Corporate Accounting Techniques Workshop

1. Remarks for Trainers • Preparation of Presentation • Please adapt the presentation prior to starting the seminar: • - Change left logo in the header • - Change date and trainers name/institution in the footer • Make these changes by clicking on ‘view’ – ‘master’ – slide master’ • Choose some of the tools at the end to open the workshop and free the mind of participants in between by shifting the slide to the position you would like to have it • General Remarks • To use this presentation for training • Please view slides by clicking ‘ view’ • Click ‘slide show’ • Press ‘page down’ to move through slides • Press ‘esc’ to stop at any time • To access support materials for trainer • Click ‘view’ and then click ‘by notes’ • There are trainer notes to help you deliver the program

2. KLAS Retail Division „Finance“

3. A. INTRODUCTION

4. A. INTRODUCTION Contents • INTRODUCTION • COST ACCOUNTING • INVESTMENT ACCOUNTING • PROFIT AND LOSS ACCOUNTING • KEY PERFORMANCE INDICATORS • PURCHASING / NEGOTIATION SKILLS

5. A. INTRODUCTION Training objectives • Throughout this day of training there will be • Theory • Exercises • Tools to take away • The intention of this training is to help you: • Understand general basics of corporate accounting techniques • Understand cost structures and how to influence them • Understand a profit and loss analysis and how it can help to analyse and plan business development • Determine Key Performance Indicators and how they can be tracked and • presented

6. A. INTRODUCTION Your expectations What are your expectations for this Workshop? Are there any special topics which you would like to have discussed?

7. A. INTRODUCTION Training targets, participation • Let us ask ourselves why we are here and where we want to go? • What is accounting all about? • Where do I already use accounting techniques in my daily business? • Where in my daily business do I currently don’t have appropriate data to make the right decisions? • What are the key financials of my business unit? Let us draw a transfer vehicle

8. A. INTRODUCTION Training targets – Transfer Vehicle Rules • Decide what you need to take with you to reach your targets • Pack all these things in or on your vehicle by drawing pictures symbolising the needed baggage • Present your transfer vehicle to the group. • Choose a vehicle to use for your transfer. It can be everything from a horse to a rocket • Draw the vehicle in the middle of a flip-chart paper • Define and describe where you are at the moment (your situation regarding “finance”)… draw a fitting picture on the left of the vehicle • Define a target and describe where you want to be at the end of the workshop… draw a fitting picture on the right of the vehicle We are going to talk about the luggage now and equip you according to your needs!

9. B. COST ACCOUNTING

10. B. COST ACCOUNTING Why cost accounting ?

11. B. COST ACCOUNTING Why cost accounting ? • (a) Planning • Profit planning • Purchase planning • Sales planning • Profitability forecast • Price setting • Comparison of market prices / target and unit costs • (b) Control • Cost-revenue control • Short-term profit/loss calculation • Cost-revenue assessment for operational sections and products • Assessment of economic efficiency (profitability calculation) • Scope and type of costs incurred (cost type accounting) • Inter-company comparison • Price control

12. B. COST ACCOUNTING Planning and controlling Cost accounting is one of the key areas of corporate PLANNING and CONTROLLING. • Cost accounting is used to • Evaluate products or services • Does the market price cover the expenses? • What price do we need to cover the expenses? • What is the value of our inventory? • 2. Evaluate corporate processes • - Shall we outsource certain services? • - Are our processes cost efficient?

13. B. COST ACCOUNTING Cost Cost are ... the value of spendings that belong to a certain product or service … the value of cash resources that has to be spend for a product or service We distinguish between … direct cost … indirect cost

14. B. COST ACCOUNTING Direct costs and indirect costs • Direct costs are costs that occur with production of good or service: • Raw material cost / purchasing costs • Personel costs • Other direct costs • Indirect costs = cost that occur for general operations: • Buildings, rent, electricity, water etc. • Administrative costs, office costs • Marketing costs • Financing costs

15. B. COST ACCOUNTING Fixed and variable costs • Fixed costs • don‘t change significantly with production / sales volume • are directly connected with time periods • Variable costs • change directly with production / sales volume • are calculated in relation to volume

16. B. COST ACCOUNTING Fixed and variable costs

17. B. COST ACCOUNTING Group-Work: What is the cost structure of your business unit? • Please work out in your working group: • Collect all cost related to your business • What are the fixed costs per year of your business unit? • What are the variable costs of each unit sold? • Can you distinguish direct and indirect costs? • Please summarise your results in a table or graph. • Please present the conclusions of your group in plenary!

