Business 1220 General Management Exam Tips

Transcription

1 Business 1220 General Management Exam Tips Exam Date: April 14, 2013 Exam Time: 9:00 1:00 Building Location: Thames Hall (gym) Elements of Analysis: Strategic Decision Making o Want Analysis- management references Personal objectives and implications Professional objectives and implications o Need Analysis- industry analysis Pest analysis Consumer analysis Competitive analysis Trade/distribution chain analysis o Key Success Factors o Can Analysis- company analysis Internal strengths and weaknesses Finance, marketing, human resources and operations o Fit Between Can/Want/Need Analysis o Competitive Advantages Is it sustainable? Evaluation of Alternatives o Firm Valuation Net book value Economic appraisal Capitalization of earnings o Net Benefit and Payback o Breakeven Analysis o Projected Income Statement Decision General Exam Tips: Read the case carefully: o Read the first and last paragraph and headings o Read thoroughly and make notes/highlights Label important sentences in the case margin o Complete exam in pencil o Label sentences and paragraphs in the case that help keep track of any important information- political, SP, VC, wants, consumer etc. Be Concise o Be neat, clear and specific

2 o Show all assumptions and calculations don t assume your grader knows or understands what you are talking about. o Use headings and subheadings to make it easy to follow and help organize your thoughts Remember the big picture Ask so what to help draw implications Make your decision based on your analysis (consistency is key) Finish all components of the exam NO DECISION = NO PASS The Exam Structure: The question: As, make whatever recommendations that you feel are appropriate You get: The question, the case, the general management cheat sheet and a blank exam booklet To Get an A in Want Analysis: What do the business owners want to do? Compare the alternatives to the goals and objectives that are being considered What are their personal goals? o Case Fact + Implication- should be two to three points maximum What are their goals for the business? o Case Fact + Implication- should be two to three points maximum To Get an A in Need Analysis: PEST Analysis- is it an attractive market to work in? Side note: some sections may have more points then others but each section should have at least one point o Political implications: What impact will government regulations have on the business? How will this impact the presented alternatives? o Economic implications: What impact does the state of the economy have on the business? How will this impact the presented alternatives? o Social implications: Considers social trends What impact does consumer demands have on the business? How will this impact the presented alternatives? o Technological implications: How will technological developments impact the business? How will this impact the presented alternatives? Consumer Analysis: o Consider consumer segments and customer profiles

3 Who are they? What do they want? Why do they buy the product? Where do they shop? How are they influenced? o Ensure that strong implications are developed Explain why the case facts are important How do they influence your decision? Which options seem more appealing? o What does the company have to do to attract and sustain their target market? Competitive Analysis: o Direct competition What are their strengths and weaknesses o Indirect competition What are their strengths and weaknesses o What are the implications for the company and are their any threats or opportunities? o Explain what the company needs to do to remain a successful competitor Trade Analysis o A trade analysis is only done if the industry sells tangible goods I.E food, computers, clothing- anything that can be physically touched o Questions to consider What kind of business is it? What does the trade chain look like? What role does the company play in the chain? Who has the power? What are roles and demands of suppliers and customers? Questions will be case specific o For the implications focus on how the preceding characteristics may provide opportunities or threats for the decision when considering different options o What must happen to keep the system running successfully To Get an A in Key Success Factors: Key success factors are the things that make the industry thrive There should be 3-5 points maximum Considering findings from your need analysis o o Look at the competitors and customers- what are the critical elements for success? Consider findings from your can analysis Is your company doing what they need to be successful? To Get an A in Can Analysis: For each component be sure to list the strengths and weaknesses along with implications Finance: o Does the company have access to funding? Are they profitable?

