Finance Chapter 7 Flashcards
Mission fulfillment
the extent to which an organization realizes its mission and moves
closer to its vision.
Is systematic,, cyclical, dynamic and broad-based approach
Mission fulfillment parts:
- formulation
- operationalizing
- monitoring
- execution
strategy
the process of carefully
devising and executing plans to achieve particular goals
Governing board
frequently the board of directors, managers, or trustees which delegates strategy responsibilities to the executive leadership.
Vision statement is a
forward-looking pronouncement that describes what a firm aspires to be and achieve. It is its ultimate purpose, its “why.” forward looking, inspirational and motivational, measurable and actionable
Mission statement
a mission is encompasses the company’s “what,” its broad purpose. A firm expresses its mission in a succinct, precise declaration through a mission statement.
Present oriented, stable and long lasting, could evolve over time
Values
Organizational values provide a facet within the “how” frameworks that allows all
within a firm to evaluate their decisions and actions, take pride in their institution’s work, and make commitments.
Often include explanations of the individual value components, which can be used as personal forethought and retro- spection tools as well as permission-to-play evaluations.
Strategic initiatives plan
- Encapsulates a handful of high-level strategic initiatives (SI) at a time,
including substrategies - Considers the potential operational and financial impacts of each SI
- Evaluates SI alignment with the mission, vision, and values
- Sets measurable, well-defined targets for tactical planning and execution,
with specific metrics, data-gathering methods, and evaluation techniques
described within the substrategies
Institutional research
An organizational function responsible for collecting, aggre-
gating, and interpreting internal and external data.
Strategic Initiatives: Broad, High level statements
- Set multiyear targets for and describe how a firm progresses from the state
of its present mission fulfillment to the state of its desired vision - Address long-term security, viability, scale, and sustainability issues
- Inform annual tactical planning and budgeting
- Fluid over time
SWOT Analysis
- EVALUATES ORGANIZATIONAL STRENGTHS, WEAKNESSES,
OPPORTUNITIES, AND THREATS - BASED ON ENVIRONMENTAL EVALUATIONS
- Data from various sources of operational, financial, and market
information - ANALYZES STRATEGIC CAPABILITIES AND COMPETITIVE POSITIONING
- Basis for strategic initiatives
- STRENGTHS AND WEAKNESSES: TRENDS IN THE INTERNAL
ENVIRONMENT - OPPORTUNITIES AND THREATS: EXTERNAL FORCES AND FACTORS
Human capital
The economic value of an employee’s skill set; recognizes that all
employees are not equal.
Organizational alignment refers to
the degree employees subscribe to, accept, and model their employer’s mission, vision, and values.
Organizational alignment and outcomes
- Determined through self-reflection, dialoguing, psychometric
benchmarking, and surveys - Include turnover rates, productivity levels, and strength of the internal
employment referrals
Role Alignment and Outcomes
- Personal job match: balancing of role outcomes with technical expertise,
natural behavioral drives, and enthusiasm toward performance of duties - Evaluate job satisfaction, engagement, and effectiveness
- Safe environment for continual personal and professional development
DEVELOPMENTAL ALIGNMENT AND OUTCOMES
- Four categories: health and wellness, company environment,
relationships, and achievement and recognition - Measure deliberate development progress
- Leads to higher levels of employee engagement and satisfaction, stable
workforces, better business outcomes, greater profitability, better error
detection, reduction in cost structures, and political maneuvering
Passion skills
Convergence of technical expertise and enthusiasm for performing specific duties.
deliberately developmental organizations (DDOs) is a company
organized around the idea that “organizations will best prosper when they are more
deeply aligned with people’s strongest motive, which is to grow”
people outcomes
Subset of broader organizational strategic outcomes focused on
organizational, role, and developmental alignment of employees.
Talent optimization and people outcomes must be
- integrated into mission effectiveness and strategic initiatives
plans - Position culture as a central business strategy
- Direct relationship between realizing human potential and
organizational potential
Strategy operationalizing
organization must operationalize or translate into executable tasks
This leads to tactical planning and budgeting
Tactics are the
planned activities undertaken to accomplish the stated substrategies.
