Chapter on "Start Management Simulation"

Chapter 16 pages (4296 words) Sources: 0

[EXCERPT] . . . .

Pop'n Bottles PNB

Quarterly Management Report

Financial Ratios and Discussion

PNB INCOME RATIOS

You can see that income to sales has fallen, this is because sales have fallen and thus cost is larger share of income.

This is #1 variable to fix; if we increase sales, that will be higher relative to income.

Result of this being so low?

= Our credit rating fell to 3 from

-So did everyone elses' except T3

-Why didn't theirs fall? Higher INCOME

= Fix this = #1 challenge.

= Increase sales. See above, talked about all time up till now.

GRAPH LIQUIDITY PNB SINCE TAKEOVER

This is why we have increased current cash in order to invest in SALES FORCE: MORE SALES PEOPLE

POTENTIAL EXPANSION

and also, now since two days ago,

DEALING WITH NOTICE 2.

We're glad we have it, cash makes operations work.

We will pay some of this down in Stock buyback

Bond buyback ongoing (every quarter as revenue allows) but

Now that we have NOTICE 2, we want to keep like $1.5 mill on hand at all times

To be able to deal w / EPA.

NEXT SLIDE

DEBT & ASSET TURNOVER SINCE TAKEOVER

Debt to assets and debt to equity will fall as we buy back bonds

More bonds than equity =

Debt to equity will improve as we buy them back down;

= Debt level will fall faster than shares out,

= This will improve even if we spend same amount on both every quarter

i.e. debt will fall faster than equity.

This will

Increase stock price by improving debt ratios and then stock price will increase even more after debt is paid down and we buy back more shares.

Total asset turnover ratio is what we want to increase most, how?

SALES. See above. (We've discussed at length already)

NEW SLIDE

PNB PROFITABILITY RATIOS

Again, these all depend on sales. If we can increase sales, particularly at home

=FOCUS on HOME AREA, MOST PROFITABLE

these will improve.

Sill reeling from the problems caused by NOTICE 1.

= ONLY NOW MOPPING UP the DAMAGE FROM THAT YES

How do we increse sales / fix these / make them go up again? See above. They're working on it.

NEW SLIDE SALES to ASSETS

Ultimately, this is where the gold is, #1 Goal is to KEEP FIXED ASSETS CONSTANT

TURN THOSE OVER FASTER

= improve this ratio, = higher sales with fixed plant, sales force, advertising,

= higher return on ADVERTISING DOLLARS SPENT

PAYROLL in SALES and LABOR

LOWER TRANSPORT COST PER UNIT

LOWER COST PER UNIT to MAKE

All of this by maximizing sales to assets i.e. ASSET TURNOVER RATIO

THIS IS OUR FAVORITE INDICATOR, besides net profit.

So, in summary, these are our objectives in future (group gathers round)

INCREASE SALES USING SAME PLANT, LABOR, SALES FORCE

= INCREASE SALES PRODUCTIVITY

-THERE IS SUCH THING as TOO MUCH ADVERTISING,

for us it's over about $80 right now

THERE IS SUCH THING as TOO MUCH SALES FORCE

Measured by sales force productivity

THERE IS TOO MUCH R&D

Depends on what quality model using

AVOID VOLATILITY

Disrupts sales

BE PREPARED for RISK

"Notice 1," "Notice 2" =

KEEP CASH on HAND

Applying these principles will INCREASE OUR FUNDAMENTALS

= INCREASE ROA, ROE

= INCREASE STOCK PRICE.

These are the most important steps we can take to MAXIMIZE VALUE for OUR SHAREHOLDERS

and Thank the Board of Directors for their oversight-

OUT

DONE

CEO TALK POINTS

Slide 1 SITUATION AUDIT

"What Happened"?

were in 2nd;

went down to 4th;

now we're in close 3rd you can see that in the graph.

SHOW THEM the GREEN bar Team 4

Slide 2: "Notice."

Was a trick

Decis tree indicated "do nothing" but wanted to be prepared for court fight

Responsibility to shareholders

= Diversified risk over larger share pool = less fx on EPS;

ie sold a bunch of shares

SHOW THEM PIE CHARTS

Black part = how much value per share would have been destroyed had we lost

2 whole quarters of output plus punitive damages

"trust fund money" also was cash to use for expansion

BUT: that didn't work: WHY?

