revisionon g business

Business MGT

Revision

Profit Making Business

Purpose is to optimize the shareholder returnPurpose is to optimize the shareholder return

Provide goods or services (iphone case, protector)Provide goods or services (iphone case, protector)

Maintain an operation Maintain an operation

Business Activities

1.1. Generating IdeasGenerating Ideas

2.2. Raising CapitalRaising Capital

• To buy equipment, hire and train workers, To buy equipment, hire and train workers, operation expenses, finance a sales transactionoperation expenses, finance a sales transaction

• Sources of Sources of funding(owner,loan,reinvestment,angel)funding(owner,loan,reinvestment,angel)

Business Activities

3.3. Employing and Training PersonnelEmploying and Training Personnel

4.4. Buy Goods and ServicesBuy Goods and Services

5.5. Marketing Goods and ServicesMarketing Goods and Services

6.6. Maintaining Business RecordsMaintaining Business Records

Ownership

consideration

In controlIn control

Make decisionsMake decisions

Investment Investment

Profit distributionProfit distribution

forms

ProprietorshipProprietorship

PartnershipPartnership

CorporationCorporation

Business Entities

HK

Limited-liability company Limited-liability company (both public and private)(both public and private)

Branch/Representative Branch/Representative Office (overseas)Office (overseas)

PartnershipPartnership

Sole ProprietorshipSole Proprietorship

Foreign Entities (China)

Representative Office (RO)-Representative Office (RO)-image promo onlyimage promo only

Business ActivityBusiness Activity

Wholly Foreign-owned Wholly Foreign-owned Enterprise (WFOE)Enterprise (WFOE)

Joint Venture (JV)Joint Venture (JV)

Business Management

contemporary business

1.1. Managing the Technology RevolutionManaging the Technology Revolution

2.2. From Transaction Management to RelationshipFrom Transaction Management to Relationship

3.3. Creating Value through Quality and Customer SatisfactionCreating Value through Quality and Customer Satisfaction

4.4. Competing in a Global MarketCompeting in a Global Market

5.5. Developing and Sustaining a World-Class WorkforceDeveloping and Sustaining a World-Class Workforce

6.6. Wanted: A New Type of ManagerWanted: A New Type of Manager

7.7. Managing Ethics and Social ResponsibilityManaging Ethics and Social Responsibility

Business Planning

What

A process that involves the creation of a A process that involves the creation of a mission or mission or goalgoal for a company, as well as for a company, as well as defining the defining the strategiesstrategies that will be used to meet those goals or that will be used to meet those goals or mission. mission.

The process of business planning can be very The process of business planning can be very broad, encompassing each aspect of the broad, encompassing each aspect of the operation, or be focused on particular functions operation, or be focused on particular functions within the overall within the overall corporate structure. .

utilization of resourcesutilization of resources within the company as well within the company as well as engaging the as engaging the services of consultantsservices of consultants to assist in to assist in designing and implementing the plan. designing and implementing the plan.

When

A new businessA new business

ExpandExpand

M&AM&A

ReviewReview

Business Plan

formal formal statementstatement of a set of of a set of business goalsbusiness goals, the , the reasons why they are believed reasons why they are believed attainableattainable, and the , and the planplan for reaching those goals. It may also contain for reaching those goals. It may also contain background informationbackground information about the about the organizationorganization or or teamteam attempting to reach those goals attempting to reach those goals

Formal Business Plan (for Formal Business Plan (for Fund RaisingFund Raising) )

Informal Business Plan (for Informal Business Plan (for Internal UseInternal Use))

Strategic Management

Strategic Management

Activities

Drafting, implementing, Drafting, implementing, evaluating cross-functional evaluating cross-functional decisionsdecisions

Long-term objectives

Setting company vision and Setting company vision and mission =Directionmission =Direction

Setting company objectivesSetting company objectives

=Implementation=Implementation

Strategic Management Process

Scan Environment

Scan Environment

Define Mission and Objectives

Define Mission and Objectives

Formulate a Strategy

Formulate a Strategy

Implement the Strategy

Implement the Strategy

Evaluate and Control

Evaluate and Control

Planning / Formulating Implementing

Strategic Management Process

- Scope and Hierarchy of Strategy

Scan Environment1. Internal analysis of the firm and industry1. Internal analysis of the firm and industry

1.1. Evaluates entry barriers, suppliers, customers, substitute products, Evaluates entry barriers, suppliers, customers, substitute products, industry rivalryindustry rivalry

2.2. SWOT analysisSWOT analysis

3. BCG Matrix

2. External macro-environment (2. External macro-environment (PEST analysis))

Strategy Formulation• Based on information from environment scan:Based on information from environment scan:

• Match its Match its strengths to the opportunitiesstrengths to the opportunities• AddressAddress itsits weaknesses and external threats weaknesses and external threats

• Develop a Develop a competitive advantagecompetitive advantage over its rivals over its rivals• Advantages:Advantages:

• CostCost• DifferentiationDifferentiation

• Three industry-independent generic strategiesThree industry-independent generic strategies• Cost leadership - priceCost leadership - price• Differentiation - product/serviceDifferentiation - product/service• Focus - marketFocus - market

IndemnifyIndemnify Create, position, define

Procurement,Technology Development, Human Resource Management, Firm Infrastructure

Competitive Adv • Ability to utilize its Ability to utilize its resources effectivelyresources effectively

• Market products faster Market products faster than competitorsthan competitors

Organization/internal Organization/internal adv.adv.

