Ignacio Lezaun

English edition
2021

Fundamentals of Finance
Contents of the course

1. The role of the Chief Financial Officer

2. Statement of cash flows
3. Working capital management
4. Short-term finance instruments
5. The time value of money
6. Conclusions
 Treasury plan: Solution UNIT 1

First we have to identify the monthly receipts and payments, since the planned sales and
purchases are not collected and paid in the same month in which they occur. Likewise,
collections and payments include the corresponding VAT. The sales and purchases of
each month will be the following:

January February March April May June July August September October November December
Sales 25.000,00 € 32.500,00 € 36.800,00 € 42.000,00 € 52.500,00 € 54.000,00 € 65.200,00 € 22.500,00 € 56.700,00 € 49.000,00 € 55.000,00 € 68.500,00 €
VAT charged 5.250,00 € 6.825,00 € 7.728,00 € 8.820,00 € 11.025,00 € 11.340,00 € 13.692,00 € 4.725,00 € 11.907,00 € 10.290,00 € 11.550,00 € 14.385,00 €
Total 30.250,00 € 39.325,00 € 44.528,00 € 50.820,00 € 63.525,00 € 65.340,00 € 78.892,00 € 27.225,00 € 68.607,00 € 59.290,00 € 66.550,00 € 82.885,00 €

Will be collected in April-2021 (2 months)….

Will be collected in March-2021 (2 months)

 January February March April May June July August September October November December
Purchases 17.500,00 € 28.000,00 € 15.000,00 € 24.000,00 € 25.000,00 € 30.000,00 € 52.000,00 € 30.000,00 € 28.000,00 € 35.000,00 € 40.000,00 € 12.000,00 €
Input VAT 3.675,00 € 5.880,00 € 3.150,00 € 5.040,00 € 5.250,00 € 6.300,00 € 10.920,00 € 6.300,00 € 5.880,00 € 7.350,00 € 8.400,00 € 2.520,00 €
Total 21.175,00 € 33.880,00 € 18.150,00 € 29.040,00 € 30.250,00 € 36.300,00 € 62.920,00 € 36.300,00 € 33.880,00 € 42.350,00 € 48.400,00 € 14.520,00 €

To be paid in March-2021 (1 month)….

To be paid in February-2021 (1 month)

January February March April May June July August September October November December
Supplies 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 € 1.400,00 €
Other expenses 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 € 500,00 €
Input VAT 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 € 399,00 €
Total 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 € 2.299,00 €

To be paid in the same month (cash)….

To be paid in the same month (cash)

TEMA 1: Empresa y el papel del director financiero

 Estimation - quarterly VAT Settlement:

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Output VAT 19.803,00 € 31.185,00 € 30.324,00 € 36.225,00 €

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Input VAT 13.902,00 € 17.787,00 € 24.297,00 € 19.467,00 €

VAT Settlement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Output VAT 19.803,00 € 31.185,00 € 30.324,00 € 36.225,00 €
Input VAT 13.902,00 € 17.787,00 € 24.297,00 € 19.467,00 €
VAT payable if (+) 5.901,00 € 13.398,00 € 6.027,00 € 16.758,00 €

To be paid in Jul-2021….

To be paid in April-2021

TEMA 1: Empresa y el papel del director financiero

 We have to breakdown the payroll payment and the payment of personal income tax:

January February March April May June June-Extra July August September October November December Dec-Extra
Payroll - Gross 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 € 10.000,00 €
IRPF Withholding 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 € 1.500,00 €
Social Sec-workers 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € - € 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € 700,00 € - €
Payroll - Net 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 8.500,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 7.800,00 € 8.500,00 €
Social Sec-Company 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € - € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € 3.500,00 € - €
Social Sec - payable 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € - € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € 4.200,00 € - €

Total Social Sec payable is the sum of the quota that

corresponds to the company and to the worker. It is
paid the following month

Quarter 1 Quarter 2 Quarter 3 Quarter 4

IRPF Settlement 4.500,00 € 6.000,00 € 4.500,00 € 6.000,00 €

To be paid in Jul-2021….

