BEC 6 - Planning, Control, Analysis, & Risk Management Flashcards
Strategic Planning
Setting long term overall goals and policies which help guide the overall goals and policies
Tactical Planning
short term objectives and temporary techniques
Strategic Plannings Steps
- Mission Statement 2. ID Goals and Objectives 3. Performance Measures 4. Tactics
Master Budget
a static budget for the company as a whole to summarize individual budgets 2 Major Budgets: 1. Operating Budget 2. Financing Budget
Operating Budget
projected income statement with various supporting schedules
Financing Budget
projected CAPITAL budget, CASH budget, Balance Sheet, & Statement of Cash Flows - usually for 1 year but could be a rolling budget as well
Static Budget
serve to analyze conditions for a SPECIFIC LEVEL of activity - do not change each time some volume changes - set up for extended period of time
Kaizen Budgeting
- managers make cost projections that incorporate their expectations for future improvements - if those improvements are not met, budget (goals) cannot be met
Kaizen Approach
focus on continually identifying and implementing small improvements, instead of focusing on major breakthroughs or large structural changes “anti-hollistic”
Preparing A Master Budget Steps
- Estimate Sales Volume 2. Estimate Revenues (based on Sales Volume) 3. Estimate Collections (based on Revenues) 4. Estimate COGS based on # of units sold 5. Estimate # of units to be manufactured (based on finished goods inventory, budgeted ending inventory, & COGS) 6. Estimate Material Needs, Labor costs, & OH costs (based on #5) 7. Budget Purchases (based on material needs, current raw materials inventory, & budgeted ending inventory) 8. Estimate Payments (based on purchase terms) 9. Analyze expense & payment patterns to complete operating and CF budgets
Budgeting Material Purchases & Payments (STEPS)
- Units to be Manufactured 2. Units of Raw Material required for Production 3. Budgeted Raw Materials Purchases 4. Budgeted Payments for Raw Materials
Units to Be Manufactured Formula
B: Units Sold A: +Budgeted Increase in Finished Goods S: - Budgeted Decrease in Fin. Goods E: = Units to be Manufactured (1)
Units of Raw Material required for Production Formula
Units to be Manufactured x Units of RM per unit of Fin. Goods = Units of RM required for Production (2)
Budgeted Raw Material Purchases Formula
B: Units of RM required for Production A: +Budgeted Increase in RM S: - E: = Budgeted RM Purchases (3)
Budgeted Payments for Raw Material Formula
B: Budgeted RM Purchases A: +Budgeted DECREASE in AP S: - E: = Budgeted Payments for RM (4)
Production Budget Formula
S: Budgeted Sales E: + Desired End. Inventory of Finished Goods = Total Needs B: - A: = # of Units to be Produced
Order of Budget Preparation
- Sales Budget 2. Production Budget 3. Direct/Raw Materials Purchases Budget 4. Cash Disbursement Budget
Flexible Budgeting
may be adjusted for changes in VOLUMES - use direct costing method
“b” Variable in Flexible Costing
Variable Costs / Sales = Variable Rate
Advantage of Flexible Budgeting
Can readily adapt to changes in VC that result from changes in Sales Level (independent variable)
Correlation Coefficient (“p” or Rho)
- closer to -1 or +1 is a stronger relationship - +1 = Direct Relationship (upwards slope) - 0 = No Relationship - -1 = Indirect Relationship
Regression Analysis
- provides streamlined approach to test which independent variable is the best predictor (or more) for 1 dependent variable
What are 3 measures to compare model specifications in Regression Analysis?
- Coefficient of Determination (R2) - F-statistic - t-statistic
Coefficient of Determination
- goodness of fit - “R2” - the percentage of variation in the dependent variable explained by the variation in the independent variable - commonly expressed with values ranging between (0-1)
F-statistic
measure of statistical significance (relevant) of the model specification
“p” value attached to a F-stat
the probability that the overall predicted predicted relationship occurred by chance
T-statistics
with attached p-value for each independent variable, indicates their individual statistical significance (or relevance) in predicting the dependent variable p-value
P Values Range
< 0.01 ———– VERY RELIABLE 0.01 – 0.05 —- Reliable 0.05 - 0.10 —– Borderline Reliable >.10 ————- Not Reliable
Responsibility Accounting
- used to decrease defective units & increase efficiency in manufacturing & decrease costs - seek to ID which parties are responsible and seek to evaluate performance - ID cost drivers as accurately as possible (ABC)
Investment Center
responsible for all REVENUES, COSTS, & CAPITAL INVESTMENTS from each center
When should managers not be held responsible for costs?
