Strategic goal of financial manager is ensure effective use of company finance. As you probably know, money has value, which today is higher than tomorrow. Playing with this value is an essence of financial management.
Frankly, I do not see finance job for MBA graduate in plastic surgery clinics. To the highest extent, any financial management in plastic surgery stands for accounting. In some cases you may expect making valuation of some project, like I mentioned before, of purchasing new liposuction technology. I would include in financial management topic also accounting, represented by the following:
- tax accounting, with reports to tax authorities
- finance accounting with reports to owners or shareholders
- management accounting with reports to management to make business decisions.
Value of money is expressed as Present Value (PV) , or today’s sum discounted by rate you believe to be fair (required rate of return, RRR); for example, if you keep 1,000USD, in one year the sum will have values:
- discounted by 10% if you compare with option to invest in bonds with interest of 10%;
- discounted by 40% if you could buy few barrels of oil, which raised during a year and you can sell now at the best price; - multiplied by xxx times if you invest in Dubai real estate in 2009.
If you add initial investment and present values of future cash flows, you’ll get Net Present Value, NPV. Net means minus initial investment. Usually NPV is calculated as discounted value stream for few years. Discount rate for each year is “1+RRR” raised to the power of years from now. I.e. if RRR is 10%, discount rate for year 2 is 1,121. Interest rate which makes NPV equal to money today is IRR or internal rate of return.
Using NPV is more wise than using payback period, e.g. when people calculate investment feasibility, dividing initial investment by future cashflow p/a, receiving number of years to return investment. You can apply NPV for plastic surgery as well. For example, making decision whether to buy new liposuction machine. Cost of machine is 1,000USD, RRR =15%, - we would lend this money to bank with such rate. Period is 5 years, annual cash flow from liposuction operations – 500USD. NPV= 434+378+328+285+249=1,673>1,000. Investment in new liposuction machine makes sense.
Results of financial management are reflected in financial statement: balance sheet, profit and loss, cash flow. Do not expect from me detailed analysis of each, even in MBA course. Because if you’ll go to finance, you’ll need to learn much more, but if you’ll go somewhere else, you’ll forget also not less. So, balance sheet is statement of assets and liabilities+capital (or owners’ equity ) at current moment of time. Assets are what you can sell or use to make money, liabilities+capital is what you owe to lenders, suppliers (liabilities) or shareholders (capital). This is so called double-entry bookkeeping, invented in Holland hundreds years ago to avoid mistakes, since assets should always be equal to liabilities+capital . For example, if you buy liposuction machine, your assets in balance sheet increase by it’s value, your liabilities to supplier also increase, and both remain equal. Quotation Assets = liabilities + owners’ equity reflects also major question for manager: how to finance business, paying interest to use money (liabilities to bank) or selling part of company to shareholders (capital).
With time assets lose value and this is called depreciation. Value can “disappear” in equal parts or parts at the beginning are bigger than at the end (accelerated depreciation). This applies to work in hard conditions or when management wants to play with bonus, increasing profit changing depreciation policies. In balance sheet such value decrease is shown as ac*****ulated depreciation. Capital represents money, invested by shareholders, regardless how can you name it: preferred stock, paid-in-capital, equity, etc. Balance sheet itself does not show information about financial health of a company. Or course, you can figure out how big is debt or retained earnings, but this information is useless without knowledge of industry. For example, retail traditionally has high values of assets (stores) and liabilities (to suppliers), while software companies may have zero debt or assets, but high accounts receivable. Profit and loss statement consists of 2 parts: Sales and Cost of goods sold. Obviously this statement to be the easiest to understand, because most of people capable to record own expenses. However, like a balance sheet, profit and loss statement contain standardized items, understandable after knowing the business. For example, materials(raw materials) . This is everything business processed to manufacture product, but materials certainly are different. The few items to remember:
EBIDTA - earnings before interest, depreciation and taxes;
Net Profit, Net Income - revenues minus cost of goods sold minus other expenses
Variable costs – change with sales volume, for example: cost-of-goods sold, costs of raw materials or energy costs.
Fixed costs – remain the same within year, for example administrative personnel salaries, rent, or insurance
Direct costs - applied to product cost (depends on company policies), for example workshop chief salary or raw materials cost
Indirect costs – extra costs, not involved in product manufacturing, e.g. marketing costs or director’s salary.
Cost-of-goods-sold - cost of the products sold to customers and usually it’s the largest expense for a business that sells products, typically 50 to 60 % of sales revenue.
Contribution margin - equals sales revenue minus cost-of-goods-sold and variable costs, has to be large enough to cover the company’s fixed costs, interest and income tax expense and still leave profit (net income).
Cash Flow statement shows how effectively company manages cash; e.g. you can sell a lot, with high margins, but customers may pay later than you need to spend to finance business.