To be paid in April-2021

TEMA 1: Empresa y el papel del director financiero

 The details of the monthly payment of the loan instalments are the following:

January February March April May June July August September October November December
Installment 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 € 6.334,96 €

Paid in the same month

Paid in the same month

TEMA 1: Empresa y el papel del director financiero

 The monthly treasury budget would be the following:
2021 January February March April May June July August September October November December
111,950.00 -47,097.67
Opening balance € 48,316.04 € 38,007.08 € 13,743.12 € 3,883.17 € -1,262.79 € -9,826.75 € -28,883.71 € € -25,139.63 € -62,955.58 € -57,332.54 €

Receipts                        
Sales 24,500.00 € 31,500.00 € 30,250.00 € 39,325.00 € 44,528.00 € 50,820.00 € 63,525.00 € 65,340.00 € 78,892.00 € 27,225.00 € 68,607.00 € 59,290.00 €
Total receipts 24,500.00 € 31,500.00 € 30,250.00 € 39,325.00 € 44,528.00 € 50,820.00 € 63,525.00 € 65,340.00 € 78,892.00 € 27,225.00 € 68,607.00 € 59,290.00 €

Payments                        
Purchases 45,000.00 € 21,175.00 € 33,880.00 € 18,150.00 € 29,040.00 € 30,250.00 € 36,300.00 € 62,920.00 € 36,300.00 € 33,880.00 € 42,350.00 € 48,400.00 €
Supplies and other
exp. 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 € 2,299.00 €
Payroll 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 16,300.00 € 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 7,800.00 € 16,300.00 €
Social Security 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 € 4,200.00 €
Loan installment 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 € 6,334.96 €
VAT payment 15,000.00 € 5,901.00 € 13,398.00 € 6,027.00 €
IRPF payment 7,500.00 € 4,500.00 € 6,000.00 € 4,500.00 €
Corp. Tax payment 6,250.00 €
Total payments 88,133.96 € 41,808.96 € 54,513.96 € 49,184.96 € 49,673.96 € 59,383.96 € 82,581.96 € 83,553.96 € 56,933.96 € 65,040.96 € 62,983.96 € 77,533.96 €

-63,633.96 -10,308.96 -24,263.96 -19,056.96

Net cash flows € € € -9,859.96 € -5,145.96 € -8,563.96 € € -18,213.96 € 21,958.04 € -37,815.96 € 5,623.04 € -18,243.96 €

• -28,883.71
The Opening balance is the Closing balance of the previous month. In January, that of the close-25,139.63
of 2020 (see Balance sheet)
Closing balance 48,316.04 € 38,007.08 € 13,743.12 € 3,883.17 € -1,262.79 € -9,826.75 € € -47,097.67 € € -62,955.58 € -57,332.54 € -75,576.50 €
• The sales collections in January correspond to the sales of November-2020 and those of February to those of December-2020, those
of March to those of January and so on.
• Payments for January purchases refer to purchases from December-2020 (see Balance), those from February to January ...
• The January Social Security payment corresponds to that of December-2020 (see Balance), February payment to January ...
• Tax payments based on the settlement period in each case.

TEMA 1: Empresa y el papel del director financiero

Conclusions UNIT
1
1. If we forecast the profit and loss account expected for 2021 we will see that
the company obtains a positive result that generates a profit:

PL Forecast 2021 2021

Sales 559,700.00 €
Purchases -336,500.00 € • We have considered an annual depreciation of € 10,000.-
Supplies and Other Expenses -22,800.00 € • Interest corresponds to the part of the loan instalment that is
Payroll -140,000.00 € not repayment of principal
Social Security - Co. -42,000.00 € • The corporation tax has been estimated at 25% of the profit
Depreciation (*) -10,000.00 € before tax
Operational income 8,400.00 €
Interest -1,019.50 €
Profit before taxes 7,380.50 €
Corporate tax -1,845.12 €
Net Income 5,535.37 €

2. The company will have a serious cash flow problem as of May since it will not have the
capacity to generate liquidity to meet all its commitments.

3. Collection or payment policies may be revisited

4. Bank financing would help fund the investment in working capital

Balance sheet UNIT 1

Accounting perspective Financial perspective

NON-OPERATING
ASSETS

EQUITY EQUITY

ASSETS
FINANCIAL
DEBT
BUSINESS
LIABILITIES

 Double accounting: Every change in the balance sheet has a corresponding effect
 The financial perspective explains how the financiers look at the company
DNA of a CFO
Career Advice from CFOs Aecon, Canadian Tire,
UNIT 1
Molson-Coors and Walmart
April 2014
 UNIT 1
Recap

 CFO responsibilities
 Two roles:
1. Controller
2. Treasury
 Importance of CFO role
 Treasury plan – crucial for survival
Exercise: Dividends UNIT 1

A company has the policy of increasing the dividend (i.e.

distribution of profits to its shareholders) per share by 5% per
year, but never exceeding a pay-out of 40%. If the dividend from
the previous year was € 1.1.- / share, and this year's net profit was
€ 400,000.-, will the company comply with its policy of increasing
the dividend this year? What dividend per share should you
distribute? The company has issued 200,000 shares.