ExperienceExperience

Response to the Response to the marketmarket

Resources Capabilities

Competencies-Innovation

-Efficiency

-Quality

-Customer responsiveness

• Patents and Patents and trademarkstrademarks

• Proprietary know-howProprietary know-how• Installed customer Installed customer

basebase• Reputation of the firmReputation of the firm• Brand equalityBrand equality

Strategy FormulationKnowing Resources

& Capabilities - Competencies

Identify Competitive Adv

Identify Where to createValues in the value Chain

Matching support activitiesFor value creation

Procurement

Technology HRM

Firm Infrastructure

Strategy Selection

Focus

CostLeadership Differentiation

Strategy Implementation

1.1. Means of Means of

1.1. ProgramsPrograms

2.2. Budgets Budgets

3.3. ProceduresProcedures

2.2. OrganizationOrganization of firm’s resources of firm’s resources

3.3. MotivationMotivation of the staff of the staff

4.4. Successful implementation depends on who is the Successful implementation depends on who is the leadershipleadership of the program of the program

1.1. Personal understanding of the strategyPersonal understanding of the strategy

2.2. Make staff understand the strategyMake staff understand the strategy

3.3. Motivate staff to do itMotivate staff to do it

Marketing

Market segmentation

Marketing Activities Summary

Marketing Strategy

Marketing Research

Marketing

Marketing FunctionsMarketing Functions

Marketing PlanningMarketing Planning

Market ShareMarket Share

Marketing MixMarketing Mix

Product Life CycleProduct Life Cycle

Product Diffusion CycleProduct Diffusion Cycle

Marketing SegmentationMarketing Segmentation

Marketing ResearchMarketing Research

B2B/ B2C

• Sales(absolute/Share (relative:Sales(absolute/Share (relative:• Market Share = Company's Sales / Total Market SalesMarket Share = Company's Sales / Total Market Sales• Preference/share/distributionPreference/share/distribution

Intro, Growth, maturity, Decline

Marketing Functions

MarketingFunctions

Promotion

Product & Service

Management

Distribution

SellingPricing

Financial Analysis

MarketingInformation

Management

Marketing Mix

Marketing Strategy – Marketing

Research (2/12)

Marketing Research Process

Prepare the research

report

Determine research design

Identify data types and sources

Design data collection

forms and Qs

Analyze and interpret the

data

Collect the data

Determine sample plan

and size

Defining the Problem

ManagementDecision

E Business Application

E-Business Models

Providing product information (customer service)Providing product information (customer service)

Promoting company (marketing)Promoting company (marketing)

Selling online (selling)Selling online (selling)

Conducting market research (marketing)Conducting market research (marketing)

Making payments (selling)Making payments (selling)

Obtaining parts and supplies (logistics)Obtaining parts and supplies (logistics)

Tracking shipments (logistics)Tracking shipments (logistics)

Types of E-Business• E-Business MatrixE-Business Matrix

– B2BB2B• Online business Online business transaction with partiestransaction with parties• Largest and fast growing segmentLargest and fast growing segment

– B2CB2C• First and most familiar modelFirst and most familiar model• Expanded salesExpanded sales of products in different geographic markets of products in different geographic markets

– C2BC2B• Consumers originateConsumers originate online transactions through price offers to businesses online transactions through price offers to businesses

– Online bidding, e.g. pricelineOnline bidding, e.g. priceline

– C2CC2C• Direct dealingDirect dealing between consumers between consumers• Bargaining and auctionsBargaining and auctions

– E.g. eBayE.g. eBay

Extended E-Business Matrix

Social Concern on Tech

• Employment TrendsEmployment Trends

• Health ConcernsHealth Concerns

• Computer CrimeComputer Crime

• Privacy ConcernsPrivacy Concerns

Business Application Systems

• ERP (Enterprise Resources Planning)ERP (Enterprise Resources Planning)

• CRM (Customer Relationship Management)CRM (Customer Relationship Management)

• SCM (Supply Chain Management)SCM (Supply Chain Management)

Risk Mgt

• Identifying RisksIdentifying Risks

Economic and Non-economic, Pure and Speculative, Economic and Non-economic, Pure and Speculative, Controllable and Uncontrollable , Insurable and Controllable and Uncontrollable , Insurable and UninsurableUninsurable

• Dealing with RisksDealing with Risks

• Uninsurable RisksUninsurable Risks

AvoidTransferInsureAssume

Phases of Software Development Cycle

Financial

Fin Statement

•Tells: Potential/Performance/PositionTells: Potential/Performance/Position

•Balance Sheet, Income Statement (P&L), Balance Sheet, Income Statement (P&L), statement of retained earning, statement of statement of retained earning, statement of cashflowcashflow

Purpose of Financial Statement• Who need to read financial statementsWho need to read financial statements

– Owners/managers/stockholdersOwners/managers/stockholders• Make important Make important business decisionsbusiness decisions

– Prospective investorsProspective investors• Assess the Assess the viability of investingviability of investing in a business in a business

– Financial institutions (banks or lenders)Financial institutions (banks or lenders)• Decide to Decide to grant fresh capitalgrant fresh capital or extend debt security to the company or extend debt security to the company

– Government entities (tax)Government entities (tax)• Ascertain the accuracy of taxes and dutiesAscertain the accuracy of taxes and duties

– EmployeesEmployees• Make collective bargaining with the managementMake collective bargaining with the management

– Vendors (suppliers)Vendors (suppliers)• Consider to extend credit to a businessConsider to extend credit to a business

– Media and the General PublicMedia and the General Public• News, investment, research, personal interestNews, investment, research, personal interest

Information for Financial Statement –

Financial Records• Asset RecordsAsset Records

– Buildings, equipmentBuildings, equipment owned by the business owned by the business– Original value, current value, mortgage, loanOriginal value, current value, mortgage, loan

• Depreciation RecordsDepreciation Records

– Assets have Assets have decreased in valuedecreased in value due to their age and use due to their age and use– E.g. production line, survey equipmentE.g. production line, survey equipment

• Inventory RecordsInventory Records

– Type and number of Type and number of productsproducts on hand for sale on hand for sale– Records of product sold, damaged, returned, lostRecords of product sold, damaged, returned, lost– Current value of inventory (likely to decease in valueCurrent value of inventory (likely to decease in value ))