18. C. COST ACCOUNTING Types of cost calculation? • Three different types of cost calculation can be differentiated: • Cost type accountingWhat type of cost do we have in a certain period? • Cost-centre accountingWhere do the cost occur? • Cost-unit accountingTo which good or service do the costs belong?

19. C. COST ACCOUNTING Cost type accounting • Material costs • Calculated as: value * volume • 2. Personnel costs- Wages- Non-wage labour costs • 3. Energy, maintenance, and other costs • 4. Calculative costsIn cost accounting depreciation is calculated from replacement value and not purchase value (as in general accounting)

20. C. COST ACCOUNTING Material costs = Volume x Value Excursus – Material costs Used volumes can be determined with: Value is determined through: Weighed average prices Inventory method HiFo-Method (highest in – first out) LiFo-Method (lowest in – first out) Fifo-Method (first in – first out)

21. C. COST ACCOUNTING Marginal costing Marginal income is the contribution of a product or service to fixed costs = Selling price – Variable costs If Price > variable costs  improve profitability Price < variable costs  product causes losses Price = variable costs  product is neutral for corporate success

22. C. COST ACCOUNTING Marginal costing - Example What is the marginal income of the product? Product purchasing price: 2.20 Transportation costs (per unit): 0.10 Product regular selling price: 2.90 Product promotional selling price: 1.90 Percentage sold on promotion: 50% Let is try this with KLAS Macaroni in your shop!

23. C. COST ACCOUNTING Break even analysis Break even point = the selling volume from which on additional sales generate overall profit Overall fixed costs Break even point = ------------------------------------- Average marginal income or Overall fixed costs Break even point = ----------------------------------------------------------- Individual Selling Price – Variable Costs of Goods

24. Net revenues C. COST ACCOUNTING Break even analysis Net revenues Costs Overall costs PROFIT Variable costs Break-even-Point LOSS Fixed costs Volume sold

25. C. COST ACCOUNTING Break even analysis - Example Selling PurchasingCurrent volume Price Price per year Product 1 2,45 1,45 1000 Product 2 4,75 2,25 200 Product 3 3,25 1,75 3200 Fixed costs per year: 10.000 What is the marginal income per product? What is the average marginal income (weighed)? Where is the break even point, i.e. how many products on average have to be sold to cover fixed costs? What selling prices can assure no losses with current volumes?

26. C. INVESTMENT ACCOUNTING

27. C. INVESTMENT ACCOUNTING Group-Work: How KLAS is dealing with investments today • Please discuss the following issues in your working group: • What kind of investments are you doing in your business unit? • What is the financial scope of annual investments? • How are investment-decisions currently done? • How are investments being tracked? • Find some examples for investments that paid out and those that did not pay out. • Please present the conclusions of your group in plenary!

28. An INVESTMENT is the commutation of money to other assets. Investments can have many different types: investments in plant and equipment investments in goods or raw materials financial investments investments in manpower etc… C. INVESTMENT ACCOUNTING Investment

29. The main criteria that influence the investment-decision are Overall cost Profit Cost-effectiveness (rentability) Investment accounting can help to determine if a planned investment pays out which of alternative investments is the best an existing asset shall be replaced by a new one C. INVESTMENT ACCOUNTING Investment

30. Total cost C = Fixed cost Cf + variable cost Cv purchase costs a0 Cf = ---------------------------- + interest rate i * a0 /2 expected useful life n Cv = all cost that are dependent on production volumes, such as wages, raw material, energy, rent, etc. Two or more investment alternatives with similar output/capacity can be compared by comparing the overall investment costs. C. INVESTMENT ACCOUNTING Cost comparison method

31. Which of these two cleaning machines should be bought? Machine 1Machine 2 Purchase costs 12.000 15.000 Expected useful life 5 6 Capacity (sqm per hour) 25 25 Salary (per year) 2 x 3.000 3.000 Detergents (per year) 600 1.200 Calculated interes rate 8% 8% C. INVESTMENT ACCOUNTING Cost comparison method – Example

32. Profit P = Turnover T – Cost C Turnover T = Sales volume x * Price p purchase costs a0 Cost C= ---------------------------- + interest rate i * a0 /2 + Cv expected useful life n Two investments con be compared by comparing the expected profit from two alternative investments. C. INVESTMENT ACCOUNTING Profit comparison method

33. Return on investment is the ratio of expected profit vs. investment value of the necessary investment. Profit P Return R = ------------------------ Investment A0 C. INVESTMENT ACCOUNTING Return on investment method

