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Predictive Analysis
Presented by: Alan Miltz BSc, Bcomm Hon, ACA, ICMA
InMatrix Technologies Pty Ltd
Predictive Analysis
What don’t we know?
Known
by
others
Not
known by
others
Known
by
us
Common
knowledge
Competitive
knowledge
Not
known
by us
Blind
Spot
Unknown
The Funnel Analogy
Sustainable Competitive
Advantage
Marketing
Prime
Moving
Strategies
Operations
Innovation
Enabling
Strategies
Human Resources
Finance
Predictive Analysis
Finance is the tool to measure Marketing,
Operations and People
For Example:
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
How does Inventory impact on Cash Flow?
What are the implications of lead times on
Cash Flow?
How do I pay bonuses?
Predictive Analysis
What is more important
1. the Profit and Loss?
2. or the Balance Sheet?
Predictive Analysis
1. Profitability
 Also known as return on sales (ROS)
 Calculated as Profit/Sales as a %
 The definition of profit is the critical issue
 The calculation should be based on profit before
interest and tax
Predictive Analysis
Profitability cont:
 Profit before interest and tax (PBIT) or (EBIT) is the
operating profit
 Profitability should be calculated before the effects
of the business’s external funding
 Profitability should also exclude abnormal or
extraordinary items
 What about tax? Is it an operating cost?
Predictive Analysis
Profitability cont:
Advantages
 Simple
 Commonly used
Disadvantages
 Ignores the balance sheet
 Relatively easy to manipulate
 Short term measure
Predictive Analysis
2. Activity
 Activity is Sales/Net Operating Assets
 The key word is Operating
 Also known as Asset Turnover
Predictive Analysis
Activity
 Activity indicates the level of balance sheet
efficiency.
 If a company has an activity of 4, this indicates that
for every $4 of sales generated, a $1 of Net assets
is required.
Predictive Analysis
Take two businesses
Company A is a Supermarket
Company B builds Ships
 A has Net operating assets of 200,000 and makes a
profit of 20,000 on sales of $2,000,000
 B has Net operating assets of 1,000,000 and makes
a profit of 100,000 on sales of $2,000,000
Predictive Analysis
Which business would you rather be in?
 A has low profitability and high activity
 B has low activity and high profitability
What if we combine the two ratios?
ROCE Flowchart
Rev
-
Cogs
O/hds
=
EBIT
Rev
Curr
Assets
+
Curr
Liabs
+
Non
Curr
=
Net Op
Assets
Profitability
ROCE %
Activity
Predictive Analysis
ROCE = Profitability x Activity
ROCE = EBIT/Sales x Sales/Net Operating Assets
ROCE = EBIT/Net Operating Assets
ROCE is also known as RONA
Predictive Analysis
Funding
(E +ND)
Cost
Net
Operating
Assets
Earnings
Predictive Analysis
Example: ROCE vs. Interest rate
Company C has the following balance sheet
C borrows at 10% and has a ROCE of 8%
Equity + Net debt
1,000 + 7,000
Interest, 700
= Net operating assets
=
8,000
EBIT, 640
Providing a Loss of 60 !
Predictive Analysis
The company has the following choices:

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Refinance at less than 8%
Increase profit to over $700
Sell off any unused assets
Put in equity
If the owner puts in equity,
have they made a good investment ?
Predictive Analysis
An indicative ROCE is therefore at least equal to the
cost of borrowed funds
Advantages
 Combines the P&L and Balance sheet into one measure
 Simple
 Comparable across businesses
 Guide for investment decisions
 Widely used
Predictive Analysis
Disadvantages
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Short term measure
Manipulable
Doesn’t encourage long term decision making
Ignores the impact of funding on the business
Lack of a definitive method for calculating
Ignores the effect of tax
Ignores the time value of money
Predictive Analysis
Balance Sheet

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Inventory
Accounts Receivable
Accounts Payable
Fixed Assets
Other
Conclusion
What should all companies be performing on
an ongoing basis?
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What if Analysis – I.e. ‘What if my Days Receivable were to be
reduced from 70 to 55 days?’
Goalseeking – I.e. ‘How can I reduce my Cash Flow from
-$300,000 to zero?’
Variance Analysis – compare performance, and analyse growth
over two years
Communicate Finance to non Financial people
Compare one business outcome to another
Projection
What if analysis
Goalseek
Goalseek
Variance Report
Assess Profitability
over two seasons:
Compare Revenue% and
Gross Profit%
Graphic screens
Business
Drivers
Business
Result
Optimist KPI
Roll Forward
Key in
Next Year’s
Targets