• Records of accountsRecords of accounts

– All purchases and sales made using creditAll purchases and sales made using credit– Accounts payableAccounts payable records – credit purchases records – credit purchases – Account receivableAccount receivable records – credit purchases by customers, status of each account records – credit purchases by customers, status of each account


Financial Records• Cash recordsCash records

– List all cash received and spent by the businessList all cash received and spent by the business

• Payroll recordsPayroll records

– Information on all employees of the company, their compensation, Information on all employees of the company, their compensation, and benefitsand benefits

• Tax recordsTax records

– All taxes collected, owed and paidAll taxes collected, owed and paid

– MPF, ORSO contributionMPF, ORSO contribution

– Withheld Employees’ salaries for income tax (not for HK)Withheld Employees’ salaries for income tax (not for HK)


Balance Sheet

• A report of company’s assets, liabilities and owner’s equity A report of company’s assets, liabilities and owner’s equity on the date the balance sheet is preparedon the date the balance sheet is prepared


Balance Sheet• Assets:Assets:

– Anything of value Anything of value owned by the businessowned by the business

– Current Assets:Current Assets:

• Cash, items that can be Cash, items that can be readily converted to cashreadily converted to cash such as inventory and such as inventory and account receivableaccount receivable

– Long-term assets (fixed assets)Long-term assets (fixed assets)

• Assets with a lifespan of more than (xx years)Assets with a lifespan of more than (xx years)

• Common Common fixed assetsfixed assets such as land, buildings, equipment, expensive such as land, buildings, equipment, expensive technologytechnology


Balance Sheet• LiabilitiesLiabilities::

– Amounts owned by the business to othersAmounts owned by the business to others

– Current liabilities:Current liabilities:

• Will be paid within a year (Will be paid within a year (short term periodshort term period))

• Payments owned to banks (short-term loans), payments to suppliersPayments owned to banks (short-term loans), payments to suppliers

– Long-term liabilitiesLong-term liabilities

• debts owned for land, buildings, expensive equipmentdebts owned for land, buildings, expensive equipment


Balance Sheet

• Owner’s equityOwner’s equity

– Value of business after liabilities are subtractedValue of business after liabilities are subtracted

– Show how much the business is worthShow how much the business is worth

– Investment from the ownerInvestment from the owner

Owner's Equity

= Assets - Liabilities


Income Statement (P & L)

• A report of company’s revenue, expenses, and net income A report of company’s revenue, expenses, and net income or loss from operations for a specific periodor loss from operations for a specific period


Income Statement (P & L)• Revenue:Revenue:

– All All income receivedincome received by the business during the period by the business during the period

– Source of IncomeSource of Income• Sale of Sale of products & servicesproducts & services• Interest earned from investmentsInterest earned from investments

• Expenses:Expenses:

– All of the All of the costs of operatingcosts of operating the business during the period the business during the period

– Expenses includeExpenses include• Rent, supplies, inventory, payroll, utilitiesRent, supplies, inventory, payroll, utilities


Income Statement (P & L)• Net Income:Net Income:

– Revenue is greater than expensesRevenue is greater than expenses

• Net Loss:Net Loss:

– Expenses are greater than incomeExpenses are greater than income


Cash flows• Difference between the number of dollars (in) and Difference between the number of dollars (in) and

the number that (out)the number that (out)

• Cash flow from assetsCash flow from assets = cash flow to credits + cash flow to = cash flow to credits + cash flow to stockholdersstockholders


Cash flows• Cash flow from assets:Cash flow from assets:

– Operating cash flowOperating cash flow– Capital spendingCapital spending– Change in net working capitalChange in net working capital

• Operating cash flowOperating cash flow

– Cash flow that results from the company’s Cash flow that results from the company’s day-to-day activitiesday-to-day activities of of producing and sellingproducing and selling

• Capital spendingCapital spending

– Net spending on Net spending on fixed assetsfixed assets

• Change in net working capitalChange in net working capital

– Measured as the Measured as the net changenet change in current assets relative to current liabilities in current assets relative to current liabilities for the period for the period


Cash flows

• Operating cash flowOperating cash flow

– Calculate Calculate revenues minus costsrevenues minus costs– But not include depreciation (not cash outflow), interest But not include depreciation (not cash outflow), interest

(financial expense)(financial expense)– But include tax (paid in cash)But include tax (paid in cash)

– Let you know if the cash generated from business is Let you know if the cash generated from business is sufficient to fund everydaysufficient to fund everyday cash outflows (operation) cash outflows (operation)

– Negative operating cash flowNegative operating cash flow• A sign of troubleA sign of trouble• Capital injection may be requiredCapital injection may be required


Cash flows• Capital Spending (CAPEX)Capital Spending (CAPEX)

– Net Capital = money spent on fixed assets – Net Capital = money spent on fixed assets –

money received from the sale of fixed money received from the sale of fixed assetsassets

• Change in Net Working CapitalChange in Net Working Capital

– Investment in current assetsInvestment in current assets

– Difference between the beginning and ending net working Difference between the beginning and ending net working capitalcapital

Usage of Financial Statement -

Management• Review business performance for a certain periodReview business performance for a certain period

• Use to compare business performance of the current period with the performance of last Use to compare business performance of the current period with the performance of last month or last yearmonth or last year

• Assets increase and liabilities decreaseAssets increase and liabilities decrease

– Better financial positionBetter financial position

• Rapid rise in liabilities or decline in owner’s equityRapid rise in liabilities or decline in owner’s equity

– Raise concernRaise concern

• Net income increasesNet income increases

– Try to maintain and continue to improveTry to maintain and continue to improve

• Expense increases but revenue is notExpense increases but revenue is not

– Need to determine the reasons for the problem and make changesNeed to determine the reasons for the problem and make changes

• Business performance is no better than similar businessBusiness performance is no better than similar business

– Lower salesLower sales

– Higher expensesHigher expenses

Understanding Financial Performance

Ratios• Financial performance ratiosFinancial performance ratios

– Comparisons of a company’s financial elements that Comparisons of a company’s financial elements that indicates how well the business is performingindicates how well the business is performing

– provide provide indicatorsindicators of past performance in terms of critical of past performance in terms of critical success factors of a business success factors of a business

• Ratio AnalysisRatio Analysis

– A ratio A ratio on its ownon its own has little or has little or no meaningno meaning at all. at all.