34. None of the three methods reflects that future payments or costs have a different value than current (because of inflation). Cost comparison method can only be used if the investment alternatives are very similar, because it does not reflect different output. Profit comparison method does not reflect ratio of expected profit vs the necessary investment, thus can only be used if there is no limitation in capital. C. INVESTMENT ACCOUNTING Problems of the three methods:

35. Dynamic Investments Decision Methods reflect the fact that payment or cost that are in the future are not as much worth as payments today. Why? Because a payment today can be re-invested and generate additional returns (easiest way is to put on a bank account and get interest rate). C. INVESTMENT ACCOUNTING Dynamic investment decision methods

36. If the series of payments is consistent (same payment every year) the value today (so called capitalized value) can be calculated easily (1+i)n - 1 Capitalized value C0 = - Investment A0 + d * ( ------------- ) i*(1+i)n d = annual surplus from investment If the series of payments is not consistent the current value of each future payment has to be calculated separately. C. INVESTMENT ACCOUNTING Dynamic investment decision methods

37. D. PROFIT AND LOSS

38. D. PROFIT AND LOSS ACCOUNTING Definition • A profit and loss analysis is an overview on • Turnover • Variable costs • Fixed costs • Overall profit or loss • for a certain period of time. • Profit and loss accounting can help to • Determine key drivers of entrepreneurial success or failure • Plan for periods ahead

39. D. PROFIT AND LOSS ACCOUNTING Example for a profit and loss analysis:

40. D. PROFIT AND LOSS ACCOUNTING Group work: Profit and loss analysis • Create a rough profit and loss analysis for your business unit for the last year • Which are the main drivers for success or failure? • Plan the profit/loss for the coming two years. How can you achieve a profit-target? • Please summarise your results in a table. • Please present the conclusions of your group in plenary!

41. E. KEY PERFORMANCE INDICATORS

42. E. KEY PERFORMANCE INDICATORS Key performance indicators • Key Performance Indicators (KPI) are used to • evaluate entrepreneurial success of a business unit • compare different business units • allow management to get a quick overview on financial • situation • allow investors to get an overview on corporate situation • KPI are differing from business to business. • KPI are dependent on corporate targets.

43. E. KEY PERFORMANCE INDICATORS Examples: Avg. selling Price (ex VAT) - Avg. purchasing price Average trade margin = --------------------------------------------------------- Avg. selling price (ex VAT) Profit Profit Margin = -------------------- Turnover Profit Profit per shelf metre = ----------------------------------------- Selling space (shelf metre) Turnover Turnover per employee = --------------------------------- Number of employees

44. E. KEY PERFORMANCE INDICATORS Group Exercise: KPI in your business unit • What are the strategic targets of your business unit? • Which KPIs could best reflect the business situation vs. the targets? • How can these KPI help me to make the right business decisions? • How can the data to calculate these KPIs be collected? • Please present the conclusions of your group in plenary!

45. F. PURCHASING & NEGOTIATION SKILLS

46. F. PURCHASING & NEGOTIATION SKILLS Does and Don’ts • Why negotiation skills are important for your business: • Successful negotiations lead to better prices or services from your direct suppliers • Professional negotiations lead to better atmosphere with your suppliers • Internal meetings can be more time effective and target-oriented • Professional negotiation skills improve the relationship with your employees

47. F. PURCHASING & NEGOTIATION SKILLS Top 10 rules of negotiating: • Always keep your target in mind • Try to convince not to persuade • Create win-win-situations, where both parties have a benefit • Ask your negotiation partner for his needs and problems • Listen actively • Always stay calm and factual • Lead the conversation with questions • Keep eye-contact – eyes cannot lie • Think and phrase positively • Always formulate precise results and next steps

48. F. PURCHASING & NEGOTIATION SKILLS Does and Don’ts • Positive • Up-to-date opening (don’t talk about weather • or politics) • Understand your conversation partners • interests • Build on existing situation • Listen actively • Speak pictorial and easy • Address conversation partner with his name • Compliment your conversation partner • Ask questions • Summarize consensus • Negative • Use platitudes • Be self-centred • Ignore problems • Cut-conversation partner • Use foreign words • Forget names • Criticise unimportant aspects • Talk more than listen • Discontinue without result

49. F. PURCHASING & NEGOTIATION SKILLS Get to know your conversation partner

50. F. PURCHASING & NEGOTIATION SKILLS Negotiation tactics: The tough negotiation style Interest compliant ____________________________ tough Power submissive ___________________________ dominating Climate jovial, personal ________________________ hostile, formal Flexibility open minded __________________________ repetitive