Let's Get Down to Business...

Your Study Guide for the Fourth Week

Time flies when you're having fun, right?  Here's your Study Guide for the Week you've been waiting for - Accounting and Finance Week! 

What do all those numbers mean?  Are they all accurate and reliable?  How can they be useful?

We'll try to answer most of those questions this week.

You need to know something about accounting as you get ready to launch your business career.  Why is it important?  It's how they keep score!  How can you win if you don't know the score?  Download Fourth Week Study Guide

Getting Right with your Ratios

Calculating the "Big Three" financial ratios is only half the fun. 

The real excitement doesn't start until you're using them to solve a mystery.  Calculating a ratio is like uncovering a new clue.  Your job is to study all the clues and figure out why something is happening. 

Calculating ratios and using them to solve financial mysteries is something you'll do in the real world.  From them, you'll get strategic insights about your own company and its competitors.  Then you can plot how you'll exploit your competitive advantage to the detriment of those competitors.

You might also use ratio analysis to figure out whether a new customer or supplier will be a good one.  Or you might study some ratios as part of deciding whether to accept a company's job offer.  Nothing would be worse than landing your dream job only to have your employer go bankrupt in six months.

So, let's look at some of the things you'll want to know and how ratio analysis can be a "tool" for getting the answers.

Keep an Eye on those Cash Flows

As you've learned, the Statement of Cash Flows often provides more useful information than the Income Statement or Balance Sheet.  Cash is the lifeblood of a business; there's nothing more essential. 

The Statement of Cash Flows reports the sources (incoming) and uses (outgoing) of a firm's cash.  It gives you an inside look at how well the firm's operations are running, where its cash is coming from and where it's being spent.  It shows how changes in a firm's Income Statement and Balance Sheet effected its cash.

Accounting and Finance: What do they really do all day?

Are Accounting and Finance just about the same thing?  What do those people working in Accounting do all day?  The Finance people seem to be sharper dressers and all drive BMWs, but what are they supposed to be doing?

Our week in the worlds of Accounting and Finance will try to answer (some of) those questions.  During your visit, you'll be introduced to lots of new terminology, even more than usual.  Because this material is new and very different from anything you've seen before, students have (occasionally) become frustrated.  Hint:  Flash cards work well for keeping all these new terms straight.

To help out, we'll shorten up the list of ratios to study.  There are just three to focus on:  (1) Current Ratio, (2) Debt/Equity Ratio and (3) Return-on-Equity Ratio.  We'll also add another financial report to know (the Statement of Cash Flows), but you'll see that studying it will be almost as exciting as reading a New York Times best-seller.

The continuation page has some more helpful hints, but to get started, here are my lecture notes and PowerPoint slides:

• Download Week 4 - Accounting and Finance

"B" is NOT the Correct Answer

As you're dutifully working through the Self-Test questions at the end of Chapter 15, the textbook's answer to Multiple Choice Question #24 should stump you.

The question asks for the term that describes the noncash process of allocating an asset's historical cost (purchase price) over its useful, economic life to account for wear and tear, deterioration or obsolescence. 

The textbook says the correct answer is "B" - Gross Profit.  That's wrong. 

The correct answer is "D" - Depreciation. 

Looking for a Competitive Advantage?

Successful businesses (and a lot of other organizations for that matter) are said to have a "Competitive Advantage." 

And because you want your business to be successful, you'll also want one.  But what exactly does the term mean?  Where can we find it?  Is it on Aisle "A" for Advantage or "C" for Competitive?

Let's see if we can get our arms around this idea and turn it into something useful.

Strategy: Here's What Started it All

About thirty years ago, a brash, young Harvard professor named Michael Porter burst onto the scene arguing that operational effectiveness alone wouldn't sustain long-term value. 

Obsessing over the details of zero-defect production was, Porter argued, an inward-looking focus.  Instead, a strategic perspective was needed that identified the forces shaping the competitive environment.  Analyzing those forces and deciding between the choices they demanded was where managers should be investing their time and energy.

Hanging onto your Competitive Advantage

Once you've mastered sustaining your competitive advantage, it's time to kick back and enjoy the good life, right? 

Or should you worry (next) about "protecting" the things that went into building your competitive advantage? 

First, this is a "good worry."  A lot of businesses never become successful enough to be concerned about this problem.  But because you excelled in BA-101, you've been successful beyond all expectations. 

So, just when you think there's nothing more to worry about, someone asks whether your competitive advantage is adequately protected. 

Before you answer, they ask another question, "What is it that makes up your competitive advantage?  How could you protect it if you wanted to?"

Thanks again to your outstanding performance in BA-101, you're not only prepared to answer these questions, but you've also got lecture notes and some PowerPoint slides to help:

• Download intellectual_property_week_3.ppt

Throw another log on the fire, open up the PPT slides and enjoy...

Product Differentiation and Market Segmentation

This post deals with the Third Week's material.  It's full of ideas and terms to take away from your Textbook reading (Chapters 12 and 13). 