* Carry target completion deadlines
* Assigned an “owner”
* Provide financial expenditures amount and timing
Tactical maps present
the tactics to be performed by units, departments, teams, and individual employees within an organization.
* Link day-to-day work functions to the strategic initiative and mission
effectiveness plans
* Translate findings from environmental evaluations, SWOT analyses,
people outcomes, and strategic initiatives into actionable items (tactics)
Budgeting
- Annual financial planning process
- Runs concurrent with and supports tactical planning
- Budgets
- Operating
- Capital
- $1,000 or more financial outlay per item (varies from organization to organization)
Strategy Execution and Monitoring:
Incentives and Accountabilities
GAINS, PROFIT, SHARING
- Geared toward accomplishing strategic outcomes
- Based on achievement of individual, unit, department, and firm-wide
operational, financial, and strategic results - Part of employees’ total compensation
- Implemented to attract, retain, and reward employees, promote cohesion and
teamwork - Must include safeguards to prevent any cheating or gaming
Consultants
Provides expertise and experience in one or more focus areas.
Incentive compensation
A variety of approaches for motivating employees; does not
need to be monetary to be effective, as long as perceived to carry meaningful value.
NON-FINACIAL INCENTIVES
- Must be perceived to carry meaningful value for each affected individual
- Organization-wide achievement recognition programs
- Satisfy employees’ innate esteem needs and contribute to their elevation to self-
actualizing - Could range from daily “values spotlights” to annual award ceremonies
DELIBERATELY DEVELOPMENTAL APPROACH
- Ongoing two-way dialogue between the employee and the manger,
grounded in self-reflection - Evaluates organizational, role, and developmental alignment
- Produces constantly evolving individualized development, or
“elevation” plans - Include personal, educational, and professional development
components - Promote better alignment
SELF-GOVERNANCE MODEL
- Grounded in human motivation theory: promotes employee choices,
driven to address deficiency and growth needs - Recognizes that most managers do not have the requisite knowledge
and skills to be effective in behavioral modification - Require separation between technical and behavioral management
Monitoring and Close-the-loop Tools: PERSONAL DASHBOARD
- widely used tools for intradepartmental communication and
alignment monitoring. - Visual snapshot of the status of tactics, projects, key performance indicators, and
development goals - Accomplishments
- Color-coded status indicators
- Known issues with mitigation plans
- Developmental opportunities
Snapshot Reviews
- an effective approach for keeping the KPI as well as strategic initiatives continually visible throughout the institution and for driving performance to reach goals.
- Create visibility into the status of key performance indicators and strategic initiatives
- Drive performance and facilitate cross-functional discussions
Tactical Reviews and Progress Reports
- Quarterly status update of tactics execution
- Offer explanations for any variances to plan
internal rate of return (IRR)
- Measures return on investment (ROI)
- Expressed in percentages
Cash inflow is
positive amount
Cash outflow
is a negative amount
Present value
Adjusted for the timing and risk, the current monetary worth of a
future cash flow or an asset.
Net Present Value
Present value of predicted future revenues minus present
value of predicted future payments.
future value
The worth of a cash flow or an investment at a specified point in the
future.
opportunity cost of capital,
The magnitude of the best-return investment alternative
of the same risk.
Capital projects consist of
multiple cash flows: initial and subsequent investment outflows, revenues generated or costs avoided as a result of a project, and expenses associated with operating a new venture created by the project.
Sunk costs
The resources previously expended on a project or investment that should
be disregarded when evaluating the net present value.