Ratios• Types of RatiosTypes of Ratios

– Liquidity RatiosLiquidity Ratios

– Asset Management / Activity RatiosAsset Management / Activity Ratios

– Financial Leverage (Gearing) RatiosFinancial Leverage (Gearing) Ratios

– Profitability RatiosProfitability Ratios

– Market Value RatioMarket Value Ratio


Ratios

• Significance of Using Ratios:Significance of Using Ratios:

– It is compared with It is compared with other ratiosother ratios in the in the same setsame set of financial of financial statements. statements.

– It is compared with the It is compared with the same ratiosame ratio in previous financial in previous financial statements (trend analysis). statements (trend analysis).

– It is compared with a standard of performance It is compared with a standard of performance (industry (industry averageaverage). Such a standard may be either the ratio which ). Such a standard may be either the ratio which represents the represents the typical performancetypical performance of the trade or industry, of the trade or industry, or the ratio which represents the or the ratio which represents the target settarget set by management by management as desirable for the business. as desirable for the business.


Ratios

• Liquidity Ratios:Liquidity Ratios:

– Liquidity refers to the ability of a firm to Liquidity refers to the ability of a firm to meet its short-term meet its short-term financial obligationsfinancial obligations

– liquidity ratio is to liquidity ratio is to measuremeasure the ability of the firms to meet their the ability of the firms to meet their short-term maturing obligationsshort-term maturing obligations

– Failure will result in the Failure will result in the total failuretotal failure of the business – liquidation of the business – liquidation

– Current RatioCurrent Ratio

– Quick RatioQuick Ratio


Ratios• Current RatioCurrent Ratio

Current AssetsCurrent Assets

Current LiabilitiesCurrent Liabilities

– Current Assets: cash, marketable securities, account receivable and Current Assets: cash, marketable securities, account receivable and inventoriesinventories

– Current Liabilities: account payable, short term notes payable, short-term Current Liabilities: account payable, short term notes payable, short-term loans, current maturities of long term debt, accrued income taxes and loans, current maturities of long term debt, accrued income taxes and other accrued expenses (wages)other accrued expenses (wages)

– Current ratio =Current ratio =• 1:1 : Just sufficient to pay short term debts1:1 : Just sufficient to pay short term debts

• 2:1 : 2:1 : Healthy business (rule of thumb)Healthy business (rule of thumb)

• Less than 1:1 : unable to support long term debtLess than 1:1 : unable to support long term debt

• Much larger than 1: 1: ???Much larger than 1: 1: ???


Ratios• Quick RatioQuick Ratio

Quick AssetsQuick Assets

Current LiabilitiesCurrent Liabilities

– Quick Assets: Easily convertible current assets such cash, marketable Quick Assets: Easily convertible current assets such cash, marketable securities, account receivablesecurities, account receivable

– Current Liabilities: account payable, short term notes payable, short-term Current Liabilities: account payable, short term notes payable, short-term loans, current maturities of long term debt, accrued income taxes and loans, current maturities of long term debt, accrued income taxes and other accrued expenses (wages)other accrued expenses (wages)

– Examines the ability of the business to Examines the ability of the business to cover its short-term obligations cover its short-term obligations from its quick assets onlyfrom its quick assets only

– Quick ratio < Current ratioQuick ratio < Current ratio

– Difference between Quick vs Current: Difference between Quick vs Current: Stock (InventoryStock (Inventory))


Ratios• Asset Management/Activity Ratios:Asset Management/Activity Ratios:

– Measure the effective Measure the effective utilization of assets for businessutilization of assets for business

– High ratio: high turnoverHigh ratio: high turnover

– Activity ratios use to Activity ratios use to assess how active various assetsassess how active various assets are in are in the businessthe business

– Inventory TurnoverInventory Turnover

– Total Assets TurnoverTotal Assets Turnover

– Fixed Asset TurnoverFixed Asset Turnover


Ratios• Inventory TurnoverInventory Turnover

– Measures the stock in relation to turnoverMeasures the stock in relation to turnover• stock turns over in the businessstock turns over in the business

– Indicates the efficiency of the firm in selling its productIndicates the efficiency of the firm in selling its product– High stock turnoverHigh stock turnover suggests that the business deals in suggests that the business deals in fast moving consumer fast moving consumer

goodsgoods– If trend shows a marginal increase in days If trend shows a marginal increase in days slow down of stock turnover slow down of stock turnover – The high stock turnover ratio The high stock turnover ratio little chance of the firm holding damaged or little chance of the firm holding damaged or

obsolete stockobsolete stock

Inventory turnover

=Sales

Average inventory

Average Inventory or

Stock Period =

Average stock

X365 daysSales or COGS


Ratios

• Total Assets TurnoverTotal Assets Turnover

– Total Assets: all assets of a companyTotal Assets: all assets of a company

– Measures the efficiency with which the company Measures the efficiency with which the company uses all its assets to uses all its assets to generate salesgenerate sales

– Manage its assets efficiently to maximise salesManage its assets efficiently to maximise sales

– Higher the total asset turnover Higher the total asset turnover more efficiently its assets have been more efficiently its assets have been utilizedutilized