4 o What do the ratios say- in the case of not being given ratios; you will need to conduct your own ratio analysis. The following ratio notes are taken from finance o Profitability Vertical analysis: SOE item/sales Return on average equity: earnings/total average equity It is a good trend if COGS is decreasing and gross profit is increasingexhibits better management at costs and expenses Analyze the biggest number o Liquidity Current ratio: total current assets/total current liabilities (2:1 ratio) Acid test: cash + MS + AR/total current liabilities (1:1 ratio) Working capital: current assets/current liabilities o Efficiency Accounts receivable: accounts receivable*(sales/365) Accounts payable: accounts payable*(purchases/365) Inventory: inventory*(cogs/365) o Stability Net worth: total equity/total assets Debt to equity: total liabilities/equity Interest coverage: EBIT/interest expense o Growth Year #2 = year #1/year #1 Sales, net income, total assets and equity Marketing: o What is the strategy? o What works vs. what doesn t work o Who has the expertise and access to the funds? Operations: o Consider whether the current process is as efficient and effective as can be o Are there any capacity issues? o Are there areas that can be improved? Human Resources: o Are the right people and skill sets in place to be successful? For the implications, do not only consider a fit between alternatives, but also if they can meet the industry KSF s Following can analysis ask if there is a fit between the KSF s and the internal analysis (can) o Implications should state what you need to do vs. what you can do o I.E if a key success factor is being reliable, write an implication for your can analysis and if there is a fit with your needs Competitive Advantage:

5 Considering the findings in the want/need/can analysis What is the company s competitive advantage? o What single element lies at the core of the company s success o What differentiates them from their competitors Sustainability- can they sustain their competitive advantage o Is it right now or in the long term o What dimensions are not sustainable o What is preventing competitors from entering the market How to Get an A in Evaluating the Alternatives: List all alternatives and sub options Remember to always do a status quo option even if it does not give it Evaluate the qualitative pros and cons of each alternative o How does it impact the overall business o Does the option align with the management s wants and findings from previous analysis o Provide new insight, implications and demonstrate integrative thinking Financial Feasibility: o Projected Statement of Earnings o Net Benefit o Payback o Breakeven o Valuation- NBV, Economic Appraisal, Capitalization of Earnings What do your numbers mean? Discuss all findings! Always evaluate a quantitative analysis for each option (pros and cons list) o Each pro and con should have an implication Alternative #1- Projected Statement of Earnings: Even if the status quo isn t given as an option always do a projected statement of earnings for the status quo o If no assumptions are given, find the percentage of sales by: Year 1 year 2/year 2 = percentage of sales Take percentage of sales and x by year 1 sales I.E /2007= 5% therefore, 2007 sales number x 1.05 = estimated projected sales o If income tax isn t given, find the previous years income tax percentage by: Income tax/income before tax = last years tax rate Some useful tips and tricks: o Complete the COGS section if there is an inventory: Beginning inventory: found on previous years balance sheet COGS: % of sales from previous year Ending inventory: age of COGS, if not given, use previous year s value

6 Purchases: COGS+BI-EI o Gross income: sales-cost of goods o Net income before tax: gross income-total operating expenses o Unless expenses are given, always use a reasonable % of sales figure or same $ figure Rent, depreciation and interest are all same $ values o Depreciation expense: Same $ + cost of new asset residual value/10 The residual value is how much the asset is worth at the end of its given life, if it is not given, assume 0 Assume 10 for useful life if not given o Whenever you are given a loan you pay interest on it and it is automatically added to the interest expense Same $ + (new loan*interest rate) You may group remaining operating expenses (same %) as a % of sales o First, subtract all same $ values from the total expenses o Take the remaining amount of expenses and divide by the most recent revenue = % of sales o Multiply % of sales and multiply it by the projected sales amount Alternative #2- Firm Valuation: A firm valuation should be performed when there is an option of selling the business Methods of valuation: o Net Book Value o Economic Appraisal o Capitalization of Earnings You must use all three methods of valuation to determine the range of values for the company Think about which method most appropriately reflects the value of the business o Why would someone buy this business? o Where does the value lie? o Given your analysis, how much is the business worth? Why? Net Book Value: o Total Assets Total Liabilities Value of Business o Strengths: Calculate using net book values from the most recent balance sheet Represents the equity of the company Gives an idea of what the historical values of assets are worth o Weaknesses: Does not account for future earning potential Does not account for market value of assets Economic Appraisal:

