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All You Need to Know about Business!


4. Die Rahmenbedingungen Factory – All You Need to Know about Business! Editorial Team:

Consultant: Proofreading:

Dipl. Kfm. Michael Gebel Dipl. Kfm. Thomas Walter Dipl. Volkswirt Cornelius Geiger Prof. Dr. Ottmar Schneck Susanne Epperlein

© Copyright 2007

BTI – Business Training International GmbH Lindenspürstr. 22 D–70176 Stuttgart, Germany Telefon: +49–(0)711–66 46 37-0 Telefax: +49–(0)711–66 46 37-99 E-Mail: info@bti–online.com Internet: www.bti–online.com

Design, Artwork and DeskTopPublishing:

Artworks – Agentur für visuelle Kommunikation Wigbert-Georg Beck AGD Elsa-Brändström-Str. 18 D–72074 Tübingen, Germany www.artworks-beck.de

All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means) without the written permission of the copyright holder. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publishers. In accordance with the International Copyright Act 1956, any person acting in contravention of this copyright will be liable to criminal prosecution and civil claims for damages.

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4. Die Rahmenbedingungen Overview 1. 2. 3. 4.

BTI Business Simulations ............................................................................................... The Stakeholders of a Company .................................................................................. Prevailing Market Conditions ...................................................................................... The Scenario at Factory™ I. The situation at Factory™ ............................................................................................... II. Setting up the simulation ............................................................................................... III. What does your company own and how does it finance? ................................................. 5. The 1st Year I. Checklist A ................................................................................................................... II. Checklist B at the end of the 1st year .............................................................................. 6. What is Depreciation? ................................................................................................... 7. The Financial Statement ................................................................................................ I. Profit and Loss Statement................................................................................................ II. Balance Sheet............................................................................................................... 8. ”Window Dressing“: Policy Playground ..................................................................... 9. Annual Business Analysis and Performance Indicators ............................................ I. Annual Business Analysis ............................................................................................... II. Financial Indicators ....................................................................................................... III. Performance Indicators for the 1st year............................................................................ 10. The Cash Flow Statement ............................................................................................. 11. How Successful Was the 1st Year? .............................................................................. 12. Cost of Capital, WACC and EVA .................................................................................... 13. The 2nd Year I. At the beginning of the 2nd year .................................................................................... II. Checklist A ................................................................................................................... III. Checklist B at the end of the 2nd year ............................................................................ IV. Annual Statement .......................................................................................................... 14. More Financial Indicators .............................................................................................. 15. The Cash Flow Statement in the 2nd Year .................................................................. 16. Analysis of the 2nd Year............................................................................................... 17. How Successful Was 2nd Year? ................................................................................... 18. Provisions ....................................................................................................................... 19. What are Costs? ............................................................................................................. 20. Product Pricing ............................................................................................................... 21. Stocks .............................................................................................................................. 22. Capital Investment Analysis.......................................................................................... I. Static Method ............................................................................................................... II. Dynamic Method .......................................................................................................... 23. At the Beginning of the 3rd Year .................................................................................. 24. The 3rd Year I. Checklist A ................................................................................................................... II. Checklist B at the end of the 3rd year ............................................................................. III. Annual Statement .......................................................................................................... IV. Cash Flow Statement ..................................................................................................... V. Annual Business Analysis for the 3rd year........................................................................ 25. How Successful Was the 3rd Year? ............................................................................. 26. What Is Marketing? ....................................................................................................... 27. Final Considerations I. Break-Even-Point ............................................................................................................ II. Calculations ................................................................................................................. 28. Glossary .......................................................................................................................... 29. Profile of BTI ................................................................................................................... 30. Our Team ........................................................................................................................

4 5 6 8 8 9 10 11 12 14 16 17 18 20 21 22 24 26 28 29 30 32 33 34 36 39 40 42 43 44 45 46 47 48 50 51 53 56 56 58 59 61 62 64 65 67 70 72

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1. BTI Business Simulations • Business simulations by BTI are an efficient method of training, which due to their interactive design provide lasting learning effects in an exciting and fun way. • Business simulations by BTI provide live experiences, which allow participants to easily comprehend complex themes and apply this knowledge in their daily business. The simulation teaches costeffectiveness and financial acumen in an integrated, wellplanned manner.

100% 90% 80%

Transfer of Learning

Info

60%

40%

40%

20%

20% 10%

Hear

See

Hear and Simulation See Learning by doing

• Business simulations by BTI are exciting board games, which clearly demonstrate business processes. The high degree of visualization inherent in a simulation is in many ways more effective and certainly less complex than many conventional computer-based simulations. The relative simplicity of board games demonstrate basic and advanced principles in a fun way. Factory will let you experience the principle of business management.