Total Asset Turnover

=Sales

Total Assets


Ratios• Fixed Assets Turnover (preferred)Fixed Assets Turnover (preferred)

– Net Fixed Assets Net Fixed Assets : all assets of a company for producing sales or : all assets of a company for producing sales or services, e.gservices, e.g., equipment., equipment

– Measures the efficiency with which the company uses its fixed assets Measures the efficiency with which the company uses its fixed assets to generate salesto generate sales

– Higher the fixed asset turnover Higher the fixed asset turnover more efficiently its assets have more efficiently its assets have been utilizedbeen utilized

Fixed-asset Turnover

=Sales

Net fixed assets


Ratios• Financial Leverage (Gearing) Ratios:Financial Leverage (Gearing) Ratios:

– Indicate the degree to which the activities of a firm are Indicate the degree to which the activities of a firm are supported by creditorssupported by creditors

– Good indicator of financial strengthGood indicator of financial strength– Greater the proportion of equity funds, greater the degree of Greater the proportion of equity funds, greater the degree of

financial strengthfinancial strength– Identify the Identify the financial strength and riskfinancial strength and risk of the business of the business

– Equity RatioEquity Ratio– Debt RatioDebt Ratio– Debt to Equity RatioDebt to Equity Ratio– Times Interest Earned RatioTimes Interest Earned Ratio


Ratios• Equity RatioEquity Ratio

– Shareholder’s interest: Shareholder’s interest: excluding financing (debt)excluding financing (debt)

– High equity ratio reflects a strong financial structure of the companyHigh equity ratio reflects a strong financial structure of the company

– Relatively Relatively low equity ratiolow equity ratio reflects a more speculative situation reflects a more speculative situation• High leverageHigh leverage

• Greater possibility of Greater possibility of financial difficultyfinancial difficulty from excessive debt burden from excessive debt burden

Equity Ratio =Ordinary Shareholder’s

Interest X 100%Total Assets


Ratios• Debt RatioDebt Ratio

– High debt ratio reflects a High debt ratio reflects a very small cushion for creditorsvery small cushion for creditors

– Difficult to raise additional funds from external sourcesDifficult to raise additional funds from external sources

Debt Ratio =Total Debt

X 100%Total Assets


Ratios

• Debt to Equity RatioDebt to Equity Ratio

–Indicates the extent to which Indicates the extent to which debt is covered by shareholders’ fundsdebt is covered by shareholders’ funds

–Reflects the relative position of the equity holders and the lendersReflects the relative position of the equity holders and the lenders

–2.12: 1 indicates that for 1 dollar of shareholders funds, there is a 2.12 2.12: 1 indicates that for 1 dollar of shareholders funds, there is a 2.12 dollars of debtdollars of debt

Debt to Equity Ratio =Total Debt

Total Equity


Ratios• Times Interest Earned RatioTimes Interest Earned Ratio

– Measure the Measure the extent to which earnings can decline without causing extent to which earnings can decline without causing financial losses to the companyfinancial losses to the company

– Ability to meet the interest costAbility to meet the interest cost– Ratio shows how many times the business can pay its interest bills from Ratio shows how many times the business can pay its interest bills from

profit earnedprofit earned

– Indicates the Indicates the interest payment ability for bondholdersinterest payment ability for bondholders– Indicates theIndicates the ability of the business to service fixed interest charges ability of the business to service fixed interest charges

Times interest earned

=

Earnings Before Interest and Tax (EDIT)

Interest Changes


Ratios• Profitability Ratios:Profitability Ratios:

– Indicate the ability of a business to Indicate the ability of a business to earn profit over a period of timeearn profit over a period of time

– Profits are essential, but not all aimed at maximising profits, Profits are essential, but not all aimed at maximising profits, irrespective of social consequencesirrespective of social consequences

– Profitability ratios show the Profitability ratios show the combined effectscombined effects of liquidity, asset of liquidity, asset management (activity) and debt management (gearing) on operating management (activity) and debt management (gearing) on operating resultsresults

– Gross Profit MarginGross Profit Margin

– Net Profit MarginNet Profit Margin

– Return on Investment (ROI)Return on Investment (ROI)

– Return on Equity (ROE)Return on Equity (ROE)

– Earning Per Share (EPS)Earning Per Share (EPS)


Ratios• Gross Profit MarginGross Profit Margin

– Gross Profit rises in proportion with SalesGross Profit rises in proportion with Sales

– Should Should compare the Gross Profit with similar businessescompare the Gross Profit with similar businesses

• Indicating the Indicating the performance of inbound logisticsperformance of inbound logistics (sourcing), production (sourcing), production (wastage)(wastage)

– Increase in GP Margin indicates the rate in increase in cost of goods Increase in GP Margin indicates the rate in increase in cost of goods sold are less than rate of increase in sales (efficiency)sold are less than rate of increase in sales (efficiency)

Gross Profit Margin =Sales – Cost of Sales

X 100%Sales


Ratios• Net Profit MarginNet Profit Margin

– Measure of company performance and its Measure of company performance and its comparable across companies comparable across companies in similar industriesin similar industries

– Low margin may not be a problem Low margin may not be a problem • Market normMarket norm• E.g. supermarket (large turnover, small margin)E.g. supermarket (large turnover, small margin)

– Trend is to be observedTrend is to be observed – Changes over different period, changes over market normChanges over different period, changes over market norm

Net Profit Margin =After Tax Earnings

X 100%Sales

• Return on Investment (ROI)Return on Investment (ROI)

– Indicates the efficiency of production Indicates the efficiency of production imply profitabilityimply profitability

– Indicates the Indicates the management’s ability management’s ability for utilizing the equity to make profit for utilizing the equity to make profit

– Increase in ROI, implies than a Increase in ROI, implies than a higher return for investorshigher return for investors

