Performance Assessment

1. Performance Assessment

2. Situation/SWOT Analysis Strategic Planning Functional Integration Performance Assessment The Big Picture • Company • Consumers • Competitors • Conditions • PEST Functional Integration Growth &Competitive Strategies • Profits • Mrkt Share • ROA • ROS • ROE • Asset T/O • Stock • Mrkt Cap Marketing R&D Production HR Finance

3. Success Measures • Cumulative Profits • Ending Market Share • ROS • Asset Turnover • ROA • ROE • Ending Stock Price • Market Cap. Performance Measures- Defined Performance Measures-Dynamics

4. Usually First & Foremost

5. PROFITS • Profitability Ratios: • ROS---Return on Sales • ROA—Return on Assets • ROE-- Return on Equity • Net Profits • Cum Profits

6. NET PROFITS $$ • Year 1 $6 million • Year 2 $8 million • Year 3 $10 million • Year 4 $12 million • Year 5 $16 million • Year 6 $21 million • Year 7 $27 million • Year 8 $35 million CUM PROFIT • Typical Range: $20 to $100 M

7. Main ratio of ProfitabilityReturn on Sales net profit net sales Return on Sales = “ROS indicates percentage of each sales dollar that results in net income.”

8. Financial Guidelines: Profitability-ROS & Margins

9. How Profitable is your Firm? ROS Contribution Margin

10. IF: Contribution Margin below 30%,Problem =Marketing (customers hate your products), Production (your labor & material costs too high), or Pricing (you cut price too much). Contribution Margin is above 30%…but Net Margin Percentage is below 20% … Problem= heavy expenditures on Depreciation(perhaps you have idle plant) or on SGA(perhaps you’re pushing into diminishing returns on Promo & Sales Budgets). Net Margin above 20%,but ROS below 5%.. --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).

11. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

12. How effective/aggressive are you in building your Co’s asset base? • Use leverage: 1.8 -2.8 optimal / <1.5 >3=poor • Fully fund plant purchase thru depreciation + stock + long term debt • At outset should be spending ~$10-25M / round on plant improvement • By end should expand asset base to min $140M to $160M+

13. LEVERAGE: Assets/Equity – simulation takes owner's perspective. Corp assets fin.w/ debt Optimal A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity 1.8 to 2.8

14. AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default Leverage from lenders’ perspective impacts bond ratings: • As your debt-to-assets ratio increases… Your short term interest rate increases… • Foreach additional .5% increase in interest -Youdrop one category

15. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

16. Return on Assets “ROA measures company’s ability to use all its assets to generate earnings.” net profit assets Return on Assets =

17. Asset Turnover Reveals how effective assets are at generating sales revenue. The higher the better = more efficient use of assets You are generating $1.05 in sales for every $1 assets sales assets Asset Turnover=

18. ERGO:…if you effectively build your asset base & efficiency work those assets Stocks Profit$ Market Share

19. net profit equity Return on Equity = As measured by ROE Encompasses the 3 main levers used by mgt to generate return on investors equity Profitability * Asset Mgt * Leverage

20. net profit equity Return on Equity = net profit sales sales assets assets equity x x Value Chain Profitability * Asset Mgt * Leverage

21. Du Pont Formula Value Chain net profit equity Return on Equity = net profit sales sales assets assets equity x x

22. net profit equity Return on Equity = net profit sales sales assets assets equity x x Du Pont Formula Value Chain

24. net profit sales sales assets assets equity x x Improve ROE by: Value Chain Profitability * Asset Mgt * Leverage Increase sales&/or reduce&/oreff.workassets Improving Margins Increasing Leverage

25. ERGO:…if you effectively build your asset base & efficiency work those assets Stocks Profit$ Market Share

26. STOCK PRICE Function of: • Earnings per Share • Net Profit / # Shares • Book Value • Equity/# Shares • Dividend Policy Good Dividend Policy

28. Let’s Examine: • Ways to plan & evaluate your financial performance • Some Financial Planning guidelines

29. Financial Proformas & Reports Cash Flow Income Statement Balance Sheet Financial Ratios

30. Shows cash movement in & out of organization • & how much cash is available

31. Shows revenues & expenses for the period Indicates profitability

32. What Co. Owes What Co. Owns Who Owns Co. http://www.fool.com/school/valuation/howtoreadabalancesheet.htm

33. Financial Guidelines Re: Liquidity

34. IF • You Produce a crappy product • &/or Your Competitors produce a better product • &/or You produce too much product You’ll be left w/less revenue than anticipated PLUSproduction & inventorycarrying costs that must be paid.. Then

35. Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment Then You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover yourproduction & inventorycarrying costs.... IF

36. Maintain Adequate working capital & cash reserves In order to: Need to: • Avoid “Big AL” & a Liquidity Crisis- • Have realistic/ accurate sales forecasts

37. Sales Forecasting • Quick N’ Dirty • Consumer Pref’s • Best / Worst Case

38. Estimate Your FAIR SHARE • Answer 2 Q’s: • What will average product sell in this segment next round? • To what degree is your product above or below average- on consumers'’ buying criteria?

39. Fair Share - Sales Forecast Determine industry demand next round. Take last year’s total demand -- multiply by (1 + Growth Rate). Estimate # products that will be in segment. Divide total industry demand by the number of products. Your product’s demand will typically be between one half and twice the average product’s demand. Compare your product with competing products. Factors include design, awareness, accessibility, and planned mid-year revisions. Examine industry capacities, and the capacities of the “best” products. Can products meet the demand they generate?

40. #2 Forecast by Consumer Pref’s

41. Forecast off Customer Survey Scores

42. For Example-in Traditional segment everyone begins w/ 13% market share • Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.) • Initial round demand can vary +/- 25% • Later rounds best case/worst case vary ~~~~ 10-15%

43. After 1st Year/Round-Can see demand spread

44. Total=223

45. R#2 2 1

46. CASE CASE

47. Worst Case: • BIG INVENTORY/ little cash • Best case: • Lots of CASH / little Inventory

48. 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

49. $0.00 In WORSE CASE: You have lots of Inventory & little or no Cash.

50. $0.00 In WORSE CASE: You have lots of Inventory & thus need to drive your cash position to the black…