Business Information & Decision Making

8/3/2019 Business Information & Decision Making

1/51

Business Information& Decision Making

Prof. Rushen Chahal

2/10/2012


2/51

L

ets get warmed upA. Introduce yourself to the class

B. What decisions have you made recently?

Examples:

Personal

Academic

Economic or Business

What do you think & feel about your decision(s)

2/10/2012


3/51

L

ets get warmed up Me 1

st

!A. Introduce yourself to the class: Richard Derbyshire

B. What decisions have you made recently?

Examples:

Personal: I climbed Mt. Lincoln a week ago: >5K feet

Academic: EC & programming goals: Java, Squeak, etc

Economic: I bought lots! of books in the USA

What do you think & feel about your decision(s)My knee still hurts!!! But, Id do it again, only better prepared

next time!

Need to make spare time to work on programming/EC goals

2/10/2012


4/51

L

ets get warmed up me 1

st

Mt. Lincoln, New Hampshire White MountainsAltitude > 5000 feet (1666 meters)

2/10/2012


5/51

Business Information

& Decision Making

Introduction: First Day

Textbook: Quantitative Methods forBusiness, by Donald Waters, 3rd edition.

Instructor: Richard (Rich) Derbyshire [email protected]

2/10/2012


6/51


& Decision MakingTextbook: Quantitative Methods for Business, by

Donald Waters, 3rd edition.

Our plan for this semester: (??? = 2 weeks / chapter ???) Ch7: Calculations with Money

Ch9: Business Forecasting

Ch10: Planning with Linear Programming

Ch11: Using Calculus to Describe Changes Ch16: Analyzing Business Decisions

Ch17: Controlling Stocks

Ch18: Planning Projects with Networks

2/10/2012


7/51


& Decision MakingOurLearning Process:

A. L

earn Concepts & DefinitionsB. Understand Application of Concepts

C. Practice (problem solving)

Lots! of practice will be key to learning Defining the Problem (Modeling)

Finding Solutions (Calculations, Analysis, Decisions)

2/10/2012


8/51


& Decision MakingOurLearning Process:

L

ots!of practice will be

keyto learning

Defining the Problem (Modeling) Situation Analysis

Problem Definition (mathematical &/ mental model)

Finding Solutions Calculations Analysis

Decisions

Evaluation

2/10/2012


9/51


& Decision MakingRecommended:

Attend every class: this makes learning a difficult

subject much easier Do all reading & assignments (keep a workbook)

Use class time to perfect your knowledge, takegood notes

Ask questions

Practice a lot

Review often

2/10/2012


10/51


& Decision MakingFirst assignment: (see next slide, also)

Look over the entire textbook, to get an idea ofthe book and its contents

Look over Chapters 7,9,10,11,16,17,18

Make sure you have the proper mathematical

background to understand these subjects, such asknowledge of basic calculus, basic accounting &finance report to me any issues

2/10/2012


11/51


& Decision MakingFirst assignment:

Read Chapter 7 in your textbook Study Worked Examples carefully

Answer all self assessment questions as youprogress through the chapter

Work Problems at the end of the chapter, aswe progress through each topic. Be ready toreview in class.

2/10/2012


12/51


& Decision Making I will try to make this class as interesting as

possible:

I will need your help (participation) This topic requires a lot of math & analytical

skills (& Deep Thinking, i.e. Critical Thinking)

This topic can be both very interesting & very

grueling (hard work), at times.

***If you master this subject, you will havedeveloped a critical and extremely valuablemanagement skill***

2/10/2012


13/51


& Decision Making

Chapter 7: Calculations with Money

Subjects covered: Financial Ratios

Break-Even Point

Value of Money Over Time Mortgages, Annuities & Sinking Funds

2/10/2012


14/51

Business Information& Decision Making Example1

Chapter 7: Calculations with Money Example:

You have decided to purchase a new automobile, and the

negotiated price is $20,000. You make a down payment of$2,000 and finance the remaining $18,000.

At this point the loan officer of the dealership asks you

a) Would you rather go with a 3% APR and no

manufacturer's rebate,b) or select a 9% APR which includes a $1,500

manufacturers rebate?

