BUSI 730 - Strategic Allocation of Financial Resources Flashcards
Describe the 4 perspectives of the Balanced Scorecard (BSC).
- FINANCIAL - how do we measure success in productivity and revenue?
- CUSTOMER - how do we create value for our customers? how do we attract, retain, & deepen customer relationships? (ex: low-cost, product leadership, customer solutions, etc.)
- PROCESS - what do we need to be good at? operations, customer management, innovation, regulations, social/environment processes, etc.
- LEARNING & GROWTH - what do we need to do to continually improve our processes and customer relationships? HR (skills, training, knowledge), IT (systems, databases, networks), Organizational (goal alignment, culture/climate, knowledge-sharing, etc.)
Strategies accomplish which 2 principle functions?
- Creates a COMPETITIVE ADVANTAGE
2. Provides guidance on where RESOURCES should be allocated
Two essential components of strategy:
- Clear statement on company’s intentions - how is it going to use it’s advantage to be better than the competition?
- Define a scope for the intended strategy - certain customer segment? geographic locations? product line breadth? where will they compete most aggressively?
Describe a Strategy Map
A STRATEGY MAP puts the strategy into a graphic form based on the BSC perspectives. Arrows show the relationships among the strategic objectives. Learning & Growth provide the foundation for the strategy based on organizational capabilities.
ABC Costing System vs. Standard/Traditional Costing System
ABC system allocates overhead (indirect expenses) directly to products based on the proportion that each product demands of the expense/activity.
Standard system allocates overhead based on the proportion of quantities produced. Very simple but not accurate.
Describe 2 fundamental parameters of ABC costing.
- Estimate the COST RATE for each resource/expense. Divide the cost by the capacity it supplies. usually expressed as cost per hour or cost per square foot.
- Estimate how much of each resource/expense is used for each activity.
Benefits of ABC costing:
- Improved profitability due to the identification of high cost and inefficient processes
- Increased accuracy and relevance to managerial decision making
BSC: Customer
Name some customer metrics that serve as leading indicators of future revenue and profit performance.
customer satisfaction
customer loyalty
willingness to recommend (aka Net Promoter Score)
NOTE: Service companies must focus on customer costs and profitability more than manufacturing companies because they are much more customer driven.
BSC: Customer
Describe the WHALE CURVE
A whale curve is used to measure customer profitability.
It graphs cumulative profits versus customers. A typical whale curve shows that 20% of the most profitable customers generate 180% of profits (should aim to penetrate them) while the 20% least profitable lose 80% of the net profits (should aim to transform them).
Large companies are usually on either end of the spectrum (rarely in the middle).
BSC: Customer
Name ways to increase customer profitability.
- Process improvements - ex: customer service improvements
- ABC costing and pricing
- Managing relationships - providing more than one service to a customer
- Pricing Waterfall - special allowances and discounts given to increase customer loyalty
- Salesperson Incentives - encourage salespeople to close deals and generate revenues from profitable customers and avoid the unprofitable ones.
- Life-Cycle Profitability - tracking costs throughout the duration of the relationship with the customer
BSC: Process
Define the THEORY OF CONSTRAINTS
The Theory of Constraints focuses on managing bottlenecks in order to increase operating income (contributions, investments, and operating income)
BSC: Process
Describe 3 different types of Facility Designs
Process Layout (aka job shop or functional layout)
Product Layout (aka flow shop layout)
Group Technology (aka cellular manufacturing)
BSC: Process
Basics of Process Layouts
All similar equipment or functions are grouped together.
Reduces costs related to moving, storing, and other non-value-added costs.
Ex: Bank or Office setting
BSC: Process
Basics of Product Layout
Assembly line, high-volume products
Product moves to the place beside where the parts are stored.
Ex: Auto manufacturing
BSC: Process
Basics of Group Technology
Grouping machines together in one place to reduce waiting time and increase visual control
Generally U-shaped so that workers can observe each other.
BSC: Process
Inventory Costs and Processing Time:
Processing Cycle Efficiency Formula
PCE =
Processing Time/(Processing+Moving+Storage+Inspection Times)
BSC: Process
JIT Manufacturing
Requires making a product or service only when the customer, internal or external, requires it.
It uses a product layout with a continuous flow - one with no delays once production starts.
Must be substantial reduction in set-up costs in order to eliminate the need to produce in batches. Processing systems must be reliable.
Minimum to no WIP inventory kept so a problem can stop all production.
Requires highly trained workforce.