Note: the pay-out is the percentage of profits that is allocated to

the payment of dividends.
 UNIT
2

Unit 2:
Statement of cash flows
OBJECTIVES UNIT
2

2.1 Understand differences between net income and cash flow:

a. Revenue and collections
b. Expenses and payments

2.2 Calculating cash flow

c. Direct versus indirect method
d. Calculating cash flow activities
e. Cash flow statement
f. Exercise

2.3 Cash flow metrics and calculations

g. EBIDTA as a proxy
h. Operating cash flow
i. Free Cash Flow (FCF)
j. Free Cash Flow to Firm (FCFF)
k. Free Cash Flow to Equity (FCFE)
l. Exercise
 UNIT
2

2.1 Understanding net income and cash

flow
The difference between net income and cash
flow UNIT
2
To understand the difference between net income and cash flow, we must first understand:

Revenue and collection

(REVENUE ≠ COLLECTION)

Expenses, cost and payment

(EXPENSES, COST ≠ PAYMENT)
The difference between revenue and
collection UNIT
2
◼ Revenue (sometimes known as sales): 

Amount generated in the process of sale of a product or provision of a service

in the exercise of the ordinary activity of the company, i.e. amount generated
by operation activities.

◼ Collection: 

This is simply the amount of cash received by the firm from customers for sale
of goods or provision of services
The difference between expenses and
payment UNIT
2
◼ Cost of sales

Resources consumed in the manufacturing process or in the provision of a

service.
Examples: direct labour attributed to the production process, raw material used in the manufacture of a
product ...

◼ Expense

Resources consumed for the business to function but not linked to the
production or provision of the service
Examples: commercial campaign, insurance, manager's salary …
◼ Payment: 
Cash outflow to meet cost or expenses
Example: bank transfers to pay for the commercial campaign
 UNIT
2

What is net income?

What is net income?
UNIT
2
◼ NET INCOME = REVENUE MINUS EXPENSES MINUS COSTS

◼ Sometimes referred to as Net Profit

◼ Relates to the real flow of goods and services

◼ Net income is calculated by preparing the income statement

◼ Helps us to analyse the economic viability of a company or business, and

helps us understand if a project is profitable or not for its shareholders
◼ Sometimes cost is recorded as part of expense
Income statement: Example
UNIT
2
 Income statement: Example
Apple Inc. UNIT
Consolidated Income Statement 2
US$ in millions
12 months ended: Sep 26, 2020 Sep 28, 2019 Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015
Products 220,747 213,883 225,847 196,534 — —
Services 53,768 46,291 39,748 32,700 — —
Net sales (legacy) — — — — 215,639 233,715
Net sales 274,515 260,174 265,595 229,234 215,639 233,715
Products (151,286) (144,996) (148,164) (126,337) — —
Services (18,273) (16,786) (15,592) (14,711) — —
Cost of sales (legacy) — — — — (131,376) (140,089)
Cost of sales (169,559) (161,782) (163,756) (141,048) (131,376) (140,089)
Gross margin 104,956 98,392 101,839 88,186 84,263 93,626
Research and development (18,752) (16,217) (14,236) (11,581) (10,045) (8,067)
Selling, general and administrative (19,916) (18,245) (16,705) (15,261) (14,194) (14,329)
Operating expenses (38,668) (34,462) (30,941) (26,842) (24,239) (22,396)
Operating income 66,288 63,930 70,898 61,344 60,024 71,230
Interest and dividend income 3,763 4,961 5,686 5,201 3,999 2,921
Interest expense (2,873) (3,576) (3,240) (2,323) (1,456) (733)
Other income (expense), net (87) 422 (441) (133) (1,195) (903)
Other income (expense), net 803 1,807 2,005 2,745 1,348 1,285
Income before provision for income taxes 67,091 65,737 72,903 64,089 61,372 72,515
Provision for income taxes (9,680) (10,481) (13,372) (15,738) (15,685) (19,121)
Net income 57,411 55,256 59,531 48,351 45,687 53,394
   
 Income statement example: Spotify
UNIT
2

Net income