– Investors use this an indicator for making their investment decisionInvestors use this an indicator for making their investment decision• Seek for high return with the same investment Seek for high return with the same investment

ROI =After Tax Earnings

X 100%Total Assets

• Return on Equity (ROE)Return on Equity (ROE)

– Shows profit attributable to the amount invested by Shows profit attributable to the amount invested by the owners of the the owners of the businessbusiness

– Excluding the financingExcluding the financing

ROE =After Tax Earnings

X 100%Stockholders’ equity

• Earning Per Share (EPS)Earning Per Share (EPS)

– EPS is for the shareholdersEPS is for the shareholders’ interest in knowing the performance of ’ interest in knowing the performance of companycompany

– It is used to It is used to determine the dividend amountdetermine the dividend amount and ratio for the reporting and ratio for the reporting periodperiod

EPS =Net Income after Tax – Preference

Dividend X 100%Number of Issued Ordinary Share

• Market Value Ratios:Market Value Ratios:

– Indicate the relationship of the firm’s Indicate the relationship of the firm’s share price to dividends and share price to dividends and earningsearnings

– Market value ratios are strong indicators of what investors think of Market value ratios are strong indicators of what investors think of the firm’s past performance and future prospectsthe firm’s past performance and future prospects

– Use for Use for evaluating listed companiesevaluating listed companies with with market valuemarket value

– Dividend Yield RatioDividend Yield Ratio– Price/Earning Ratio (P/E Ratio)Price/Earning Ratio (P/E Ratio)– Dividend CoverDividend Cover– Dividend Pay-out RatioDividend Pay-out Ratio


Ratios• Dividend Yield RatioDividend Yield Ratio

– Indicates the Indicates the return that investorsreturn that investors are obtaining on their investment in are obtaining on their investment in the form of dividendsthe form of dividends

– A strong relationship between dividend yields and market prices A strong relationship between dividend yields and market prices • Some investment funds invest in high dividend stocksSome investment funds invest in high dividend stocks

– Very high dividend yields signals potential financial difficultiesVery high dividend yields signals potential financial difficulties

Dividend Yield =Dividends per share

Stock Price

Dividend per share =Total dividend

Number of shares outstanding


Ratios• Price/Earning Ratio (P/E ratio)Price/Earning Ratio (P/E ratio)

– Indicates of what premium or discount Indicates of what premium or discount investors are investors are prepared to pay or receive for the investmentprepared to pay or receive for the investment

– Higher P/E ratio indicates the higher the premium an Higher P/E ratio indicates the higher the premium an investor is prepared to payinvestor is prepared to pay

– Also indicates the potential strong growth and earnings Also indicates the potential strong growth and earnings of the share as perceived by investors of the share as perceived by investors

P/E Ratio =Market Price per share

Current earnings per share


Ratios• Dividend CoverDividend Cover

– Measures the extend of earnings that are being paid Measures the extend of earnings that are being paid out in the form of dividendsout in the form of dividends

– Higher cover indicates a Higher cover indicates a larger percentage of earnings larger percentage of earnings are being retained and re-invested in the businessare being retained and re-invested in the business

Dividend Cover (times)

=Earning per Share

Dividends per Share

• Dividend Pay-out RatioDividend Pay-out Ratio

– Indicates of the Indicates of the dividend payment in relation to net dividend payment in relation to net incomeincome

Dividend Payout Ratio

=Dividends per share

X 100%Earnings per share

Limitations of Ratio Analysis• Only an Only an epoch of performanceepoch of performance but cannot tell how good the business is doing in but cannot tell how good the business is doing in

comparing with:comparing with:

– the previous performance in the same periodthe previous performance in the same period– The performance of competitors and industrial normThe performance of competitors and industrial norm

• History dataHistory data that cannot be used to project current business performance that cannot be used to project current business performance

• Rely on the Rely on the raw business dataraw business data to derive the ratio to derive the ratio

– AccuracyAccuracy– ReliabilityReliability– AssumptionAssumption

• Single ratioSingle ratio cannot tell if the business is healthy or not cannot tell if the business is healthy or not

• Poor ratio may not be a good indicator of the company’s performance in the market Poor ratio may not be a good indicator of the company’s performance in the market versa viceversa vice

Income Statement (P & L) - example

Balance Sheet - example

Definition of Project• Project Project is considered to be one having the is considered to be one having the following characteristics :-following characteristics :-

a)a) it has to produce a set of it has to produce a set of productsproducts to meet the to meet the business business needsneeds;;

b)b) it requires a corresponding set of it requires a corresponding set of activitiesactivities to construct to construct the required products;the required products;

c)c) it needs certain amount of it needs certain amount of resourcesresources to carry out the to carry out the activities;activities;

d)d) it has a it has a finite life-spanfinite life-span;;

e)e) it runs under an it runs under an organisation structureorganisation structure with properly with properly defined responsibilities; anddefined responsibilities; and

f)f) it is a it is a temporary structuretemporary structure, created to achieve a specified, created to achieve a specified

Items to be Managed• Functions – scope of workFunctions – scope of work

• Time - schedule Time - schedule

• Resources – cost related Resources – cost related

• Quality - deliverableQuality - deliverable

• Risk – all of the above Risk – all of the above

These items are inter-related and These items are inter-related and a balancea balance is to be is to be struck struck to optimiseto optimise these factors properly under a these factors properly under a project environmentproject environment..

