Transcript BA460-3 - University of Alaska system

Evaluating Strategy#
Step 4: Performance
Assessment
Planning & Evaluating
Your Strategy
Market Research:
Situation & SWOT
Analysis
Performance
Assessment:
Success Measures
& Financial Ratios
Corp. & SBU
Strategy:
Mission & Vision
Growth &
Competitive Strategy
Functional Planning:
Marketing
Production
R&D, HR
Finance
Let’s Examine:
1. Ways to plan &
evaluate your
financial
performance
2. Some Financial
Planning guidelines
Financial Proformas &
Reports
Cash
Flow
Income
Statement
Balance
Sheet
Financial
Ratios
 Shows cash movement in &
out of organization
 & how much cash is available
 Compares revenues &
expenses for the period
 Indicates profitability
What Co. Owns
What Co. Owes
Who Owns Co.
http://www.fool.com/school/valuation/howtoreadabalancesheet.htm
Financial Ratios
Provide insights into
company’s operations &
strategy


Used internally to evaluate
performance & set goals
Used externally to make
investment decisions
ROE
ROA
ROS
Asset
T/O
P:E
Financial Ratios
Answer 5 key Questions
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your
assets ?
4) How are you financing your assets?
5) Are you providing your owners an
adequate return on their investment ?
Your
Company’s
ratios as
reported
annually in
the
Capstone
Courier
Financial
Guidelines
Re: Liquidity
You Produce a crappy product
 &/or Your Competitors produce a
better product
 &/or You produce too much
product

IF
Then
You’ll be left w/less
revenue than anticipated
PLUS production &
inventory carrying costs
that must be paid..
IF
You’re left w/less revenue than
anticipated and did not plan &
allocate enough cash to cover your
production & inventory carrying
costs....
Then
Big Al arrives -pays your bills,
and leaves you
with a loan & a
stiff interest
payment
In order to:
• Avoid a
Liquidity
Crisis& “Big AL”
Need to:
•Maintain
Adequate
working capital
& cash reserves
•Have realistic/
accurate sales
forecasts
Basic Steps of Sales Forecasting
1
2
3
BEST CASE
WORST CASE
Your Product/Total Customer survey scores = Demand
4
•Enter WORSE case- in “your
sales forecast” on marketing
spreadsheet
•Enter BEST case- in
“production schedule” on
production spreadsheet
•Spread show up as inventory
on proforma BALANCE SHEET
In WORSE
CASE: You
should observe
lots of
Inventory
& little or no
Cash.
$0.00
Return to Marketing
Spreadsheet.
 Enter your best case
forecast.
Observe that your
Balance Sheet will
now reflect:
 lots of Cash
 and no Inventory
000
Important Considerations
re: BEST-WORST Scenario Analyses
By adjusting your CASH
POSITION according to your
WORST CASE estimate– will
avoid …
In WORSE
CASE: You will
have lots of
Inventory
& thus need to
drive your cash
position to the
black…
$0.00
Liquidity Guidelines
To adjust your cash position -
If you are cash poor,
issue Stock /Bonds ; or if
necessary consider a short
term loan

If you are cash rich, pay
dividends
stock.
and/or
buy back
Important Considerations
re: BEST-WORST Scenario Analyses
By adjusting production
according to BEST CASE
estimate– will minimize loss
of profit due to Stock-outs


Fixed costs (marketing, R&D, interest
or depreciation) already covered
Thus, any additional sales would
only incur variable (production)
costs
For example,
1.
2.
3.
If your annual sales were
$120M, in one month
you’d sell $10M.
If a months material &
labor costs = $7M, you
missed contributing $3M
to Net Margin.
This would be taxed in
the simulation at 35%, so
your opportunity cost is a
missed $2M in profit.
Financial Ratios
2nd Key Question
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your
assets ?
4) How are you financing your assets?
5) Are you providing your owners an
adequate return on their investment ?
Profitability
Ratios
Show how profitable company is
ROS---Return on Sales
 ROA—Return on Assets
 ROE-- Return on Equity

Main ratio of Profitability
Return on Sales
“ROS indicates the percentage of each
sales dollar that results in net income.”
net
profit
Return on Sales =
net sales
Financial
Guidelines:
Profitability
2) How Profitable is your Firm?
ROS
Contribution Margin



