Work Performance

Value-Based Rank

Value Performance

Work Performance (For employees to be considered for permanency)

Preparation/Skills

Continuing training/development

Social/Environmental Involvement

Starting Rank

Work Performance ( For regular employees)

Incremental Increase in Skills

Incremental Increase in Continuing Training/Development

Incremental Increase in Social/Environmental Responsibility

New Rank

Value Performance* Community Involvement (%) Value Performance Quality Assurance Circle Involvement (%)

* A Necessary Condition for a New Rank

Unit Costs/Unit Revenues Economic Value Added Drivers

Asset Utilization Asset utilization refers to the use of an asset to generate revenue

Cost per employee TSPE CPE = ( ------------- ) TFTEE CPE TSPE TFTEE TFTE

X

TFTE

cost per employee total salaries paid to employees total FTE rendered by all employees total FTE rendered by a particular employee

Cost per administrator TSPA CPA = ( ------------- ) X FTEA TFTEA CPA TSPA TFTEA FTEA

cost per administrator total salaries paid to administrators total FTE rendered by administrators total FTE rendered by a particular administrator

EVA for Employee TSE EVAE = ( ------------ ) - CPE FTE EVAE TSE FTE CPE

economic value-added of employee total salary of employee actual number of hours rendered by employee cost per employee

NOTE: EVAE > 0 for the employee to be productive

EVA for Administrator TSA EVAA = (------------) - CAP FTE EVAA TSA FTE CAP

economic value of an administrator total salary received by an administrator actual number of hours rendered by administrator cost of an administrator

NOTE: EVAA > 0 for an administrator to be productive

Value of an Individual A Value-Based Model

Supporting Variables Individual Where: I ۸ O = O

Organization

I N D I V I D U A L

HR costs

Performance

Training Development Continuing Education Maintenance

Promotability Transferability Productivity

HR Conditional Value

Expected Conditional Value

O R G A N I Z A T I O N

Motivational Costs (MC)

Probability Of Stay (POS)

Expected Realizable Value (ERV)

Value of an Individual I

O

HRC

Motivational Costs

Performance

Probability of Stay

HRCV

ERV

Expected Value Of Individual

Note: The value of an individual is positive when ERV > HRCV