BSC: Process
Lean Manufacturing
Elimination of any spending that does not add value for the end customer.
Value is anything that the customer would be willing to pay for.
BSC: Process
Cost of Nonconformance and Quality Issues
4 Categories
- Prevention - training employees, quality engineering
- Appraisal - inspection, maintenance of equipment, process control
- Internal Failure - detecting a defect before it ships & reworking the product
- External Failure - correcting a problem after the customer received the product (costs include shipping, service calls, reputation, customer satisfaction)
Summary Chart page 158
BSC: Process
Basics of Kaizen Costing
Focuses on reducing costs during the manufacturing stage of a product in small, incremental amounts rather than large innovations.
Opposed to focusing on variances of budgeted cost amounts, Kaizen focuses on cost reduction target that are CONTINUALLY ADJUSTED DOWNWARD.
Cost reductions are the responsibility of the workers, not engineers and managers.
Must be careful to not forget the “big picture” while focusing on small, incremental cost details.
BSC: Process
Five Stages of BENCHMARKING
- Internal Study & Preliminary Competitive Analysis
- Commitment to the benchmarking process and development of a team
- Identify benchmarking partners
- Information gathering and sharing
- taking action to meet or exceed the benchmark
BUDGETS
Basics of Budgeting
Budgeting includes forecasting for the amount of resources (4 different types) that will be needed during a period of time with certain assumptions.
Budgeting promotes the coordination of the organization’s activities and helps identify coordination problems.
BUDGETS
4 Different Types of Resources
- Flexible Resources that create variable costs (WIP, materials)
- Intermediate-term capacity resources that create fixed costs (rental storage space)
- Potential-enhancing resources - short and long term (R&D, training, advertising)
- Long-term capacity resources that create fixed costs (new facility)
BUDGETS
Basics of the Master Budget
The MASTER BUDGET includes operating and financial budgets.
Operating Budgets - sales plan, capital spending, production, materials purchasing, labor, admin/discretionary spending, etc.
Financial Budgets - pro forma financial statements, Cash Flow
What-If Analysis
Allows for the calculation of many different scenarios based on different strategies
Sensitivity Analysis
Process of selectively varying a plan’s or a budget’s key estimates for the purpose of identifying over what range a decision option is preferred.
Variance Analysis
Compares actual costs or revenue figures with the target/budgeted amount.
First-level variance - the difference between actual and budgeted costs (favorable or unfavorable)
Second-level variance = Flexible budget variance or planning variance
Examples and Calculations on pages 223-226.
BUDGETS
Types of Budgets
Periodic - budgeting process done once per period
Continuous - when one month ends, it drops off and another month is added to the end of the budget period.
Incremental - increasing or decreasing by a %
Zero-based - justification is needed for every expenditure
Project Funding - a hybrid of incremental and zero-based where some spending is based on a % and other is based on a project’s life.
Cost of Capital
The rate of return that financial managers use to evaluate all possible investment opportunities to determine which ones to invest in on behalf of the firm’s shareholders.
The COC represents the firm’s cost of financing and is the minimum rate of return that a project must earn to increase firm value.
CAPM
The Capital Asset Pricing Model describes the relationship between the required return and the nondiversifiable risk of the firm as measured by the beta coefficient.
WACC
The Weighted Average Cost of Capital reflects the expected average future cost of capital over the long-run by weighing the cost of each specific type of capital by its proportion in the firm’s capital structure.
Capital Budgeting
The process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing owner’s wealth.
Steps in the Capital Budgeting Process
- Proposal Generation
- Review and Analysis
- Decision Making
- Implementation
- Follow-up
NPV vs IRR
NPV measures how much wealth a project creates (or destroys, if NPV negative) for shareholders. It does not measure benefits relative to the amount invested.
IRR provides a rate of return or actual dollar amount that is easily related to by financial managers.
Major Cash-Flows of a Project
- Initial Investment
- Operating Cash Flows
- Terminal Cash Flow (liquidation)
Assessing Project Risk
- Scenario Analysis - uses possible outcomes to create various scenarios
- Simulation - statistics-based approach that applies predetermined probability distributions and random numbers to estimate risky outcomes.
- Exchange-Rate Risk - the risk that an unexpected change in exchange rates will reduce the market value of a project’s cash flow.
Biblical Integration
Stewardship
Value Creation
Measuring Success - businesses measure in financial terms but we must also remember the qualitative measures as well.
Ethical Decision Making
Business Strategy
