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BU121 Final Exam Review (2).docx

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Laura Allan

BU121 Final Exam Review Finance – 26 Marks Textbook pg. 170: “Using Financial Information and Accounting” Lab Manual Readings (pg. 226-230 and 236-248) Lab Manual Exercises (pg. 262-266, 286-291, and 304-305) Lecture Material Evaluating Financial Performance – analytical measures at different stages of the life cycle  Evaluate financial performance because of principle 1 of entrepreneurial finance (real human and financial capital must be „rented‟ from owners) and principle 5 (a venture‟s financial objective is to increase value)  Different analytical measures are important to different users at different stages  Development and Start-up Issues o How quickly the venture uses cash (cash burn rate), their ability to meet short- term financial obligations like pay bills (liquidity), and the length of the operating/working capital cycle (conversion periods)  Additional Survival Issues: the venture‟s potential to employ and repay debt (leverage) and their ability to provide a return on invested capital (profitability and efficiency)  Analytical Measures – financial ratios o Liquidity: ability to maintain a build rate high enough to meet obligations; compares assets that can be quickly converted to cash with liabilities that represent short-term needs for cash, addresses long-term trends, and deals with working capital management issues o Conversion Period: the amount of time (days) to convert assets into cash; the faster, the greater liquidinote: cash = accounts payable + accrued liabilities) o Leverage: considers how the firm will finance (to support a longer C³) and measures the extent to which a firm uses debt to meet debt obligations Debt Leverage  Interest: provides a discount in tax because  Dividends that are paid after taxes it is counted as an expense but can also  Lower risk but lower return (higher cost of accumulate and cause higher expenses capital)  Higher risk and higher return (due to lower  Gives up control through legal recourse cost of capital)  More control o Profitability and Efficiency: ability to provide a return on investment and profit; how well a company controls expenses and uses assets  Analytical techniques o Industry Comparable Analysis: compare against average o Cross-Sectional Analysis: compare to specific firms o Trend Analysis: compare over time Process of Ratio Analyses  Cash Burn Rate: how quickly a venture “burns through” /uses cash; determine weeks of cash remaining; the cash a venture spends on operating and financing expenses and its investments in assets Cash Burn = cash operating expenses + interest + taxes + increase in inventories – changes in payables and accruals + capital expenditures = (COGS + marketing + general/admin) + interest + taxes + increase in inventories – changes in payables and accruals + (change in net fixed assets + depreciation)  Cash Build Rate: how quickly a venture build cash balances through collections on sales Cash Build = net sales – increase in receivables  Burn and build rates can also be determined using the Cash Flow Statement o Cash flow from operating and investing activities – if negative = cash BURN o Net Cash Burn: cash burn – cash build o Monthly Net Cash Burn Rate = monthly cash burn rate – monthly cash build rate  How long before more external financing is needed? o Calculate monthly net cash burn to determine months of cash remaining? Ratios Ratio Name/Issue Calculation Comparisons Interpretation Liquidity Ratios Rule of thumb > 2 for risk Current Ratio 2 < x < 4 < 4 for return - used to measure a firm‟s Should have at least If stronger than Acid Test, liquidity 2x current assets than look at inventory-to-sales liabilities conversion period Acid Test/Quick Ratio - measures a firm‟s Rule of Thumb If much lower than current ⁄ ratio, too dependent on liquidity excluding x > 1 inventory (ex. retail inventory since it is less liquid than other assets stores) Net Working Capital to A high NWC to total Total Assets - analyze the extent to Rule of Thumb assets ratio shows the which assets are tied up in The higher the %, the company‟s ability to match its A/P obligations WC or the amount of greater liquidity on time and low means assets req‟d to run daily operations cash flow difficulties Conversion Period Ratios Inventory-to-Sale - measures # of Higher ratio indicates better performance (but times/period that a could be accompanied by a loss of sales due to inventory shortage) and a lower value means business sells and replaces inefficiency in controlling inventory levels all inventory Indicates productivity Sale-to-Cash – higher indicates “Days of sale - ability to convert sales to growth due to outstanding,” the average cash sufficient cash flow collection period to finance Average Operating Cycle