Amortization as a tax shield, Changes in operating capital, Budget format, Settlement - spreadsheets - Financial decisions in business management

Amortization as a tax shield

When accounting and evaluating options, it should be borne in mind that depreciation is not taxed, although this is still costs. Therefore, accounting for depreciation in the evaluation of investment will look like (million rubles):

Operating income - 9.8

Less: Amortization - (3,0)

Income before taxes - 6.8

Less: Tax (34%) - (2,3)

Income after taxes - 4.5

Plus: Amortization - 3.0

After-tax money inflow - 7.5.

Changes in operating capital

Working capital in reserves and accounts receivable has two characteristics. First, this part of the investment is largely returned when the project is closed and stockpiles are eliminated. Secondly, when the project is launched, it generates spontaneous free monetary sources in the form of trade credit when purchasing stocks (see Chapter 5 of this textbook). An intelligent account of these sources reduces the amount of investment and increases its effectiveness.

Budget Format

The basis of any budget for the future is the present. The budget for the next year is compiled on the basis of the results of the current year. However, the evaluation of the results of the current year is a problem, because the year has not yet ended. Thus, the budgeting of the next year or future project has one more stage: forecasting the state at the beginning of the new year or at the beginning of the project. This forecast is compiled using the same methodology with the only simplification that the forecast horizon is shorter and, accordingly, the forecast is more accurate. If you do not use the full budget format, and limit yourself to doubling the final data for June to get a forecast for December, the result will be very unreliable. The links between sales, costs and profits, even in a medium-sized firm, are far from directly proportional. The generalized budget format is shown in Table. 12.3.

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Table 12.3

Generic Budget Format

Metrics

Current year

Next year

Fact for today

Balance by the end of the year

Total

year-end

The minimum budget

Desired

Budget

Optimal

Budget

1

2

3

4

5

6

Sales

Cost price

Gross Margin

Other variable costs (list)

Variable costs total

Limit contribution

Fixed costs (list)

Fixed costs, total

Profit before interest and taxes

Interest to the bank

Profit before income tax

Tax

Net Income

The columns are filled in as follows:

(1) from the current earnings report;

(2) is projected on the basis of direct specification of fixed costs and the percentage of variable costs in proportion to sales;

(3) the sum of the columns (1) and (2);

(4) sales forecast, refinement of fixed and variable cost percentages;

(5) introducing managed variables in sales and some variables and fixed costs;

(6) after clarifying the data of column (5) for minima, maxima, constraints, situation and results of negotiations.

If we are talking about a company with several lines of business, budgets for each line are compiled first, then they are analyzed for synergies (joint use of equipment, qualifications, infrastructure, mutual services, etc.) and only then summed up . After agreeing the general figures for a year, the budget items are divided into quarters, months and other periods necessary for the company.

Making calculations - spreadsheets

In the past, the complexity of calculations related to investment projects of even average scales made many of them playing roulette or forcing them to reject them without proper study. Currently, computer programs - electronic spreadsheets allow you to quickly build electronic models with a stable structure without the help of professional programmers. Watching the work of these models is just a pleasure. We change one number, and in a matter of seconds hundreds of numbers on the screen change, giving the user a new version of calculations. The number of calculated options and the accuracy of calculations using spreadsheets grow tens of times.

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