Here also are my Lecture Notes and PowerPoint slides for the Third Week: 

• Download Week 3 - Competitive Advantage

Look closely at the elements of Product Differentiation; they'll need to be part of your Business Plan's Strategic Concept submission.  Also think about using the Perceptual Mapping "tool" for your market segmentation analysis.  Finally, don't overlook your "Distribution Channel" as how you'll obtain and sustain your Competitive Advantage.

Here are some helpful hints for figuring this out...

If You Can't Beat Them, Then Beat Them

Wal-Mart grew to be a retailing behemoth as a Price Competitor. "Always Low Prices" was their mantra for 19 years.

Three years ago, they began re-positioning themselves with a new slogan, "Save Money. Live Better." New advertising messages were rolled out portraying a warmer, family-friendly Wal-Mart. No more Smiley-Faces slashing prices in every aisle.

The idea was to appeal to a "middle-class" market segment who wanted more fashionable merchandise and lower prices due to the recession.

Guess what? Wal-Mart got it wrong. The strategy didn't work. It alienated their core customer base who wanted "everyday low prices."

To regroup, Wal-Mart is doing more than just returning to their roots. They're launching a massive, multi-billion dollar strategy that could re-make the face of retailing.

As you'll read in this Wall Street Journal Story [Download Wal-Mart sees Small Stores in Big Cities], there's a new Wal-Mart coming to town. No more big-box stores (typically about 185,000 square feet (over 4 acres) under one roof). Instead, they'll be "Neighborhood Markets" ranging in size from 30,000 to 60,000 square feet or only about a quarter of the size of a "Super Center."

For years, Portland effectively blocked big-box stores, forcing Wal-Mart, Target and others into existing buildings. Wal-Mart plans to work around this roadblock by building more, smaller stores (a typical grocery store is about 45,000 square feet in area) rather than a few, huge stores.

To do this, they'll spend about $7.5 to $8 Billion a year for the next few years. By comparision, the annual General Fund budget for the State of Oregon is about $7 Billion. And, unlke the State, Wal-Mart has that much cash, and more, in their bank account.

Keep an eye on this. It could the biggest brand re-positioning/strategic shift in retailing history.

The Third Week's Study Guide

Here we are in the course's third week and here's the study guide for this week: Download Third Week Study Guide

Pay particular attention to the three elements of marketing strategy: differentiation, segmentation and distribution.

How can you obtain a sustainable competitive advantage with one of those? Don't try for all three. You can't be all things to every customer in the solar system.

Your goal is to obtain a sufficient market share that allows you to earn a reasonable return for your investment and the investments of your partners or shareholders.

Don't forget those investments aren't always the financial kind. People want and should be compensated for the time and effort they put into the enterprise.

Fiscal Policy comes in Two Flavors: Which one works?

The federal government is using both fiscal policy and monetary policy to stimulate consumer and business demand and end the current recession. If things work as planned, positive economic growth will be restored (how long this will take is another problem for another day).

Fiscal policy, as we've discussed, can have two approaches. The one getting most of our recent attention is "stimulus spending." It is based on a theory that properly-directed government expenditures will have a "multiplier" of greater than one. In other words, one dollar of government spending will produce more than one dollar of gross domestic product.

The other "flavor" of fiscal policy is tax reductions. The idea here is lower taxes mean more disposable income for consumers who will spend and invest more thereby boosting economic growth and helping end the recession.

Surprisingly, there isn't much empirical evidence to support using one or both of these tools. The ideas have been around for a long time as theories but there aren't many studies that tell us which works best.

Here's a recent article from the Wall Street Journal reporting some research done on this question by a Harvard Economics Professor: Download Stimulus Spending Doesn't Work.

I won't spoil the story other than to point out that (1) the unemployment rate during the Great Depression was consistently around 25% and (2) lowering income taxes when personal and corporate incomes are falling is a double-whammy for local, state and federal governments.

Yield Curves "Rate" your "Interest"

Understanding Monetary Policy and Interest Rates becomes easier when the ideas are illustrated.   A great way to do that is by looking at some Yield Curves.

Yield curves are nothing more than plots of interest rates as of a specified time based on maturities. 

The "based on maturities" part of that definition gets clearer if you think about "money markets" being where different financial products are bought and sold.

Helpful Note:  Financial markets deal in dozens of different bonds, paper, bills, instruments and notes.  It can get overwhelming.  Keep it simple by remembering they're all just products.  How they differ from one another isn't important.  Every market, including money markets, has buyers (someone wanting a financial product that pays a specified amount on a certain future date) and sellers (someone providing the financial product that will do that).

One of the ways financial products differ from one another is by their term.  One product you buy today might not pay-off for one year while another might not pay-off for 20 years (these time periods are called the product's "term").

Obviously the "price" you pay for a product with a one-year term will not be the same as what you pay for a product with a 20-year term.  And what makes them different is the interest rate for one won't be the same as the interest rate for the other. 

Things get very interesting (and even exciting) when you think about the relationships between these differences and how they change over time.  That's when Yield Curves become your new "best friend!"