If your Contribution Margin is below 30%,
…..the problem = combination of Marketing
(customers hate your products), Production
(your labor and material costs are too high), or
Pricing (you cut the price too much).
If your ROS is below 5%, but your Net
Margin Percentage is above 20%, ….you
either experienced some extraordinary "Other"
expense like a write-off on plant you sold, or
you are paying too much Interest (If TQM is
enabled, you may also have spent heavily on
TQM initiatives).
If your Net Margin Percentage is below 20%,
but Contribution Margin is above 30%,… the
problem is heavy expenditures on Depreciation
(perhaps you have idle plant) or on SGA
(perhaps you are pushing into diminishing
returns on your Promo and Sales Budgets).
Financial Ratios
3rd Key Question
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your
assets ?
4) How are you financing your assets?
5) Are you providing your owners an
adequate return on their investment ?
Drive Asset Turnover
Reveals how effective assets are at
generating sales revenue.
The higher the better= more efficient use of assets
Asset Turnover =
sales
assets
$103,777/ $96,043 = 1.08
Firm can generate $1.08 in sales for every $1 assets
Drive- Return on Assets
“ROA measures company’s ability to
use all its assets to generate earnings.”
Return on Assets =
net profit
assets
Financial Ratios
4th Key Question
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your
assets ?
4) How are you financing your assets?
5) Are you providing your owners an
adequate return on their investment ?
LEVERAGE:
Assets/Equity – simulation takes
owner's perspective.
Corp assets fin.w/ debt
Optimal
Leverage
A Leverage of 3.0
says, "For every
$3 of Assets there
is $1 of Equity
Assets
Debt
Equity
$1
$0
$1
$2
$1
$1
3.0
$3
$2
$1
4.0
$4
$3
$1
1.0
2.0
1.8
to
2.8
Leverage from lenders’ perspective impacts bond ratings:
AAA/AA/A/BBB/… BB & beyond is Junk…
B/CCC /CC/C/D = default
•As your debt-to-assets
ratio increases…
•Your short term interest
rate increases…
•For each additional .5%
increase in interest
•You drop one category
Last Key Question
Are you providing
your owners an
adequate return
on their
investment
Owners evaluate profits w/
two stat’s:
ROE (Return On Equity)
ROE = Profits/Equity = Profits/Assets *
Assets/Equity = ROA * Leverage.

EPS (Earnings Per Share)
EPS = Profits/Shares Outstanding

STOCK PRICE
Function of:
1. Book Value

Equity/ # shares
issued
2. Earnings per
Share (wgtg 2-3?)

Net Profit/ Shares
3. Dividend Policy
(wgtg 5-8?)
ROE
Encompasses the 3
main levers used by
mgt to generate
return on investors
equity
Profitability * Asset Mgt * Leverage
DuPont Formula
net profit
Return on Equity =
net profit
sales
x
sales
assets
equity
x
assets
equity
Profitability * Asset Mgt * Leverage
Return on Equity =
net profit
equity
Improve ROE by:
1) Increase sales w/out increase costs & expenses
2) Reduce COG or operating expenses
3) Increase sales relative to asset base- either by
increasing sales or by reducing company assets
4) Increase use of debt relative to equity-but only to extent it does not jeopardize firm’s
financial position
Success Measures








Cumulative Profits
Ending Market Share
ROS
Asset Turnovers
ROA
Performance Measures- Defined
Performance Measures-Dynamics
ROE
Ending Stock Price
Market Capitalization (Ave # Shares) * (Closing Price)
Diff Strategies Play into
Different Success Measures
Profit
BCL
X
L=2-3
MS
X
SP &
MC
ROE
pf/e
X
CostAll Segments= more sales & thus enable
Niche &
greater
PLC
X
L=1.5-2
NichePLCDiff
X
X
AT
s/a
X
X
X
X
ROA
pf/a
X
Cum. profit & overall market share
B-Diff
ROS
pf/s
X
X
X
X
TODAY’S
• Determine Relative
Weightings for Your
Selected Success
Measures
• Enter weightings – in
preparation for simulation:
Practice Round #1