Reveals how long Long cycle means less - # of days from cash to cash is tied up in inventory to accounts Inventory-to-Sale + Sale-to-Cash receivables and cash is available to meet receivable to cash inventory short-term obligations Purchase-to-Payment Higher means business - how many times/period Short-term liquidity was able to repay you pay suppliers A/P suppliers quickly (better) Rule of Thumb – as The # of days of operation Cash Conversion Cycle Inventory-to-Sale + Sale-to-Cash close to zero as that must be externally (C³) – Purchase-to-Payment possible financed Leverage Ratios Total-Debt-to-Total-Assets The % of a company‟s assets financed by debt - measure of financial risk Lower is better Debt-to-Equity - indicates how much High means a company has been aggressive in equity is financing the financing its growth with debt which can result in volatile earnings because of interest expenses company`s assets Current Liabilities to Total Debt Interest Coverage Rule of Thumb Tells you how low you can x > 1.5 drop while still being okay - the actual cash you are < 1 means not Lower ratio means the able to pay on outstanding generating enough company is more burdened by debt revenue to pay the debt expense interest expenses Fixed Charges Coverage Higher is better BUT too high - indicated # of times the (too much safety) indicates interest can be covered by undesirably low level of revenues leverage Profitability Ratios Gross Profit Margin Higher is better, more money What is leftover as a % of - the money you keep after sales to spend on other operations paying for COGS; profit The remaining % is your Indicates efficiency of margin expense to produce production process Operating Profit Margin Higher is better - GPM without operating Should be much smaller than GPM expenses Net Profit Margin - measures % of each sales Higher indicates advantage(s) $ remaining after all Shows the impact of over competition and a cushion financing expenses (incl. taxes) are for protection deducted Sales-to-Total-Assets Measures efficiency Higher ratio means smaller - Shows how much more in managing assets in investment req‟d to generate sales revenue was generated relation to revenue revenue and therefore higher than assets generated profitability Operating Return on Assets Needs to be > interest - The venture‟s basic to benefit from What will it cost to service debt? earning power, should be leverage Do you have the earning power? compared to interest and cost of debt Represents ROA as the joint Return on Assets (ROA) Measures efficiency - What are we making in in using assets to outcome of net profit margin and generate net income sales-to-total-assets terms of income on assets? Higher means more profitable Shows the magnifying effect of Return on Equity (ROE) Measures how much leverage - What are you getting out the shareholders earn Represents ROE as outcome of ROA and Equity Multiplier of the business wrt what for their investment iHigher means more efficient in you are putting in? the company utilizing equity base and a better return for investors Cost-Volume-Profit (CVP) Analysis  Used for decision making – assesses the risk in a decision when doing something new  Shows the effect of changes in cost, volumes, or profits, and the impact of operating leverage o You must sell more to cover fixed costs (Risks) o But once covered – leverage effect on profit (Return) Let breakeven units be “x” o Essentially, trading off fixed cost for variable xPrice = FC + xVC + desired profit  Also used for breakeven analysis x(Price – VC) = FC + 0 o The most important concept is contribution x =  Breakeven Point: where TR = TC (revenues = expenses)  # of Breakeven Units = You must sell more than the number of units sold at the breakeven point to make profit. „  Easier way to determine decision point – find where incremental (additional) FC are covered by the incremental contribution o “What‟s left over after covering VC that contributes towards covering FC?” o “What % of every sales $ is left over after covering VC to cover FC?”  Contribution Margin per Unit: the difference between the selling price per unit and the variable cost per unit – how much better off the company is from selling one additional unit o Measures the marginal effect of a sale Contribution Margin (%) = 1 – o What do sales have to be at a contribution rate of ^ to cover FC?  CVP Recap When FC are covered by contribution from sales = o Compare to the market to see if this is realistic or not o Determine a decision point and decide when to change your strategy and start a new approach (usually when incremental FC cover incremental contribution) o Make decisions that affect costs and/or volume and have a positive impact on profit  Total incremental contribution > incremental FC  Process: o What is the additional/incremental contribution? o Compare it to the additional/incremental FC o Better off? Quantitatively and qualitatively?  