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Financial Reporting. What is it?. Measure performance of business to guide decision making Internal and external reporting Different users… - Management - Investors & analysts - Banks - Employees - Government - HMRC - Others ? … focus on different things in the financial statements.
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What is it? • Measure performance of business to guide decision making • Internal and external reporting • Different users… • - Management- Investors & analysts • - Banks - Employees • - Government- HMRC • - Others? • … focus on different things in the financial statements. 1
What does it look like? • Financial information generally comprises 3 primary statements: • Profit & loss account:- Measures financial performance over a period • Sales x • Cost of sales (x) • Operating expenses (x) • Tax (x) • Interest (x) • Net profitx • Balance sheet:- Indicates financial status at a point in time • Assets x • Liabilities (x) • Net assets x • Shareholders’ funds x • Cash flow statement:- Measures changes in cash over a period • Net profit x • +/- non cash items(x) • Operating cash (x) • Tax paid (x) • Interest paid(x) • Net cash flowx 2
How do we produce it and ensure accuracy? • Processes and systems in place to record financial information • Framework of internal control to ensure numbers are accurate • Consolidation across the business: The Edrington Group Whisky production Rum production Selling businesses Blending and bottling • Scotland • SAP system • GBP currency • Dominican Rep • BPIX system • DOP currency • Americas, EMEA, Asia • SAP Intrepid • Every currency! • Review and audit of financial information 3
Internal financial reporting • Primarily to provide management with information on which to make business decisions. • Management identifies Key Performance Indicators (KPI’s) – the measurements which tell us whether we are operating profitably or not - and tracks actual performance against budgeted targets • KPI’s can be financial and non-financial. At Edrington we broadly separate financial KPI’s into three categories • Operational (making)Commercial (selling)Group (overall) • Whisky cost variances Cased contribution Consolidation • Supply chain variances - by brand & market Overheads • Logistics variances A&P spend Interest • Distillation production cost/loa - by brand & market Currency • Cask investment Taxation • Stock on hand S/holder return 4
KPI page 5
External financial reporting • Primarily to provide investors, banks and authorities with information on which to make their decisions. • Format of statutory reporting governed by law and accounting rules. For UK private companies, only annual report required. • Annual report requires to be audited by independent auditors • Tax returns are submitted to the HMRC together with the statutory financial statements. • Banks and private lenders request access to both internal and external financial information. • They are interested in ability of company to generate cash for loan repayment. 6
External financial reporting – bank covenants • Banks commonly use ratios to determine whether a company has sufficient profit and cash flow to meet its loan repayments. These are generally used to assess whether the “gearing” of the company is appropriate. • Simply put, gearing is the level of debt in a company, relative to net assets owned by shareholders (shareholders’ equity). A highly geared company will have a lot of debt, with minimal equity. It will need to generate significant profit to repay loan interest and is considered higher risk. This also applies to nation states! • Common ratios used to measure gearing are: • Net debt/EBITDA - EBIT/ Net interest • The bank sets targets for these ratios called covenants. If the company fails to meet the target, the cost of borrowing (interest) goes up, and the bank can ultimately decide to ‘call in’ the loan which could put the company out of business. 7