for costs that the manager cannot affect - costs allocated to that dept. but have been incurred/directed by another level/other decisions - if the managers own salary is determined by someone other than the manager
Activity Based Costing (ABC)
- seeks to group together costs that are affected by common factors (cost driver or allocation base) - segregate mfg overhead into numerous cost pools with common elements that will result in a increase in the costs included in that pool - Costs classified as either “value-adding” or “non-value adding”
Value-Adding Costs
those that actually make the product itself or make it better for customers - customers perceive as increasing the worth of a product or service which they would pay more
Non-Value Adding Costs
- costs that increase the cost of a product but that customers do no specifically value - ie: moving/handling/storage of raw materials, factory utilities, depreciation of mfg equipment
Service Department Costs
Allocation of OH costs incurred by service departments to the appropriate prediction (or mfg) department 1. Direct Allocation Method 2. Step Allocation Method
Direct Allocation Method
firm allocates costs from each service department directly to & only to the production departments
Step Allocation Method
firm allocates costs from a service department to BOTH: A. Production departments B. “Temporarily or as a Step” to the other service departments (ranked from most performance to least performance) Process is repeated until the costs of all service departments have been allocated to production departments
Econometric Models
- company data & industry/economy-wide data for regressional analysis
Time Series Analysis
focuses on analyzing & forecasting data for a single firm over time
Total Return Formula
Distribution Rate + Growth Rate
Gordon Growth Model
(Next Dividend / Market Price) + Growth% = Dividend Yield Plus Growth
Portfolio Expected Return
WTD AVG of the expected return of the individual investments
Arithmetic (Simple) Average Rate of Return
Adds the returns of several period & divides by the # of periods
Geometric Average Return Rate
- single annual compound rate of return required to turn the initial value of investment into the final value of investment of the # of periods intervening - less than Arithmetic Average EXCEPT when all single period rates are identical
How to Calculate Standard Deviation
- Determine the Arithmetic Average Return 2. Calculate the difference from the average for each individual period 3. Square those differences 4. Determine the average of the squared values 5. Calculate the Square Root of this average
Standard Deviation measures
the volatility of an investment (risk)
Risk Averse
- demand higher expected returns from investments with higher SD - demand lower expected returns from investments with lower SD
Coefficient of Variation
- seeks to address shortcoming of SD’s & provide a measure of relative risk that readily comparable across investments of different size
Coefficient of Variation (CV) Calculation
SD / Average Expected Return
Modern Portfolio Theory (MPT)
- SD of a Portfolio < SD of the individual investments - since prices of various investments do NOT move up & down at the same time -1951 Henry Markowtiz
Covariance Matrix
measure of the degree of to which 2 or more investments move together +1 (Direct Relationship) -1 (Indirect Relationship) - interpretation is not straightforward so investors often use correlation coefficients (only 2 at a time)
When Covariance Matrix is <1.0
SD of Portfolio < The AVG of the SD of the individual investments
How do you largely eliminate unsystematic risk?