Free cash flow (FCF)
- FCF = net operating margin after tax + depreciation – incremental
working capital – capital expenditures - FCF is cash that a firm has available to distribute to its debt and equity
holders - Depreciation is a noncash expense
WACC (WEIGHTED AVERAGE COST OF CAPITAL)
- Represents opportunity costs for both debt and equity holders and the
firm’s target debt–equity ratio
In a one period case, PV=
FV /(1+r)
Investment Decisions Based on NPV
- INVEST IF NPV > 0; IF MORE THEN ONE CHOICE, PICK THE HIGHEST NPV
PROJECT - CONSIDERS TIME VALUE OF MONEY (TVM)
- DEPENDS ONLY ON FORECASTED CASH FLOWS AND THE APPROPRIATE
DISCOUNT RATE - MEASURED IN TODAY’S $$
- Has an immediate impact on a share price (enterprise value)
- ALLOWS TO EASILY SELECT MORE VALUABLE PROJECTS AND COMPARE
DIVISIONS - ANY VALUATION METHOD PRODUCING INVESTMENT DECISION RESULTS
THAT DIFFER FROM NPV IS WRONG - Use with caution
NPV Considerations/ Forecasting:
- disregard sunk costs
- cash flow projections and discount rates should be used on the after-tax basis
- all
organization-wide financial effects of projects should be estimated and taken into
account. - only incremental, or additional,
cash-based projections should be considered. - existing overhead costs should not be allocated to the new projects.
- opportunity cost of the project
must be evaluated. In other words, the question of what the company would be giving
up by investing its resources in a given project must be answered.
3-F Framework for Projects Evaluation: FINANCES /ROI
- Many financial modeling tools exist
- Need evidence-based pro-forma financial statements and capital expenditures projections
- NPV and IRR calculations determine ROI
3-F Framework for Projects Evaluation: FIT
- Every prospective project and investment should be evaluated for fit with the strategic
outcomes and broad organizational frameworks - Some positive financial return projects may be rejected due to lack of alignment
- Allows companies to focus scarce resources on living the mission and realizing the vision
3-F Framework for Projects Evaluation: Feasibility
- Financial and human resources availability
- Market viability
- Opportunity cost
Capital Budgeting Process
- LED BY THE CHIEF FINANCIAL OFFICER (CFO)
- BUDGETS DERIVED FROM STRATEGIC INITIATIVES, SUBSTRATEGIES,
TACTICS, ENVIRONMENTAL EVALUATIONS, AND SWOT ANALYSES - SHOULD BE SUPPORTED BY ALL 3-F ELEMENTS
- SERVES AS THE BASIS FOR SETTING SOME OF THE KEY
PERFORMANCE INDICATORS - TIE EXPENDITURES TO THE MISSION EFFECTIVENESS AND STRATEGIC
INITIATIVES PLANS AND TACTICAL MAPS - BUDGETS APPROVED BY THE GOVERNING BOARD
- Evaluate your organization’s mission, vision, and values statements and determine
how well they match the current state of affairs. How well do they describe what
your organization is, does, and aspires to be? How is the organization doing in
aligning with its stated pillars? How well is the organization aware of its individual
contributors’ organizational alignment to these strategic pillars?
- Based on your organization’s stated mission devise several mission effectiveness
outcomes (KPIs), and cascade these through your organization down to the
individual contributors’ roles.
- Develop three people outcomes as well as related substrategies and tactics to
improve your organization’s focus on alignment. Complete the tactical map
template. Prepare an argument in support of your outcomes, substrategies, and
tactics to be presented to the strategy committee.
- Using the data in Tables 7.4 and 7.5, calculate the total year-end bonus amount for a
nurse manager who earns $100,000 annually, has a 10% bonus target, meets the
individual financial contributions, and completes their assigned tactics, but fails to
meet some of the individual and unit operational goals, and works in a hospital that
has met all of its strategic, operational, and financial goals, achieved 115% of the
projected EBITDA, and uses the “all-or-nothing” approach to the incentive
compensation criteria. Assume that the maximum aggregate bonus amount is set
high enough for all to receive the entire individually calculated bonus amounts.
- Prepare a full 3-F framework for a project of your choosing. Base your assumptions
on research and trends, and use Excel for financial modeling. Prepare a presentation
for the board of trustees or group of investors. Good luck and have fun!