PRINCE (Projects in Controlled

Environments)• Project Definition under PRINCE:Project Definition under PRINCE:

– A series of management stages A series of management stages without overlapwithout overlap

– Focus on the productsFocus on the products to be produced to be produced

– Different Different levelslevels of plan are used of plan are used

– Defines Defines controlcontrol mechanism on mechanism on

• ProgressProgress

• ResourcesResources

• QualityQuality

• RisksRisks

• Product deliveryProduct delivery

Benefits of PRINCEa)a) The project organisation encourages The project organisation encourages user participation at user participation at

all levelsall levels..

b)b) The planning and control mechanisms are The planning and control mechanisms are tailored and tailored and structured to one anotherstructured to one another..

c)c) The The end-product orientationend-product orientation facilitates better estimating, facilitates better estimating, planning and control.planning and control.

d)d) The The stage conceptstage concept provides the basis for conscious provides the basis for conscious management control.management control.

e)e) Quality is planned, controlled and assuredQuality is planned, controlled and assured from the outset from the outset of the project.of the project.

f)f) Procedures provide a good vehicle for encouraging the Procedures provide a good vehicle for encouraging the right people to make the right decisionsright people to make the right decisions at the right time. at the right time.

Principles and Techniques used in

PRINCE

• Project Project OrganizationOrganizational Structureal Structure

• Product-based Product-based PlanningPlanning

• Project Project ControlControl Mechanisms Mechanisms

Project Organization• Project OrganizationProject Organization

– Two Principles:Two Principles:

• A project is a A project is a joint responsibilityjoint responsibility of of users, supplier and customerusers, supplier and customer

• A project has a A project has a distinct nature and distinct nature and demands a special structuredemands a special structure to to manage it as opposite to normal line manage it as opposite to normal line management activitiesmanagement activities

Project Organization

Project Organization

PSC - oversees overall project management

PM - performs day to day management;

TM - oversees the production of end products (Optional);

Project Assurance delegated by PSC assures the quality of end-products.

Project Organization - PSC• Project Steering Committee has the Project Steering Committee has the ultimate responsibilityultimate responsibility

for the project. It is responsible for for the project. It is responsible for assuranceassurance that the that the project remains project remains on courseon course to deliver products of the to deliver products of the required qualityrequired quality to meet the Business Case as defined in to meet the Business Case as defined in the Project Initiation Documents.the Project Initiation Documents.

Executive

- represents the interest of the overall business of the organization- provides overall departmental guidance and assessment throughout the project development cycle

Senior User - represents the users of the system (product);

Senior Technical- represents developer(s) or procurers, the resources which will deliver the technical products of the project.

Project Organization – Project

Assurance• PSC’s responsibility to monitor all aspects of the project’s PSC’s responsibility to monitor all aspects of the project’s

performance and products performance and products independent of PM independent of PM

• Areas to be assured:Areas to be assured:

– viabilityviability of the Business Case of the Business Case

– effectiveness and effectiveness and usabilityusability of the solution of the solution

– feasibilityfeasibility of technical solution of technical solution

– compliancecompliance to organisational and business strategy to organisational and business strategy

– SecuritySecurity

UsersUsers will normally take up project assurance regarding the will normally take up project assurance regarding the BusinessBusiness and and the the User’s interestUser’s interest while while officers from OGCIO or the Supplierofficers from OGCIO or the Supplier may take may take up project assurance regarding up project assurance regarding Technical interestTechnical interest..

Project Organization – PM & TM• Project Manager – Project Manager –

– all team members to report to, all team members to report to, – is responsible for the is responsible for the timely production of all end-productstimely production of all end-products

• agreed agreed qualityquality standards standards• within the within the tolerancestolerances of time set by the PSC of time set by the PSC• and and costcost set by the PSC set by the PSC

• Team Manager (TM) - who possessing specialised Team Manager (TM) - who possessing specialised skills and knowledge, to manage the team to produce skills and knowledge, to manage the team to produce some products. some products.

– Authority delegated by PMAuthority delegated by PM for the beneficiary of the project for the beneficiary of the project

Planning• Product-Based PlanningProduct-Based Planning

– Focusing on Focusing on goalsgoals not the process not the process

– All All productsproducts required can be identified and described before required can be identified and described before developmentdevelopment

• StagingStaging

– Not overlappingNot overlapping stages stages

– facilitate project mgnt and controlfacilitate project mgnt and control

– Checkpoints to assess progressCheckpoints to assess progress

Planning - Staging• Benefits of breaking a project into stages includes:Benefits of breaking a project into stages includes:

– it allows management to assess the project progress by it allows management to assess the project progress by discrete packages of workdiscrete packages of work for review at management for review at management checkpoints (stage start/end);checkpoints (stage start/end);

– it encourages a it encourages a re-appraisal of the Business Casere-appraisal of the Business Case at stage at stage start/end; andstart/end; and

– it requires it requires detailed estimatesdetailed estimates be produced immediately be produced immediately prior to the commencement of each stage enabling more prior to the commencement of each stage enabling more realistic estimating and monitoring.realistic estimating and monitoring.

Planning - Staging• Project Assessment on each stage by PSC to decide Project Assessment on each stage by PSC to decide go go

or not goor not go::

– RequirementsRequirements

a)a) the start and finish the start and finish datesdates of the stage; of the stage;

b)b) the the end-productsend-products to be produced; and to be produced; and

c)c) all of the resources needed to produce the end-products.all of the resources needed to produce the end-products.

Planning - Staging• The The number of stagesnumber of stages for a project is a for a project is a PSC decisionPSC decision

reflecting the level of management time to be spent to reflecting the level of management time to be spent to maintain controlmaintain control

– Stage breaks may be set at checkpoints:Stage breaks may be set at checkpoints:

a)a) Upon the Upon the completion of major end-productscompletion of major end-products (any stage boundary (any stage boundary should not divide a major end-product);should not divide a major end-product);

b)b) Where decisions have to be made about the Where decisions have to be made about the ongoing viability of ongoing viability of the projectthe project; and; and

c)c) At parts of the project, which are the most critical, where At parts of the project, which are the most critical, where visible visible tight control is necessarytight control is necessary..