What else do you need to know to choose the better

deal? What choice would you make?2/10/2012


15/51

Business Information& Decision Making Example2

You are studying for yourInformation and Business Decisions Final and have acraving for a fresh pizza. You cant spare the time to pick up the pizza andmust have it delivered.

Perfect Pizza offers a 1 thick (including toppings), 20 square pizza with yourchoice of two toppings for $15 plus 5% sales tax and a $1.50 delivery charge (no

sales tax on delivery charge).

Freds Pizza offers the round, deep-dish Pizza Bomb which is 20 inches in

diameter. It is 1-3/4 thick, which includes two toppings, and costs $17.25 plus 5%sales tax and free delivery.

(a) What is the problem in this situation?

(b) Assuming that your common unit of measure is $ (i.e., cost), what is the bettervalue for

getting a pizza based on the criterion of minimizing cost per unit of volume?

(c) What other criteria might be used to select which pizza to purchase?

What is your choice?2/10/2012


16/51


Chapter 7: Learning Objectives

Financial Ratios Consider Financial Ratios

Understand Use of Ratios & Importance

2/10/2012


17/51



Break-Even Point Construct a Break-Even Graph

Calculate Break-Even Points

Understand Economies of Scale

2/10/2012


18/51



Value of Money Over Time

Calculate Investment Values Simple Interest

Compound Interest

Calculate PV (Present Value)

Calculate IRR (Internal Rate of Return)

Calculate Depreciation of Assets

2/10/2012


19/51



Mortgages, Annuities & Sinking Funds Calculate payments:

Sinking Funds

MortgagesAnnuities

2/10/2012


20/51


2/10/2012


21/51

An Experiment!

Beijing Olympic Lemonade!!!

Phase One: Our IdeasHow to make money selling lemonade?

Brain Map

Main Idea

PMI

Refined Idea 2/10/2012


22/51

An Experiment!

Beijing Olympic Lemonade!!!

Phase Two: Analysis (Angel Investment 20,000RMB)

What do we need? (How were going to do it?)

Break-even? (7.2 in our book)

Economy of Scale? (7.2.2 in our book)

Looking at some ratios (7.1 in our book)

Go?, or No Go?

or How to Make a Go?

2/10/2012


23/51


Fourteen Key Business Ratios Used by D&B

Ratios are a means of highlighting relationshipsbetween financial statement items. Generally,ratios are used in two ways: for internal analysisof items in a balance sheet; and/or for

comparative analysis of a companys ratios atdifferent time periods and in comparison to otherfirms in the same industry.

2/10/2012


24/51



D&B uses fourteen key financial businessratios to measure a companys solvency,efficiency and profitability.

The ratios are divided into three groups:

2/10/2012


25/51



Solvency Ratios measure the financialsoundness of a business and how well thecompany can satisfy its short- and long-

term obligations

2/10/2012


26/51



Efficiency Ratios measure the quality of thefirms receivables and how efficiently it uses andcontrols its assets, how effectively the firm ispaying suppliers, and whether the firm is

overtrading or undertrading on its equity (usingborrowed funds).

2/10/2012


27/51



Profitability Ratios measure how well acompany performs; analyze how profitwas earned relative to sales, total assets

and net worth.

2/10/2012


28/51


Fourteen Key Business Ratios Used by D&B Solvency Ratios (6)

Quick Ratio

"Acid test" or"liquid" ratio

Measures the extent to which a business can cover its current liabilities withthose current assets readily convertible to cash.

Shows number of dollars of liquid assets available to cover each dollar ofcurrent debt.

Any time the ratio is 1:1 (1.0), the business is said to be in a liquid condition.The larger the ratio, the greater the liquidity.

Cash + Accounts Receivable Current Liabilities

2/10/2012


29/51


Fourteen Key Business Ratios Used by D&B SolvencyRatios (6)

Current Ratio

Measures the degree to which current assets cover current liabilities.

The higher the ratio, the more likely the company will be able to meetits liabilities. A ratio of 2 to 1 (2.0) or higher is desirable.

Current Assets Current Liabilities

2/10/2012


30/51


Fourteen Key Business Ratios Used by D&B SolvencyRatios (6)

Current Liabilities to Net Worth Ratio (%)

Indicates the amount due creditors within a year as a percentage of theowners' or stockholders' investment.

Measures the funds creditors are risking with a business temporarilyagainst the funds permanently invested by its owners.

