Financial Management in Foreign Companies Lectures 2

Financial Management in Foreign Companies Lectures 2 & 3: « Guidelines »

TABLE OF CONTENTS I. Purpose of financial management. II. FM and underlying business. III. Aim of a company. IV. Which accounts to produce? February 2014 2

I- Purpose of financial management 1. 1 - Accounting: the basement of FM What is accounting? - A LANGUAGE!!! - It translates economic and financial realities into figures so as to make them understandable and handable by anybody who “speaks” the language. - Double-entry (modern) accounting is a system in which data are entered in 2 different accounts (credit and debit) which enables it to prevent most of basic mistakes: “accounts need to balance”. Who invented “modern” accounting? - Officially, Fra Luca Bartolomeo de Pacioli, an Italian mathematician, Franciscan friar and collaborator with Leonardo da Vinci in order to help Venetian merchants to control their business during the 15 th century. - In reality, most probably the antique Egyptians (3 700 years ago). The scribes precisely accounted basically every economic activity for tax collection purposes. February 2014 3

I- Purpose of financial management 1. 2 - What is FM use for? All processes based on financial documents that enable managers to: Run the business (i. e. like a road map, or GPS): - Define clear cut short, mid and long-term goals; - Assess performances; - Provide forecast views; - Support decision making process (what if? ); - Reduce risk. Communicate with: - Shareholders; - Banks; - Administration; - Business community; - As well as internally. February 2014 Report to authorities: - Taxes; - Statistics. 4

II- FM and underlying business Can FM be independent from understanding underlying business? NO, NO and NO!!! Only in mathematics do number exist per se. In FM (or in physics) they represent something. So you absolutely need to understand that something. Doing proper FM management requires understanding: - The company and its operations; - Its business and the industry it is a part of; - Its economic, legal and financial environment. February 2014 Focus is put here on industry and economic environment understanding. 5

II- FM and underlying business 2. 1 - The swine industry value-added chain February 2014 6

II- FM and underlying business 2. 2 - “ 5 forces diagram” - TEMPLATE February 2014 7

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to Hog production In the future, slaughterhouses will constitute an oligopoly - as it happened in most of the countries because there are huge economies of scale in that business. February 2014 8

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to Hog production Vertical integration into feed production is an absolute must. February 2014 9

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to Hog production February 2014 10

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to Hog production Competing in the hog industry requires: - Cost efficiency thru improvement of technical performances shall be the dayto-day concern of management. - Product differentiation thru “European type hogs” (low fat content and stable carcass weight). - Branding of animals and meat, potentially thru creation of own retail network. February 2014 11

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to Hog production February 2014 12

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to “Multiplication” February 2014 13

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to “Multiplication” Vertical integration into feed production is an absolute must. Establishing a long term relationship with the genetic R & D supplier is a key success factor in business. February 2014 14

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to “Multiplication” February 2014 15

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to “Multiplication” February 2014 16

II- FM and underlying business 2. 2 - “ 5 forces diagram” applied to “Multiplication” February 2014 17

II- FM and underlying business 2. 2 - “Hog production” vs. “Multiplication” Otradagen: - is focusing on multiplication; has got its own feed-mill; has got the strongest brand-name for genetics in the market (Danavl); has a long lasting contractual relationship with genetic R&D supplier; is the most efficient swine company in Russia from a technical performance point of view (source NSS); differentiates thru use innovative technology and animal welfare focus. February 2014 18

II- FM and underlying business 2. 3 - Supply and Demand of Carcasses Russia is still heavily relying on imports for supplying pork meat to its citizens. The domestic swine and meat market is not a “free” market because, among others, quotas and import duties have been implemented. In order to run a pig company in Russia it is mandatory to understand: - how these market distortions influence “Supply” and “Demand” and the resulting market price; - why the state authorities have decided to do that. For purpose of simplification, we will consider the “carcass” market and make the assumption that only carcasses are imported (vs. livestock and cuts in reality) and that quotas and duties apply only to that good. In a second stage, we will qualitatively try to understand how the things are running at the “hog” market level. February 2014 19

II- FM and underlying business 2. 3 - Supply and Demand of Carcasses February 2014 20

II- FM and underlying business 2. 3 - Supply and Demand of Carcasses In implementing import quotas and duties, Russia’s government increased market price compared to an “open / free market” situation which obviously benefits to producers (and quota holders and State). Consumers pay extra margin to the domestic producers with the hope that the latter will use the money to expand production so that Russia will achieve self sufficiency (move of the domestic supply curve to the top of the diagram) generating in the long run lower market prices, i. e. in line with the worldwide market. The government reduced barriers to entry in this highly capitalistic business in subsidizing the high interest rates charged by Russian banks, thus pushing into the same direction as the quota / duties. A more detailed analyses shows that these subsidies are indeed financed by the cash-in the government makes on import duties. February 2014 As a consequence, industrial production of pigs has been multiplied by 4. 5 since 2005 when program was launched, but there is still along way to go: Russia imported 25% of its pork meat consumption in 2013. 21

III- Aim of a Company 3. 1 - Contribution vs. Output February 2014 22

III- Aim of a Company 3. 2 - Who runs the show? The contributions of the different business partners allow the company to create “Value Added” = Sales - Purchases. Value Added is shared among the company (asset base) and rewards the different business partners (wages, taxes, interests and profits) compensating for their respective resource contribution (labor, infrastructure, loan, capital). Bot the initiative of creating the company and the highest risk level go to the shareholders which make them standing in the position of the “conductor” of the orchestra. Provided that the other business partners get their reward according to business contracts (wages, interests) or law provisions (taxes), the shareholders can manage the company in short and long term so as to maximize their interest, i. e. ROE. In a capitalistic economy, the shareholders run the show! February 2014 23

IV- What accounts to produce? 4. 1 - 3 different statements The Balance sheet is a “picture” at a given point in time outlining the Assets, Debts and Equity of the company. The Profit & Loss Statement outlines the revenues, costs and profits generated by the company during a given period of time. The Cash Flow Statement outlines the in and out flows of money during a given period of time. All 3 statements provide valuable information about the company which cannot be fully understood with only 1 or 2 of these statements. As a consequence: Always go for the full set. February 2014 24

IV- What accounts to produce? 4. 2 - Always go for the full set February 2014 25

IV- What accounts to produce? 4. 3 - IFRS vs. Russian GAAP February 2014 26