-we switched to new product, as demanded by "Notice."

-we chose premium product, = higher cost.

= higher price.

>> we found out that higher price cut into sales, very much.

= customer does not necessarily want higher quality.

-problem is can't go back from that.

The other problem was, no one else responded.

= our sales plummet;

= our stock price plummets; but no one elses'.

DIVIDEND

And then, the next quarter, we paid out DIVIDEND.

$74,000. = a penny a share.

Pie chart 99/1% shows how little amount that was but

We were first to issue yes = win

Shows we will probably pay out dividend in future again BIGGER!

Didn't hurt cash that much to show that we know we should issue divi's.

Why?

In real world, investors usually WANT dividends, and issuing a dividend within a year of taking over management, displays the ability to generate enough cash that we can pay some out and thus this is a sign of confidence and performance.

This usually improves share price, in theory.

Did this improve our share price? Perhaps. We can't tell because all of the other noise from accidental bond issue ruining our debt-to-equity ratio;

also model change and sales drop from "Notice" that we responsibly prepared for, mistakenly it turns out.

BUT, overall, we've

-been trying to push the edge, instead of just coast along;

-have been exploring the parameters to see what works and what doesn't;

Notice or no notice, this is evidenced by -we were first to expand plant; shows decisive leadership;

-1st to issue dividend; shows performance for shareholders;

-highest sales force first, although that is eroding;

-- and other factors. Discovered limits to return on advertising etc., although strict measurement of that was confounded by price change; result is, these are all testing to see how dialing in various factors affects bottom line.

SALES talk points

Problem / Decision Statement:

THIS IS SALES VP

Fix this capital structure problem: Too much debt, equity now

What have been the costs of this adaptive strategy?

-Never had a bank loan yet;

-Never had layoff cost or idled plant cost or overtime;

-Are surviving ok-ish all these mistakes notwithstanding; = anyway.

-We and 2 other teams now have credit rating of 3

Team 3 has CR of 2 still, even tho they had 2 emergency bank loans!

BUT, they have much higher income; assets etc.

Theirs in fact is the winning strategy so far, sell the lowest-quality product for higher prices than the premium product.

CHART W / YELLOW, GREEN BARS:

LOOK at CHART: can you see that

First and last sales go up when the price goes down?

But not for all groups, only ones on ends?

Other groups sales fluctuate even tho price stays same.

These are two different results: What's the deal?

= sales go up even tho price doesn't change: = ?

plus also, sales go up when lower price: = ?

BUT, our sales aren't as high as we want them to be, = how to fix?

This is the question. Simply lowering price helps but does not guarantee!

= must figure out how to increase sales. Just dropping price didn't work as much as wanted.

= there must be something else going on. WHAT?

DIFFERENT PRODUCTS

T1 and PNB both switched to premium model 2;

T2 switched to low-grade model 2;

T3 kept selling the oldest, mid-grade model 1.

T3 has also kept their prices and other variables relatively constant compared to the other teams.

THIS MEANS different factors affect different products, not just as easy as,

Increase production (no help w/o sales)

Increase advertising: we did that, didn't work ENOUGH

More sales force: ditto last comment NOT ENOUGH

But, THESE ARE BASICALLY ONLY TOOLS we have to affect sales

= What's the deal?

= use REGRESSION.

Using regression to find 'correlation coefficient' [(this is in assignment yes)]

Shows differences in different factors for various different products.

NOT ALL SALES FACTORS ARE SAME!

SOME SALES WENT UP, EVEN WHEN PRICE GOES UP: = ?

= MUST FIND explanation.

Script p. 6 explains this to YOU in more detail. Google "correlation coefficient" if you don't know what it is.

OK yellow and blue squiggly lines:

Two in middle don't show any trend:

sales go up and down both at same time price goes up / stays same; etc. CAN U. SEE?

Two on ends show clearly that when price goes down sales goes up.

We would LIKE for sales and PRICE to BOTH GO UP

This is the goal. The two on the ends show clear trends; but not ones in middle.

This shows we can increase performance if we can get to being like the MIDDLE groups.

Both sales performance and return on expenditures.

Next graph, two up two down. Remember, 1 = 100% correlation!

Correlation coefficients tell… READ MORE

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