Normally a business starts to have trouble when this relationshipexceeds 80%.

Current Liabilities Current Net Worth

2/10/2012


31/51



Total Liabilities to Net Worth Ratio (%)

Shows how all of the companys debt relates to the equity of the owner orstockholders.

The higher this ratio, the less protection there is for creditors.

If total liabilities exceed net worth then creditors have more at stake than

stockbrokers.

The difference between this ratio and Current Liabilities to New WorthRatio is that it pinpoints the relative size of long-term debt, which canburden a firm with substantial interest charges.

Total Liabilities Net Worth 2/10/2012


32/51



Fixed Assets to Net Worth (%)

Shows the percentage of assets centered in fixed assetscompared to total equity.

Generally the higher this percentage is over 75%, the morevulnerable a concern becomes to unexpected hazards andbusiness climate changes. Capital is frozen in the form ofmachinery and the margin for operating funds becomes toonarrow to support day-to-day operations.

Fixed Assets Net Worth

2/10/2012


33/51


Fourteen Key Business Ratios Used by D&B EfficiencyRatios (5)

Collection Period Ratio (Days)

Helpful in analyzing the collectibility of accounts receivable, orhow fast a business can increase its cash supply.

Accounts Receivable Sales x 365 Days

2/10/2012


34/51



Sales to Inventory Ratio

Measures how fast inventory is moving the cash flow into thebusiness.

When this ratio is high, it may indicate a situation where sales arebeing lost because a concern is understocked and/orcustomers are buying elsewhere.

If the ratio is too low, this may show that inventories are obsoleteor stagnant.

Annual Net Sales Inventory2/10/2012


35/51



Assets to Sales Ratio (%)

Rates sales to the total investment that is used to generate those sales.

If percentage is abnormally high, it indicates that a business is notbeing aggressive enough in its sales efforts, or that its assets arenot being fully utilized. A low ratio may indicate a business is sellingmore than can be safely covered by its assets.

Total Assets Net Sales

2/10/2012


36/51



Sales to Net Working Capital Ratio

Measures the number of times working capital turns over annually inrelation to net sales. Should be viewed in conjunction with theassets to sales ratio.

A high turnover rate can indicate overtrading (excessive sales volumein relation to the investment in the business). A high turnover may

indicate that the business relies extensively upon credit granted bysuppliers or the bank as a substitute for an adequate margin ofoperating funds.

Sales Net Working Capital or Sales (Current Assets Current Liabilities)

2/10/2012


37/51



Accounts Payable to Sales Ratio (%)

Measures how the company pays its suppliers in relation to the salesvolume being transacted.

A low percentage would indicate a healthy ratio. A high percentageindicates the firm may be using suppliers to help finance operations.

Accounts Payable Net Sales

2/10/2012


38/51


Fourteen Key Business Ratios Used by D&B Profitability Ratios (3)

Return on Sales (%)

Profit Margin

Measures profits after taxes on the years sales (profits earned perdollar of sales).

The higher this ratio, the better prepared the business to handledowntrends brought on by adverse conditions.

Net Profit AfterTaxes Net Sales

2/10/2012


39/51



Return on Assets Ratio (%)

The key indicator of profitability.

A high percentage tells you the company is well run and has a healthyreturn on assets.

Net Profit After Taxes Total Assets

2/10/2012


40/51



Return on Net Worth (%)

Return on Equity

Measures the ability of a companys management to realize anadequate return on the capital invested by the owners.

Net Profit AfterTaxes Net Worth

2/10/2012


41/51


Lets look at some real businesses:

Seven-Eleven Convenience Stores

Starbucks Coffee Shops

CVS Pharmacy Stores

Take a look over the annual reports and see what you thinkWhat types of data, information do you see?

How about financial & performance ratios &/ statistics?

2/10/2012


42/51


2/10/2012


43/51


2/10/2012


44/51


2/10/2012


45/51


Chapter 7: Calculations with Money

Financial Ratios

Break-Even Point

Value of Money Over Time

Mortgages, Annuities & Sinking Funds

2/10/2012


46/51


2/10/2012


47/51


2/10/2012


48/51


2/10/2012


49/51


2/10/2012


50/51


2/10/2012


51/51


2/10/2012

Business Information & Decision Making

Documents

Transcript of Business Information & Decision Making