Practice questions in PPT Negotiating – 10 Marks Lab Manual Readings (pg. 276-285) (4 MC & 6 SA) 1. Negotiating is not merely a series of compromises 2. It‟s your people skills that can make the difference (understand DISC) 3. The most powerful negotiating skill is listening a. Selective: we hear things that we believe are important b. Responsive: letting the other party know that you are paying attention, involves verbal and physical feedback c. Playback: restating wheat you think you heard and asking for confirmation, follow up with a confirming question 4. Develop a plan before beginning to negotiate a. Determine the negotiating style of the other party b. What are our/my interests and what are the interests of the other side? c. What can I trade that is of low value to me and of high value to the other side? d. What are three options I can use to move the negotiation from compromising to joint problem solving? e. What is the very least that is acceptable? - What do we aspire to? What will we be content with? What can we live with? f. What is my Best Alternative To a Negotiated Agreement (BATNA)? 5. Keep in mind the top 10 factors for successful negotiating a. Know what you want, know the other side, consider timing and method of negotiations, prepare point by point, offer benefits for accepting your offer, frame your negotiation around one or two key points, know your BATNA, prepare options for mutual gain, listen to the other side, and use the power of the draft  Focus on WHY rather than WHAT for successful negotiations  Questioning skills require three techniques 1. Know where you are going before you start asking questions; randomly fired questions with no logic make the other party feel tense and interrogated 2. Ask for permission to ask questions 3. State why you want to ask questions Lecture Material (4 MC & 6 SA)  Negotiating is an ongoing process, more than just an agreement, and a necessary skill  Negotiaphobia: disease of attitude; skill deficiency; see negotiating as an act of combat EASY Process  Engage: recognize you‟re in a negotiation and review viable strategies  Assess evaluate your (and the other person‟s) tendency to use each of the negotiation strategies  Strategize: select the proper strategy for this particular negotiation  Your One-Minute-Drill: before negotiating, take a minute to review each of the 3 steps  Thomas-Kilmann Conflict Mode Instrument o Compromising isn‟t an effective strategy – only compromise late in the negotiation process after the 4 legitimate strategies have been used or when only a small gap remains on one issue; always directly tied to an agreement o Does not build effective relationships, but tests them Negotiation Strategy Matrix: 5 Basic Negotiating Strategies and When to Use Each  Sages: natural collaborators vs. Dreamers: wannabe collaborators o Only 20% of people are sages  Check accommodation vs. compete tendency  Biggest concern if one strategy is too high because people will deploy this strategy regardless of the situation and the strategy used by the other party (dangerous) Competition Collaboration  Proactive/Low Cooperation (Win/Lose)  Proactive/High Cooperation (Win/Win)  Doesn‟t care about the relationship  Growing pie so everyone gets bigger slices  Fixed pie and wants the biggest slice  Use when a situation presents significant opportunity with capable and willing  Use when opponent is not inclined or capable of collaborating – need senior players decision-makers on all sides (80/20 rule)  Use when it will not be worth the effort – but Requires preparation, need identification, and you must look for true potential of candor (trust) – show all the „cards‟ negotiation  If you don‟t prepare, you may end up  Be competitive if they‟re competitive accommodating  Internal collaboration is a prerequisite for external collaboration Avoidance Accommodation  Reactive/Low Cooperation (Lose/Lose)  Reactive/High Cooperation (Lose/Win)  Use if it‟s a minimal issue, a waste of time Use when you have significantly weaker or not of importance (but recognize it may bargaining position and no leverage grow in importance) o Improve your leverage with knowledge  Do it in a way that demonstrates investment  How you accommodate is as important as in the relationship when o Ex. not charging a loyal customer – o “This time around we would be willing SAY something (tell them) to consider...”  