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17 Chapter Accounting (2/28, 3/2) The Accounting Cycle Objectives of Financial Statement Analysis Find out how liquid is an enterprise Find out how profitable is an enterprise Find out how efficient is an enterprise Solvency Ratios Quick Ratio = Cash + Marketable Securities + Receivables / Current Liabilities Current Ratio Debt-to-Equity Ratio Profitability (Performance) Ratios Return on Sales Return on Equity Earnings per Share Activity Ratios Inventory Turnover = COGS / Avg. Inventory Accounts Receivable Turnover = Net Accounts Receivable / Net Daily Credit Sales Caveats on Financial Statement Analysis Industry matters! Size matters! You can be tighter in some areas of your financial structure, if you have more leeway in others. The DuPont Model a "simple" way to combine the strengths of ratio analysis. (Net Income / Sales) X (Sales / Total Assets) = Net Income / Total Assets Return on Investment Chapter 18 Corporate Finance (3/5) Financial Planning Process Forecast cash flow o Short-term uses o Long-term uses Budget cash needs o Capital budget o Cash budget o Operating budget Control differences o Actual vs. projected flows Compare results o Modify forecasts and budgets The Three Financial Sins Undercapitalization Poor control over cash flow Inadequate expense control Financial Management: Responsibilities Short term finance o Working capital Long term finance o Retained earnings o Long term debt o Equity Corporate investment decision making Sources of Funds Short Term Trade Credit Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Factoring selling company's A/R Commercial Paper Long Term Debt Term-Loan Bonds o Secured o Unsecured Equity Stock Retained Earnings Venture Capital Use of Excess Funds Expansion Marketable securities low yield instruments with high liquidity Treasury bills Commercial paper unsecured promissory notes Certificates of deposit Asset purchases Weighted Average Cost of Capital Cost of retained earnings is based on the alternatives that could otherwise be used for the money and what else could be done Guest Speaker Cheryl Francis (3/7) What is the Goal? The Goal is to maximize: a) b) c) d) e) Revenue Profit Cash flow Return on investment Assets Economic Value The sum in today's dollars of all expected future cash flow generated by the company. Why is Economic Value Important? Indication of financial health and potential Focus on value creation keeps eye on "right" thing Where does Economic Value come from? Productivity of assets Profitable growth What we have today and what we will create in the future. How can I assess value? EVA: economic value added Revenue Less: Costs = Earnings before Interest and Taxes Less: Interest and Taxes = Net Income Less: Capital Charge (investment X cost of capital) = EVA Firm value=sum PV of expected future EVAs VALUE = SUM OF FUTURE CASHFLOWS DISCOUNTED TO TODAY'S DOLLARS ***5 WAYS TO CREATE ECONOMIC VALUE*** 1. return of current operations 2. $ invested in high return projects and 3. Speed up receipt of cash 4. # years of high expected returns 5. Cost of capital $ invested in low return projects Decision Making (3/9) The Decision Making Process Define the problem Identify the alternatives Determine the criteria Evaluate the alternatives Choose an alternative Breakeven Point Breakeven point in units o Total fixed costs / (Price Variable cost) o P-VC = contribution margin Breakeven point in dollars o Total fixed cost / (1 (Variable cost / Price) ) Multiproduct case o Total fixed cost / (1 (Variable cost (i) / Price (i)) * w(i)) Assumptions of Breakeven Point Model Constant fixed costs; Linear variable costs; No consideration of financing, interest rates and time value of money. Time Value of Money Present value o How much you have now Future value o What the money you have now grows to when compounded at a given rate FV= PV (1 + i )^N Net Present Value The difference between the present value of the cash flow generated and the present value of the investment incurred. NPV = (I(t) O(t)) / (1 + i)^t o I(t): Annual Inflows o O(t): Annual Outflows o Interest rate o Time Calculating I o Cost of capital o Return from benchmark investments o Average returns from stockmarket, or primerate. Chapter 19 Financial Markets (3/12) Some Elements of Strategic Management Planning o Michael Porter's Five Forces Analysis o SWOT Analysis Organizing o Core competencies Leading o Corporate vision Controlling o Corporate culture o The DuPont model Five Forces Analysis Tangible Resources Financial resources o Cash o Access to financial markets Physical resources o Facilities o Equipment o Access to raw materials Legal resources o Patents o Trademarks Human resources o Employees' individual expertise and skill Intangible Resources Organizational resources o Culture o Shared visions and values o Routines o Working relationships Informational resources o Customer and competitor information Relational o Strategic alliances o Relations with stakeholders Reputational resources o Brands Types of Organizational Control Market based o Uses external market mechanisms, such as price competition and relative market share, to establish standards used in the system; Bureaucracy based o Relies on administrative and hierarchical mechanisms (rules, regulations, procedures, policies, standardization, and budgets) to ensure that employees exhibit appropriate behaviors and meet performance standards; Clan based o Regulates employee behavior by the shared values, norms, traditions, rituals, beliefs and other aspects of the organizations' culture. Appendix C Managing Risk (3/14) Types of Risk Pure Risk o Potential for Loss with no Potential for Gain Speculative Risk o Potential for Loss with Possibility for Gain Reputational Risk o Anything that Could Harm the Image of the Firm, from Accounting Irregularities to Product Recalls Options After