combining investments with low covariances
Mean Variance Optimization
combining expected returns of various investments and their covariances with each other
Efficient Portfolio
combining investments that will have highest possible expected returns & lowest level of volatility
Efficient Frontier
plots the combinations of assets that yielded the most efficient portfolios at various levels of risk
Beta Risk
measure of investments’ systematic risk - developed by William Sharpe
Alpha (CAPM)
degree a portfolio does better or worse then the returns predicted by the Beta - also considered to be a measure of the degree of success or failure of the individual portfolio manager
CAPM implies
asset allocation of a portfolio is overwhelmingly the most important factor in determining the return an investor can expect - also higher Betas = higher expected returns to compensate for extra volatility
Efficient Market Hypothesis (EMH)
individuals cannot outperform market averages over long periods of time EXCEPT by luck (individual variations from an alpha = 0) - led to the development of index funds
Behavioral Finance Theory
consistent bias by the market participants that may be occasionally exploited to gain higher than average returns by those who resist those biases
Secular Bull Market
Multi-year periods of sustained price growth (even in bear markets are included)
Secular Bear Market
Multi-year periods WITHOUT sustained price growth (even if bull markets are included)
Sector Risk
fraction of a borrower’s credit risk associated with being in its industry
Interest Rate Risk
risk that rising interest rates will depress the resale value of pre-existing bonds or loans
Yield Curve
represents US Treasury interest rates in the y-axis & terms (or maturities) in the x-axis
Normal Yield Curve
interest rates are higher for longer terms (liquidity preference theory) - usually during expansionary periods
Liquidity Preference Theory
interest rates higher for longer terms due to more risk
Inverted Yield Curve
interest rates are lower for longer terms (expectations theory)
Expectations theory
long term interest rates reflect future expected short term interest rates Reflects investors’ expectations of upcoming declines in economy-wide interest rates (usually due to falling inflation rates and/or worsening economy wide conditions)
Flat Yield Curve
interest rates are similar across terms (market segmentation theory) - neutral monetary policy periods
Market Segmentation Theory
some participants in bond and loans markets focus on lending at different terms
Borrowers using mostly Short Term (Variable Rate) Debt
- more liquidity risk - more earnings volatility - may be charged higher interest rates by lenders
Borrowers using mostly Long Term (Fixed Rate) Debt
forgo benefits of falling interest rates (should they fall)
Key Tasks in a Project
setting budgets Defining goals and objectives Monitoring the project’s progress
4 Basic Elements that a Project Manager must manage to be effective
- Resources 2. Time 3. Money 4. Scope
5 Processes of Project Management
- Project Initiation 2. Project Planning 3. Execution 4. Monitoring & Control 5. Closure
Project Initiation
1st process of PM - most promising project selected - ID goals - Mgmt approval - PM selection (project charter too)
Project Planning
2nd process of PM - determine what tasks to carry out, by whom, & by what dates - Quantity/Quality parameters - Budgeting resources - possible risks and responses - Statement of Work (Document) - Life Cycle Approach - Methods to Plan and control projects
Statement of Work (SOW)
- part of the Project Planning process in Project Management - narrative form that the work is to be carried out - Project Specifications (resources) - Milestone Schedule (timeline) - Work Breakdown (WBS)
Life Cycle Approach
- part of the Project Planning process in Project Management - planning split into separate stages - at the end of each stage, decide whether to launch next stage
Methods to Plan and Control Projects
- part of the Project Planning process in Project Management - Milestone Charts - Gantt Charts - Network Diagrams - PERT (Program Eval. & Review Techniques) - CPM (Critical Path Method) - GERT (Graphical Evaluation & Review Techniques) - ABC Analysis - Project Crashing - Risk Management
PERT – Program Evaluation and Review Techniques
- used to schedule and control - emphasize that tasks are often interdependent - seeks to ID critical path (shortest time to finish) - 3 time estimates (optimistic, most likely, & pessimistic) - Slack Time
CPM – Critical Path Method
- only one time estimate (normal time to finish) - used when times to completion are easier to forecast - similar to PERT
GERT – Graphical Evaluation & Review Techniques
- readily permits tasks to be looped OR to branch out if appropriate - used with projects where many approaches may be used to accomplish tasks & when approach followed changed during project
ABC Analysis
Scheduling Method A – Urgent & Important B – Important but NOT Urgent C – Neither important nor urgent
Project Crashing
adding more resources than usual to a task to speed it up on project’s critical path - tasks have a normal time and a crash time
How to Manage Risks in Project Management
- ID Possible Risk 2. Quantify those Risks 3. Prioritize risks from most to least important 4. Develop in advance – sets of possible responses *use controls (to reduce) OR enter into contracts
Project Execution
3rd process in PM Managers: 1. Secure ongoing resources & cooperation 2. Direct activities to be performed 3. Manage personnel for efficiency Problems 1. Organizational Uncertainty (PM vs Permanent Managers) 2. Uncommon Decision Making Conditions 3. Poor Support from Management (delay or reject)
Project Monitoring & Control
4th process in PM 1. Progress performance 2. Actual vs Predicted (+ Analysis) 3. Adjust the project as needed to improve it
Project Closure
5th process in PM 1. establish all tasks have been completed 2. completion of the contract, paperwork, & all project-related financial expenses
3 Characteristic of Derivatives
NUNS N – No net investment UN – Underlying and a Notional Amount S – net Settlement
2 Purposes of Derivatives
Speculative & Hedging
Business Risks associated with use of derivatives
- Credit risk 2. Market risk 3. Legal risk (void/alter) 4. Basis Risk (ineffective portion)
Uses of derivatives to hedge
- Fair Value Hedge 2. Cash Flow Hedge (ineffective portion to I/S) 3. Foreign Currency Hedge
Balanced Scorecard
ensure following/implementing mission and strategic plans 1. Financial Perspectives 2. Customer Perspectives 3. Internal Business Process Perspectives (variances, defects, time) 4. Learning and Growth Perspectives
Learning and Growth Perspectives
- seek to ensure the key drivers of organization LT ability to carry out their mission are not neglected in pursuit of ST objectives - track employee satisfaction, training, & advancement
What do balanced scorecards commonly include?
