[Book Summary] Financial Management Canvas

Last month (December) I found a wonderful books one of those is Financial Management Canvas by. Kho Sin Hien and Fransiska Ida Mariani. This book will tell you how easy to learn and analyze financial report by using infographic. Although this book is easy to understand there are some minor mistake like miss match between picture and the text written in this book. But let's focus on the good things and what I have learn through this book.

First is Working Capital. Working capital can be explained that after fulfilled payment of current liabilites there are some cash left in the current asset.

Working capital can be calculated by this formula:

Working Capital = Current Asset - Current Liabilites

And you can use this to calculate Working Capital Turnonver (WCT):

Working Capital Turn Over = Sales / Working Capital

The larger the resulting number from this ratio the more efficient the company. You can learn more about this ratio on this link : https://www.investopedia.com/terms/w/workingcapitalturnover.asp

Basically, this ratio inform you if the company still have enough capital to generate sales. The company that have not enough capital have to increase their long-term debt or the worst they get liquidate.

Secondly, I learn about Key Performance Indicators (KPI) it is a driver of the ratio of the company. For example return  on asset KPI of this ratio is Profit Before Interest Tax (PBIT) which we can look through to how much the cost of goods sold of the company and their other expense to generate large PBIT.

The integrated key performance indicators:
1. Not all KPI is equally important, for example trading company the important ratio of this kind of company is receivable turnover and inventory turnover. On the other hand, the important ratio of manufacture company is asset turnover. If we know which ratio that lead to performance driver for the larger KPI. Furthermore, this operational performance ratio can be explained for KPI which related to productivity.

2. ROA and Financial leverage (Solvability) is a KPI that support the achievement of return on equity (ROE) KPI.

3. Beside for shareholders, ROO is KPI which also for high-level management that can be interpreted as ratio that related to value of the company and receive dividend.

Performance Driver for Profitability

Details :
A = Profit Margin

Profit Margin = PBIT / Sales

B = Return on Assets

Return on Assets = PBIT / Assets

C = Assets Turnover

Assets Turnover = Sales / Assets

By using picture above we can learn that the value PBIT related to COGS and expenses. While, return on assets can be interpreted how much profit before interest tax (PBIT) generates by it's assets.

ex of KPI:
1) %Material to sales
2) %Factory overhead to sales
3) %Employee compensation to sales
4) %Other expenses to sales

More about Return on Equity (ROE)

In this book I really learn very well, that ROE not only just a ratio measure how much net profit generate by it's equity. But, we can learn how to value the true Return on Equity. I will explain this by using picture below:

There are 3 (three) kind of company balance sheet base on the picture below:

In this picture we can figure that PT. C have the highest Return on Equity. It's because PT. C operate using huge debt so the equity looks small and make ROE look larger than other company. In Conclusion, we learn that we can't just make a decision base on how large the ROE generates by the company but we have to determine performance driver which make the result of the ratio.

Characteristic of the KPI :

1) KPI will support anything that have any data

example : receivable turnover will support assets turnover and also liquidity ratio.

If there is middle-management the KPI driver is how much receivable turnover in total days so on it's implementation the KPI is how many receivable not taken.

Okay, I think I will end my summary in here. Of course it's just a little summary you can learn more by buy the books but I think if there any revised version of this book would be better.