Financial Management Essentials

Financial Management

• Key concepts include risk vs. return, time value of money, cash flows, asset valuation, and diversification.

Risk vs. Return

• A risk-return trade-off exists where higher potential returns are associated with higher risk.

Time Value of Money

• Money available at the present time is worth more than the same sum in the future due to its potential earning capacity.

Cash Flows

• Focus should be on cash flows rather than just profits.
• A common problem for rapidly growing firms

Asset Valuation

• The process of determining the present value of an asset

Diversification

• Can mitigate risk

Financial Planning Process

• Involves forecasting, budgeting, and controlling.

Forecasting

• Determines how much cash is needed to meet objectives in both the short and long term

Budgeting

• Operating budgets focus on expected revenue and expenses linked to predicted sales forecasts, ultimately determining the firm's expected gross profit
• Capital budgets establish a plan to acquire and finance expensive assets like equipment or real estate.
• Cash flow budgets design solutions for forecasted cash flow shortfalls or suggest plans to utilize short-term cash surpluses.
• All budgets can be compiled into a master budget, which is a master financial plan for the firm over a specific planning horizon

Controlling

• Involves comparing the budget versus actual results, identifying deviations, proposing solutions, and making adjustments.

Short-Term Financial Needs

• Managing involves cash inflows vs. cash outflows, managing accounts payable, and accessing trade credit.
• Working capital refers to funds for day-to-day operations.
• Trade credit gives access to a product or service before needing to pay for it.

Acquiring Funds

• Debt financing includes secured loans (collateral), unsecured loans, and corporate bonds with repayment at a predetermined time.
• Equity financing includes retained earnings (profits reinvested in the company), issuing stock, and venture capital.
• Issuing stock provides investors with part ownership of the company.
• Venture capital involves investment firms providing funds to companies for a percentage of ownership.

Debt vs. Equity Financing

• Debt involves principal and interest repayable upon some agreed schedule, even if the firm is not profitable.
• Equity is an investment that is not required to be repaid by the firm, but they may choose to pay dividends.
• Debt means no ownership is given up, but may have restrictions as a condition of borrowing.
• Equity gives investors an ownership stake in the company with voting rights.
• Interest is tax deductible for debt
• Dividends are not tax deductible for equity

Shareholder Wealth Maximization Theory

• This is a Key Decision Making Tool

Understanding Customers

• This is Chapter 11

Types of Customers

• Consumers (B2C) are end-users of products and purchase for their own use.
• Business Buyers (B2B) purchase products to resell or use in producing another product, or for operating purposes.

Consumer Decision Process Example

• Problem recognition occurs when something such as a hurricane knocks shingles off roof
• Search involves internal experience and external advice from friends, websites, and calls
• Evaluation involves salespeople and prices
• Selection involves hiring a person to complete the work
• Purchase evaluation involves analyzing purchase decision after the next hurricane

Consumer Buying Decision Types

• Extended Problem Solving
• Limited Problem Solving
• Routine Response Behavior

Business Buying Decision Types

• Straight buy - the same exact purchase
• Modified rebuy - changing the purchase in some way
• New task rebuy - completely new type of purchase

Marketing Research

• It links the consumer and the public to the marketer through information

Marketing Research Process

• Involves problem definition, secondary research, setting research objectives, developing hypotheses, design research method, data collection, data analysis, results and recommendations, and follow up for actions.

Design Research Methods

• Exploratory research involves focus groups and interviews
• Descriptive research involves observing characteristics and behaviors using surveys and observations.
• Causal research attempts to find cause and effect relationships through tests and experiments.

Marketing Strategy

• STP stands for Segmentation, Targeting, and Positioning

STP: Segmentation

• Grouping customers by characteristics (narrow scope)

STP: Targeting

• Deciding which group to focus upon by identifying a market segment

STP: Positioning

• Understanding customers' perceptions of products/services (establish unique place in the market)

The Total Market

• Includes existing and potential customers meeting purchasing criteria

Targeting Markets

• Undifferentiated Targeting avoids segmentation and treats the total market as a segment.
• Differentiated Targeting identifies multiple market segments, and builds a unique marketing mix to appeal to each segment.
• Concentrated Targeting selects a single segment of the market and focuses exclusively on that market.

Positioning

• Establishes a unique place in the minds of the target market relative to competitors.

Perceptual Map

• A visual tool to see where a company sits among competitors to guide positioning decisions.
• Examples of criteria for mapping are economical to high priced, and sporty to family.