7 o Total Appraised Assets Total Liabilities = Value of Business o List total assets at net book value (most recent information on assets from balance sheet) o Mark to Market - assign a factor value to each asset What percentage of the asset do you think the market is willing to pay? o Add new assets to find total market value of assets o Market value liabilities value of business o I.E Assets -> NBV ($) -> FV (%) -> Appraisal value = total value total liabilities = Economic Appraisal NBV- the $ given in the most recent balance sheet FV- the factor value given o Strengths: Easy to do Yields more accurate asset values, based on appraised market values o Weaknesses: Must estimate factor value, unless given Does not consider future earning potential Is the business worth more then the market value or the assets? Capitalization of Earnings: o Projected NPAT x Earnings Multiple = Value of Business o Create a projected statement of earnings Incorporate all assumptions in the case- can build of the one done for status quo Rent, amortization, and interest (Same $) Group remaining operating expenses as a % of sales o Determine a multiple for the business Use earnings multiple scale between 0-20 Determine multiple based on risks and growth potential of the business Should be both a risk multiple and a growth multiple, find a balance between the two State why the multiple were given o Multiply the PNPAT by multiple, defend your proposed value- does it seem rational? PNPAT projected net income after tax P/E multiple price investor is willing to pay for every $1 of the company earning o Strengths: Evaluates future earning potential of the company Commonly used among the industry o Weaknesses: Difficult to project earnings for an unstable business Does not value assets of the firm A business is ultimately worth what someone is willing to pay for it

8 When assigning a factor value to the cash asset, it is always given 100% Alternative #3- Net Benefit and Payback: When should it be used o When an investment is being made by the business Big time purchase, one time in flow of cash, not a recurring inflow or outflow of cash o Looks at how many years it will take the proceeds of the venture to pay back the investment o Considers how much money is being made or lost by investing Net Benefit o Incremental Revenue Incremental Costs Payback o Investment/Net Benefit Alternative #4- Breakeven: When should it be used o Net growth opportunity o No projected sales numbers are given o SP and VC or UC are given or can be calculated SP- selling price VC- variable costs (costs that varies with volume, think statement of earnings) UC- unit contribution o Tells us how many units must be sold to cover fixed costs Tells us the volume necessary to make $0 profit Breakeven = Fixed Costs/Unit Contribution o Unit Contribution = Selling Price Variable Costs After finding the breakeven point, ask if the number is reasonable and obtainable How to Know: The first challenge of general management is properly framing the problem Be sure to identify all alternatives and associated sub options Consider the kinds of numbers and quantitative information that is given for each option, if given any Which financial tools will best convey the feasibility of the option o A projected income statement is best used for evaluating the status quo o Firm valuation is most feasible evaluation for whether to sell the business or not o A breakeven analysis is used for net growth, or promotional opportunity o Net Benefit and Payback is used for expansion purposes How to know which alternatives to use: o If you are not given an estimated benefit or sales- breakeven analysis o If you are given an estimated benefit or sales- ask if there is an investment

9 o o If there is not an investment associated with the benefit - projected statement of earnings If there is an investment associated with the benefit- net benefit and payback How to Get an A on the Decision: A justification must be given for why a particular option/s was/where chosen Include linkage to past analysis Be sure to provide a clear, concise and convincing argument Decision Outline: o State who you are, your role and your decision o State the conditions for how the decision will be implemented I.E I have decided to expand the business on the condition that A, B and C are fulfilled Your conditions must be expanded on within the decision o Why do you believe your choice out of the alternatives is the best course of action o How does it fit with your Want/Need/Can analysis? Provide an explanation for each analysis o Why didn t you choose the other alternatives What wasn t as attractive about them o State your action plan Discuss in detail potential outcomes and financial feasibility o Risk analysis What will you do to mitigate any risks o Conclusion Approximate Grade Allocations: 30% is allocated to the want/need/can analysis 50% is allocated to the evaluation of alternatives 20% is allocated to the final decision Time Management: 45 minutes: read case and make notes 45 minutes: want/need/can 10 minutes: want analysis 20 minutes: need analysis and key success factors 15 minutes: can analysis and competitive advantage 120 minutes: evaluation of the alternatives 30 minutes: decision and review * 2 hours for reading the case, want/need/can analysis and decision * 2 hours for evaluation of the alternatives