People may disengage because they‟ve found o Don‟t make excuses another option somewhere else – dangerous o Object as a sign of interest Basic Interaction Styles and How They Relate to Negotiation Tendencies  People are predictable and you can usually assess their tendency by observing their behavioural style and company culture  4 basic interaction styles (similar to DISC) based on pace of information exchange (fast vs. slow) and focus on tasks vs. relationships Drivers (D) Analyticals (C)  Fast pace, Task focused  Slow pace, Task focus  Transparent and very clear  Take time to assess and decide  Tend towards competing strategy, want to  Stubborn once a decision is made get the job done  Analytical and confident  Will collaborate if met in the middle  Fear making mistakes  Dislike detail, concerned with “big items”  Focus on facts  Fear failure Expressives (I) Amiables (S)  Fast pace, People focus  Slow pace, People focus  Cares about relationships  Ultimate avoider, accommodators  Quick to make decisions  Care about relationships  Dislike details and disengaged by boredom  Fear conflict  Collaborate if you work at their pace  Passive-aggressive negotiator  Dreamers because don‟t have the skill/time  Hardest to deal with Principled vs. Positional Bargaining and Distributive vs. Integrative Bargaining  “Getting to YES” book by Roger Fisher and William Ury – bible for negotiating Principled Bargaining Positional Bargaining  Step back to see how to benefit all parties  Typical negotiations  Collaborative (win/win)  People state their positions  Four basic points of principled negotiations  What they want 1. Separate people from the problem – attack the problem and not each other 2. Focus on interests, not positions – what do I really want, why do I want it, what need am I trying to fill? 3. Generate a variety of options before deciding what to do 4. Insist the result be based on objective criteria – remove your ego and use decision criteria Integrative Bargaining Distributive Bargaining  Principled negotiations use an integrative/  A mindset for strategy collaborative strategy  Competing, avoiding, or accommodating  Produces a wise agreement efficiently and  Deciding how to distribute pieces of the amicably pie (scarce resources)  Try and work together to expand the pie  To truly collaborate, you need to see the  Keep and improve relationships size of the pie as expanding – win/win Operations and Sustainability – 15 Marks Textbook pg. 232: “Achieving World-Class Operations Management” (5 MC)  Achieving world-class operations management – 3 decisions at 3 stages  Productions and operations management involved 3 main types of decisions at 3 stages  Decisions are ongoing and often occur simultaneously 1. Production Planning: managers decide when, where, and how production will occur; they obtain resources and determine site locations 2. Production Control: focus on scheduling, controlling quality and costs, and the day- to-day operations of running a factory or service facility 3. Improving Production and Operations: focus on developing more efficient methods of producing goods or services Lab Manual (pg. 294-303) (5 MC)  Corporate Social Responsibility: the balanced integration of social and environmental considerations in business strategy and operations; maintaining economic success and achieving commercial advantage by building reputation and gaining trust of people that work with or live around the company; satisfying customers‟ demands, while also managing the expectations of other people, such as employees, suppliers, and the surrounding community  Global Drivers of sustainability include: o Legislation (e.g. on pollution and environmental issues) o Investors with the spread of CSR performance indices o Other stakeholders, particularly NGOs o Commercial issues of compliance and risk management o The need to develop competitive advantage and brand reputation Lecture Material (10 SA)  Critical Success Factor #3: Providing quality products and services Differences between Service and Manufacturing Businesses and Implications for Operations  Both transform raw materials into finished goods  Different impacts on capacity in the different types, changes the integration of marketing and operations, and there is a demand/capacity trade off Service Manufacturing  Raw material is a person with an unsatisfied need  Manufacturing can run 24/7 or possession that requires care or attention  Inventory can be an issue  A service is performed, not produced  Set capacity slightly ahead of  Focuses on process as well as outcome demand since it is expensive to  Judged on quality of work and service add or sit idle  Set capacity high with plans to  Intangible; can‟t be stored in inventory expand  The customer is a part of the process and the  If demand is too high and you extent of contact affects operations (ex. hours of can‟t expand then in the short operation, location, parking, simplicity – dine in term, turn away customers or vs. takeout) outsource at lower margins  Low Contact: set capacity to average demand  If products are seasonal, shift (ex. taxes) demand and capacity in off-  High Contact: set capacity at peak demand season by pricing (ex. end-of- (ex. restaurant‟s # of tables) season sales, discounts, „gifts‟)
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