Marketing Management

• Chapter 12

The 4 P's of the Marketing Mix

• Product, Promotion, Price and Place/Distribution

Product

• Products can be tangible or intangible; consumer products or business products; goods, service or ideas

Consumer Products

• Convenience products are used routinely, consumer spends little time deciding
• Shopping products involve customer choice and brands on quality, price
• Specialty Products involve brand image, customers will do whatever it takes

Developing and Managing Products

• A product class is an industry or the broadest classification like major home appliances
• A product mix is an overall group of products that a business offers
• A product line is a group of related products

Product Life Cycle

• Stages include Introductory Stage, Growth Stage, Maturity Stage, and Decline Stage

Branding

• The Trade Name identifies the company
• A Family Brand is a single brand name for the sale of more related products
• Manufacturer's Brand is owned and controlled by the producer
• A Private Label Brand is owned and controlled by intermediary, such as a distributor or retailer
• A Generic product has no brand on the product
• Individual Brand is where each product is given its own brand name

Services

• Intangibility, Inseparability, Perishability, Heterogeneity

Promotional Mix

• Advertising involves a similar message to a large group of people via mass media
• Personal selling involves a salesperson making a one-on-one connection with a customer
• Sales promotion involves offering a potential customer a temporary incentive to buy the product now
• Public Relations involves generating Publicity about brands and the company

Pricing

• Price is an indicator of how the customer values the product in the marketplace
• Perceived value is what the customer is willing to give up to get desired benefits

Pricing Objectives

• Profit maximization involves higher price and higher markups
• Sales maximization involves lower price and higher volume
• Status quo is the same as competitors

Elasticity of Demand

• If price increases, then quantity demanded decreases
• Elastic - small change in price, big change in demand
• Inelastic - small change in price, small change in demand

Place (Distribution)

• Involves the distribution and the marketing channels
• Entities necessary to move a product from the producer to the end user
• Physical movement and transfer of ownership

Channel Structure

• The channel structure can be direct or indirect

Indirect Channel Structure

• Involves a larger number of intermediaries

Direct Channel Structure

• Involves a smaller number of intermediaries

Distribution Intensity

• Intensive: low-price convenience products, distribute to retail as much as possible
• Selective: distribution: involves some shopping, limited problem solving
• Exclusive Distribution: Is specialty products, needs problem solving

Supply Chain Management

• Comprises the logistical activities involved in sourcing including procurement and management

Operations Management

• Chapter 13
• It manages the transformation of inputs into outputs

Transformation Examples

• Automotive manufacturing: Steel, components, machinery, and labor are the inputs, converted through manufacturing into vehicles.
• Real estate: Homes for sale, sellers, and potential buyers are the inputs, which are transformed through advertising and showings into purchased homes with satisfied buyers and sellers
• Grocery store: Fresh, canned, and frozen foods along with other products and customers are the inputs transformed into retail transactions with customers who have desired groceries.
• Airline: Airplanes, fuel, labor and people needing to get elsewhere are the inputs, converted with transportation into transported passengers

Operations Management Goals

• Provide customers the products/services that they want and ensure products/services are available/where demanded
• Ensure products/services meet quality standards and design facilities for business operations

Make-to-Stock vs. Make-to-Order

• Make-to-stock is made from high output at lower costs per unit
• Make-to-Order is exact quantities customers want, in exact quantities they want
• Businesses need to value high output/low cost or specialization

Postponement

• Restaurants
• Pant manufactures

Inventory Management

• It's the management of items held for future use so that businesses can support its production and serve its customers
• Businesses must effectively manage items for future use by maintaining awareness of product levels

Inventory Management of Services

• Yield Management uses real-time analysis of the customer of the demand data to price a service
• Service management: hotels and transportation

Service Location Strategy

• Many services—like restaurants, gyms, hotels, and supermarkets -find that locating close to their competitors increases the number of customers
• They form clusters

Offshoring

• Advantages:
  • Access to markets
  • Lower labor and facility costs
  • Availability and cost of materials
• Disadvantage:
  • loss of jobs in home country
  • less control over operation
  • customer dissatisfaction

Meeting Customer Quality Standards

• Quality is defined as the characteristics of a product or service related to satisfy

Acceptance Sampling

• Determines the quality of a batch of products by testing a portion of the batch developed.

Statistical Process Control

• Monitoring the variability or changes in processes that occur over time.

Statistical Process Control (SPC)

• Control charts help to measure acceptable variability when developing new products

Total Quality Management

• A management system for a customer-focused organization that involves all employees focused on continual improvement
• This requires Total participation, Continuous improvement and Customer focus
• Developing a culture that values employee contributions and long-lasting relationships with suppliers.

Manufacturing Layout types

• Process Layouts are where there is a Variety of Products that involves Make-to-Order for Lower outputs
• Product Layouts are Highly similar products that involves a Make-to-Stock, with higher output and Less variety, for a lower cost

Manufacturing Layout Considerations

• These layouts consider worker satisfaction, worker productivity and worker safety

Service Layouts

• These layouts Must consider customer presence
• They include product layouts, process layouts and retail layouts