Planning - Plans• Plans Plans provide informationprovide information as the basis for decision-making as the basis for decision-making

and controland control

• PRINCE provides a PRINCE provides a structured set of technical and structured set of technical and resource plansresource plans to achieve effective technical and to achieve effective technical and managerial control of a project. managerial control of a project.

Planning - Plans• Plans may be classified by levels (project or stage) or by plan types Plans may be classified by levels (project or stage) or by plan types

(technical or resources)(technical or resources)

– By LevelsBy Levels• Project PlanProject Plan

– Progressive monitoringProgressive monitoring– Identify major activities, end-products, major resources requirements, total costsIdentify major activities, end-products, major resources requirements, total costs

• Stage PlanStage Plan– Work responsible by the involved partiesWork responsible by the involved parties– Details required for day-to-day control by PMDetails required for day-to-day control by PM

– By Plan TypesBy Plan Types• Technical Plan (a bar chart or Gantt Chart)Technical Plan (a bar chart or Gantt Chart)

– Identify the sequence of events, timeline, responsibilities, end-productsIdentify the sequence of events, timeline, responsibilities, end-products– Project Technical Plan: mandatory for all projects, identify major control points with the Project Technical Plan: mandatory for all projects, identify major control points with the

projectproject– Stage Technical Plan: for each stage, show all products and technical activities within the Stage Technical Plan: for each stage, show all products and technical activities within the

stage in greater detailsstage in greater details

• Resources PlanResources Plan– Identify type, amount and period of use of the various resources requiredIdentify type, amount and period of use of the various resources required– Project Resource Plan: mandatory for all projectsProject Resource Plan: mandatory for all projects– Stage Resource Plan: may not requireStage Resource Plan: may not require

Planning - Plans

Control• Management by ExceptionManagement by Exception

• Quality ControlQuality Control

• Control MeetingsControl Meetings

• Management of RiskManagement of Risk

• Configuration ManagementConfiguration Management

Control – Management by Exception

• When project When project exceeds the time and resource exceeds the time and resource tolerancestolerances allocated to the PM by PSC allocated to the PM by PSC

– PM should report the problem and recommend recovery PM should report the problem and recommend recovery action to the PSCaction to the PSC

• Keep the PSC resource to min but still can maintain Keep the PSC resource to min but still can maintain the overall control of the projectthe overall control of the project

• ““Tolerance SettingTolerance Setting” technique is used:” technique is used:

– Amount of tolerance allotted on any one stage:Amount of tolerance allotted on any one stage:• In the light of the plansIn the light of the plans

• Degree of riskDegree of risk

• Criticality of that stageCriticality of that stage

• Experience of the PMExperience of the PM

Control – Quality Control• Part of PRINCE methodologyPart of PRINCE methodology

– Control the quality of the product in addition to Time and budgetControl the quality of the product in addition to Time and budget

• Based on Based on Quality PlanQuality Plan

– included in the Project Initiation Document (PID) for included in the Project Initiation Document (PID) for outlining the outlining the overall Quality Expectation and Control of the projectoverall Quality Expectation and Control of the project

– Personnel on Personnel on Project Assurance may be involvedProject Assurance may be involved in reviewing in reviewing the quality of products (quality review)the quality of products (quality review)

• Quality ReviewQuality Review is a quality control technique applied to is a quality control technique applied to supplied the Quality Control Principlessupplied the Quality Control Principles

– Review based on the Product Description on PIDReview based on the Product Description on PID

– Product DescriptionProduct Description contains Quality Criteria and Quality contains Quality Criteria and Quality Checking MethodChecking Method

Control – Control Meetings• Two Levels of MeetingsTwo Levels of Meetings

– By the By the PSCPSC at formal assessment meetings at formal assessment meetings

– By the By the PM/TMPM/TM at Checkpoint meetings/reviews at Checkpoint meetings/reviews

• PSC Meetings:PSC Meetings:

– Only held when there is good reasonOnly held when there is good reason for doing for doing

– Well planned, well structuredWell planned, well structured

– Triggered by eventsTriggered by events rather than by time or progress rather than by time or progress

– Key meetings: Project Initiation Meeting, End-stage Key meetings: Project Initiation Meeting, End-stage Assessment Meetings, Project Closure MeetingAssessment Meetings, Project Closure Meeting

Control – Management of Risk

• PM responsiblePM responsible to ensure that risks are identified, to ensure that risks are identified, recorded and regularly reviewedrecorded and regularly reviewed

• PSC responsible for:PSC responsible for:

– Notify PM of any external risk exposure to the projectNotify PM of any external risk exposure to the project

– Make decision on PM’s recommended reactions to riskMake decision on PM’s recommended reactions to risk

• Risk Log is used by the PM to record and keep track of Risk Log is used by the PM to record and keep track of identified risksidentified risks

• CM is to achieve a CM is to achieve a controlled and traceable product controlled and traceable product changeschanges towards production towards production

• PSC is responsible forPSC is responsible for

– Endorsing the CM PlanEndorsing the CM Plan

– Overseeing all the CM activitiesOverseeing all the CM activities

• PM is authorized to PM is authorized to handle Change Requests – with handle Change Requests – with the tolerancethe tolerance

• PSC or personal on project assurance is PSC or personal on project assurance is responsible for assessing Change Requests by responsible for assessing Change Requests by conducting impact analysis from the views of conducting impact analysis from the views of business, technical or usersbusiness, technical or users

Project Management

• Reading information:Reading information:

– G39_pub.pdf – User Guide on Project Management, G39_pub.pdf – User Guide on Project Management, OGCIO, The Government of the Hong Kong Special OGCIO, The Government of the Hong Kong Special Administrative RegionAdministrative Region• Except for Session 7: Project ActivitiesExcept for Session 7: Project Activities

– Review of Software Project Development CycleReview of Software Project Development Cycle

– http://www.ogcio.gov.hk/eng/prodev/eprodev.htm