- Strategic Objectives 2. Performance Measures (quantitative) 3. Baseline Performance (how well) 4. Targets (for improvement) 5. Strategic Initiatives (changes needed to achieve)
Performance Drivers
Cause and Effect LEADING indicators
Outcome Performance Measures
cause and effect LAGGING indicators
Sunk Costs
current costs associated with past decisions that are largely UNAVOIDABLE (therefore largely IRRELEVANT to such analysis)
Strategy Maps
diagrams to help ID cause and effect relationship
Decision Trees
graphical aids to highlight the chains of decisions - will or will not happen
Value Based Management (VBM)
- financial scorecard to ID the EVA (economic value added) that different activities contribute - ID each activity’s financial value to the firm - if misapplied, may lead to failure of linking activities that lead to value creation
Value Chain
sequence of business processes through which a product or service becomes more valuable or useful
Real options techniques
treat each business investment decision as the purchase of a series of options to be exercised as the project evolves - value of these options is not reflected when the mangers focus solely on expected cash flows
Common Types of Benchmarking
- Internal 2. Competitive (Cross-Sectional, Time-Series, Panel Data) 3. Industry (1 vs industry) 4. Generic (1 vs. all) More relevant to the more alike that the firms compare are
Internal Benchmarking
subdivision within firm to carry out 1 task
Competitive Benchmarking
relative to its most direct competitors
Cross Sectional Analysis
explore data from 1 time period for multiple firms
Panel Data Analysis
explore data from multiple firms over time
International Organization of Standards (ISO) 9000 Series
focusing non the quality of products and services provided by firms 5 parts (9000-9004)
ISO 14000 Series
focuses on the environmental goals
Pareto Principle
80% of quality problems result form only 20% of the possible causes - firms should focus on the most important causes and only address later the less important causes
Six Sigma Quality
- statistical measure of the percentage of products that are in acceptable form based on SD measures 1 Sigma: 68% of products must be acceptabel 6 sigma: 99.999997% must be acceptable (3.4 defective units in 1 Million)
Theory of Constraints (TOC)
applied to maximize operating income and overcome bottlenecks in operations 1. Bottleneck (throughput contribution, investment, operating costs)
Bottleneck Resource
Demand > Resource Capacity
Non-Bottleneck Resource
Resource Capacity > Demand
Throughput contribution
MAXIMIZE Revenues – DM COGS
Investment
MINIMIZE Cost of Materials + WIP + Inventories; R&D Expenses; & Upfront Expense on equipment and buildings
Operating Costs
MINIMIZE employee compensation + rents paid + utilities + depreciation
Cost of Quality Philosophy
prevention is cheaper than failure
4 Different Stages of Cost of Quality
- Prevention Costs 2. Appraisal (or Detection) Costs (in production) 3. Internal Failure Costs (after production/before shipped) 4. External Failure Costs (after shipped)
Conformance Costs
Quality Control costs Prevention + Appraisal
Non-conformance Costs
Quality Control FAILURE costs Internal + External
Business Process Management (BPM)
- align all aspects of an org with wants/needs of its clients - AKA Process Optimization Process - promotes effectiveness/efficiency while striving for innovation (understood, managed, & improved) - recognize the processes that have HUMAN & TECH aspects
Process Optimization Process
Business Process Management
Life Cycle of Business Process Management (BPM)
- Design – ID & Design 2. Modeling - “what if” scenarios before production 3. Execution – installed & trained 4. Monitoring – test & yield data 5. Optimization – data analysis and ID means for improvement / redesign
Risk of Outsourcing or Offshoring
- Quality Risk 2. Language Risk 3. Information Security Risk 4. Intellectual Property Risk 5. Public Opinion Risk 6. Social Responsibility Risk
Redesign
on going process Change means new benefits, new risks, & eventual need for new redesigns
