Business Information & Decision Making

Prof. Rushen Chahal

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Lets get warmed up

A. 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)

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Lets get warmed up Me 1st!

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
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Lets get warmed up me 1st

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

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Business Information & Decision Making

Introduction: First Day Textbook: Quantitative Methods for Business, by Donald Waters, 3rd edition. Instructor: Richard (Rich) Derbyshire  Ebusiness_icb@yahoo.com

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Textbook: 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
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Our Learning Process:
A. B. C.

Learn Concepts & Definitions Understand Application of Concepts Practice (problem solving)


Lots! of practice will be key to learning

 

Defining the Problem (Modeling) Finding Solutions (Calculations, Analysis, Decisions)

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Our Learning Process:

Lots! of practice will be key to learning



Defining the Problem (Modeling)

 

Situation Analysis Problem Definition (mathematical &/ mental model) Calculations Analysis Decisions Evaluation

Finding Solutions
   

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Recommended:
     

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, take good notes Ask questions Practice a lot Review often
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First assignment: (see next slide, also)


Look over the entire textbook, to get an idea of the 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 as knowledge of basic calculus, basic accounting & finance report to me any issues

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First assignment:
  

Read Chapter 7 in your textbook Study Worked Examples carefully Answer all self assessment questions as you progress through the chapter Work Problems at the end of the chapter, as we progress through each topic. Be ready to review in class.
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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 have developed a critical and extremely valuable management skill***
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Chapter 7: Calculations with Money Subjects covered:  Financial Ratios  Break-Even Point  Value of Money Over Time  Mortgages, Annuities & Sinking Funds
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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?
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Business Information & Decision Making Example2

You are studying for your Information and Business Decisions Final and have a craving for a fresh pizza. You cant spare the time to pick up the pizza and must have it delivered. Perfect Pizza offers a 1 thick (including toppings), 20 square pizza with your choice 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 better value 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?
2/10/2012 What is your choice?

Business Information & Decision Making

Chapter 7: Learning Objectives Financial Ratios  Consider Financial Ratios  Understand Use of Ratios & Importance

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Chapter 7: Learning Objectives Break-Even Point  Construct a Break-Even Graph  Calculate Break-Even Points  Understand Economies of Scale

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Chapter 7: Learning Objectives 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

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Chapter 7: Learning Objectives Mortgages, Annuities & Sinking Funds  Calculate payments:
  

Sinking Funds Mortgages Annuities

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An Experiment!
Beijing Olympic Lemonade!!! Phase One: Our Ideas How to make money selling lemonade? Brain Map Main Idea PMI Refined Idea
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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?
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Fourteen Key Business Ratios Used by D&B Ratios are a means of highlighting relationships between financial statement items. Generally, ratios are used in two ways: for internal analysis of items in a balance sheet; and/or for comparative analysis of a companys ratios at different time periods and in comparison to other firms in the same industry.
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Fourteen Key Business Ratios Used by D&B D&B uses fourteen key financial business ratios to measure a companys solvency, efficiency and profitability. The ratios are divided into three groups:

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Fourteen Key Business Ratios Used by D&B Solvency Ratios measure the financial soundness of a business and how well the company can satisfy its short- and longterm obligations

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Fourteen Key Business Ratios Used by D&B Efficiency Ratios measure the quality of the firms receivables and how efficiently it uses and controls its assets, how effectively the firm is paying suppliers, and whether the firm is overtrading or undertrading on its equity (using borrowed funds).

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Fourteen Key Business Ratios Used by D&B Profitability Ratios measure how well a company performs; analyze how profit was earned relative to sales, total assets and net worth.

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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 with those current assets readily convertible to cash. Shows number of dollars of liquid assets available to cover each dollar of current 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
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Fourteen Key Business Ratios Used by D&B Solvency Ratios (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 meet its liabilities. A ratio of 2 to 1 (2.0) or higher is desirable. Current Assets Current Liabilities

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Fourteen Key Business Ratios Used by D&B Solvency Ratios (6) Current Liabilities to Net Worth Ratio (%) Indicates the amount due creditors within a year as a percentage of the owners' or stockholders' investment. Measures the funds creditors are risking with a business temporarily against the funds permanently invested by its owners. Normally a business starts to have trouble when this relationship exceeds 80%. Current Liabilities Current Net Worth
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Fourteen Key Business Ratios Used by D&B Solvency Ratios (6)
Total Liabilities to Net Worth Ratio (%) Shows how all of the companys debt relates to the equity of the owner or stockholders. 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 Worth Ratio is that it pinpoints the relative size of long-term debt, which can burden a firm with substantial interest charges. Total Liabilities Net Worth
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Fourteen Key Business Ratios Used by D&B Solvency Ratios (6) Fixed Assets to Net Worth (%) Shows the percentage of assets centered in fixed assets compared to total equity. Generally the higher this percentage is over 75%, the more vulnerable a concern becomes to unexpected hazards and business climate changes. Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow to support day-to-day operations. Fixed Assets Net Worth
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Fourteen Key Business Ratios Used by D&B Efficiency Ratios (5) Collection Period Ratio (Days)

Helpful in analyzing the collectibility of accounts receivable, or how fast a business can increase its cash supply. Accounts Receivable Sales x 365 Days

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Fourteen Key Business Ratios Used by D&B Efficiency Ratios (5) Sales to Inventory Ratio Measures how fast inventory is moving the cash flow into the business. When this ratio is high, it may indicate a situation where sales are being lost because a concern is understocked and/or customers are buying elsewhere. If the ratio is too low, this may show that inventories are obsolete or stagnant. Annual Net Sales Inventory
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Fourteen Key Business Ratios Used by D&B Efficiency Ratios (5) 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 not being aggressive enough in its sales efforts, or that its assets are not being fully utilized. A low ratio may indicate a business is selling more than can be safely covered by its assets. Total Assets Net Sales

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Fourteen Key Business Ratios Used by D&B Efficiency Ratios (5) Sales to Net Working Capital Ratio Measures the number of times working capital turns over annually in relation to net sales. Should be viewed in conjunction with the assets to sales ratio. A high turnover rate can indicate overtrading (excessive sales volume in relation to the investment in the business). A high turnover may indicate that the business relies extensively upon credit granted by suppliers or the bank as a substitute for an adequate margin of operating funds.
Sales Net Working Capital or Sales (Current Assets Current Liabilities)
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Fourteen Key Business Ratios Used by D&B Efficiency Ratios (5) Accounts Payable to Sales Ratio (%) Measures how the company pays its suppliers in relation to the sales volume being transacted. A low percentage would indicate a healthy ratio. A high percentage indicates the firm may be using suppliers to help finance operations.

Accounts Payable Net Sales

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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 per dollar of sales). The higher this ratio, the better prepared the business to handle downtrends brought on by adverse conditions. Net Profit After Taxes Net Sales

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Fourteen Key Business Ratios Used by D&B Profitability Ratios (3) Return on Assets Ratio (%) The key indicator of profitability. A high percentage tells you the company is well run and has a healthy return on assets. Net Profit After Taxes Total Assets

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Fourteen Key Business Ratios Used by D&B Profitability Ratios (3) Return on Net Worth (%) Return on Equity Measures the ability of a companys management to realize an adequate return on the capital invested by the owners. Net Profit After Taxes Net Worth

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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 think What types of data, information do you see? How about financial & performance ratios &/ statistics?
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Chapter 7: Calculations with Money
   

Financial Ratios Break-Even Point Value of Money Over Time Mortgages, Annuities & Sinking Funds

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