Risk is Identified the Reduce risk Avoid the risk Self-insure against the risk Buy insurance against the risk Types of Uninsurable Risk Market Risk Political Risk Personal Risk Operational Risk Managing Business Risk Hedging and derivatives o E.g. forward contracts "Real options" strategies o Start by investing a little, and proceed after results have been achieved Allows for better information, cutting losses short But, requires managerial attention Public relations Crisis management function o Teams and outfits o Scenarios o Contingencies Types of Insurance Health o HMO o PPO o MSA Disability Workers' Compensation Liability Other Business Insurance Life Insurance for Business Home-Based Business Chapter 19 Securities Markets (3/16) Types of Investments Traditional o Stocks/Bonds o Government Securities o Certificates of Deposit placing money for a set amount of time in an account with a set rate of return o Money Market or Mutual Funds aggregate money which can be diversified and optimizes strategies o Real Estate High-Risk o Stock on Margin o Commodities o Futures o Junk Bonds Bond Market Coupon Rate/Interest Rate Principal payment at end of bond's life Maturity Date Types o Unsecured/Debenture o Secured Sinking fund certain percentage of sales or profits are put towards paying the bond back Callable bonds that can be recalled at any time Convertible changing the bond into stock issues takes company off the hook as far as paying interest, however it gives up ownership shares of company Capital Markets Primary Markets (IPOs) offered to institutions first Secondary Markets available to all individuals Common vs. Preferred callable bonds tend to turn into preferred stock have priority of payment over common shares Underwriting banks take responsibility for the issue and placement Valuing Stocks 3 Major Elements o Returns o Growth o Risk The Capital Assets Pricing Model o r = Rf + beta x ( Km - Rf ) where r is the expected return rate on a security; Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of the appropriate asset class; Beta is the volatility of the security relative to the asset class. Hedging - The purchase or sale of a derivative security in order to reduce or eliminate risk associated with undesirable price changes of another security. Derivatives Options o Buy (Call) o Sell (Put) o Exchange a security (Swap) Best Strategy Long term investing with an emphasis on many investments Chapter 4 Business Ethics (3/26) Ethics The systematization, recommendation and defense of right and wrong conduct; o Meta-ethics o Applied ethics o Normative ethics Business ethics - Standards of moral behavior accepted by society and the business community as right and wrong. The Problem of Self Awareness Human cognitive limitations; o Information overload and selective perception; o The law of just-noticeable differences (or how the frog got boiled); o Confusing causality with correlation; o Gamblers' fallacy. Groupthink o The mode of thinking that persons engage in when concurrence-seeking becomes so dominant in a cohesive in-group that it tends to override realistic appraisal of alternative courses of action. Mimetism, imitation and fashion The Problem of Self-Awareness: Solutions Engage in multiple kinds of learning o First loop learning o Second loop learning o Third loop learning Be contrarian Keep an inner compass o An innate navigational device that is governed by your unique combination of conscience, wisdom and intuition. The Problem of Trust Greed o V.I. Lenin Games o Prisoners' dilemma o Zero-sum games Stereotypes and false assumptions The Problem of Trust: Solutions Start by trusting o "Tit-for-tat" strategy Take small steps o Strategic alliances and joint ventures Don't be confrontational o Write a long and detailed contract, and bury it in the drawer. Business Ethics and Society The internal compass; o Is it legal? o Is it balanced? o How will it make me feel about myself? The stakeholder corporation and social responsibility; Integrity-based ethics codes. Being ethical in business BE AWARE o OF YOURSELF o OF YOUR INNER COMPASS o OF THE OTHERS o OF YOUR ENVIRONMENT ALWAYS PROMOTE TRUST ALWAYS EMPHASIZE INTEGRITY OVER COMPLIANCE Guest Speaker Jim Gwinn (3/28) #1 issue facing business = finding and retaining productive employees The Kabachnik Survey 76% low employee productivity Employee Commitment Economic Interdependence Trust and Reciprocity Status and Identity Fit and Belonging Emotional Reward Reasons for Disengagement Job-employee mismatch Overworked and under appreciated Culture / Climate shock Politics and perception Politics and control The "Peter Principle" Business "By the Book" The "Bad" Boss Chapter 11 Human Resources Management (3/30) Determining HR Needs Prepare HR Inventory Prepare Job Analysis o Job Description o Job Specification Assess HR Demand Assess HR Supply Establish Strategic Plan Hiring Process Recruit o Internal o Referral o Headhunters o HS / College o Employment programs o o Select o o o Temp organizations "Walk-ins" Application Form Interview Test o Investigate o Examine Training Methods Employee Orientation On-The-Job Apprenticeship Off-The-Job Online Vestibule Job Simulation Management Development On-The-Job Coaching Understudy Job Rotation Off-The-Job Courses & Training Performance Appraisal Establish Standards Communicate Standards Evaluate Performance Discuss Results Take Corrective Action Use Results to Make Decisions Employee Retention Compensation o ndividual o Team Fringe Benefits Job-Sharing o Probation Flextime o Core Time o Compressed Workweek Home-Based & Mobile Work Compensation & Benefits Program Objectives Attract the right people Employee incentives Retain valued employees Maintain competitiveness Financial security for employees Employee Movement Promotion/Reassignment Termination Retirement Resignation

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