Contents: • Business management concepts • Terms of business management • Decisions and their effects • Stakeholders of a company • Areas of improvement and • Shareholder-Value concept for business management

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2. The Stakeholders of a Company Discuss who are the stakeholders of a company and what are their specific interests.

Task

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3. Prevailing Market Conditions Info

Degenerating Prices impacting many Products

………………………………………………………………………………….. The pressure facing the products of Factory Inc. has increased dramatically. Even the “Factory” brand name does not allow any price premiums.

Globalisation

…………………………………………………………………………………….. New competitors from overseas are challenging “Factory Inc.” with low production costs. High investment costs are necessary for potential markets overseas.

Innovation …………………………………………………………………………………….. New products and new designs are changing the market place. Long-established brands are losing market-share to innovative, young companies, locally and globally.

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3. Prevailing Market Conditions Investors Demand higher Returns

..……………………………………………………………………………………

Info

Volatility and raising concern about the long-term perspective lead investors to high-yield short-term investments.

Higher Investments

..…………………………………………………………………………………… Product life cycles are rapidly decreasing, while new technologies demand high initial investments.

Increasing Risk of Investments ..…………………………………………………………………………………… Very short product life cycles and lack of foreseeable product development have increased the risk in investment.

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4. The Scenario at Factory™ I. The Situation at Factory™ …………………………………………………………………………………….. Info

Before you begin! As of today you are part of the new management team at Factory Inc. In the past this company was very successful and turned out good profits. Competition has become increasingly more difficult, causing a decline in economic results. This situation and the negative forecast have depressed stock prices. Prices have reached a historical low. It’s now in your hand to help Factory, Inc. get its business back on track. Profit/Loss Factory Inc.

Share Price 100

Revenues Profit

Historical Low

80 60

Total Costs

40

Jan Feb Mar Apr MayJuneJuly Aug Sep Oct Nov Dec

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

II. Setting up the Simulation

…………………………………………………………………………………….. Please set up the board according to the following illustration Production

BALANCE SHEET

P&L Account (Profit & Loss Account)

Assets

Revenues

Current Assets

Material Stock

3 3

Accounts Receivable • Raw Material + Supplies Inventory • Work In Progress • Finished Products

Manufacturing Stage 1

3

Manufacturing Stage 2

6 6

7

Distribution Warehouse

7

Direct Costs

7 7 7 Distribution Warehouse

Cash & Cash In Bank

Overhead Costs •R&D • Administration • Sales

Material Stock

Fixed Assets

Buildings

20 Research & Development

Suppliers

Interest

Administration Customers

Liabilities Borrowed Capital

0

0

0

20* 20* 20* 20* 20*

Equity Capital

0

0

0

ers Ord

0

Cash & Cash In Bank

20

4

Accounts Receivable

20 5

ed oic Inv ders Or

Shareholders Dividends

0

Bank Interest

0

Goverment Taxes

BALANCE SHEET

On each marked field place a container and fill it with the respective number of money chips.

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Taxes Net Profit / Loss

/,&

Capital Stock

Retained Earnings

Profit / Loss Before Taxes

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Suppliers

Long-Term Liabilities

Overhead Costs

Customers

Short-Term Liabilities

0

Operating Profit Sales

10

Land

Depreciation

P&L Account

20

Manufacturing Stage 1

12

Machinery

Manufacturing Stage 2

Furniture And Fixtures

Gross Profit

(Profit & Loss Account)

Task

0

© BTI GmbH, Stuttgart , Germany Tel.: + 49 /711/ 66 46 37-0 e-mail: info@bti-online.com


4 The Scenario at Factory™ III. What Does your Company own and how Does it Finance? ..…………………………………………………………………………………… Task

Complete the following inventory list

Assets

Value + + + + + + + + + =

Notes:

_______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________

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5. The 1st Year Task

I. Checklist A …………………………………………………………………………………….. (Don‘t forget to tick off the steps passed through each quarter of the year.)

Quarter 1 2 3 4 Customers pay. Move the value carriers from Accounts Receivable to Cash and Cash Bank. Deliver Finished Products as ordered. Note the Production Costs in the table you find on the next page. Write an Invoice and place the amount to Accounts Receivable. Place finished products into Distribution Warehouse. Carry out production in Manufacturing Stage 2 with the Products in Progress. Pay production costs (1 M per unit) from Cash and Cash in Bank. Start new production in Manufacturing Stage 1 and pay production costs (3 M per unit) from Cash & Cash in Bank. Receive Raw Materials from the supplier. Place them into Material Stock (2 units). Pay Raw Materials (3 M per unit) from Cash & Cash in Bank. Order new Raw Materials. Place 2 empty value carriers on the field Suppliers. Pay Overhead Costs for Administration, Distribution and R&D (6 M) from Cash & Cash in Bank.

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5. The 1st Year Orders 1st Year: Order Nr.

Delivery

Quantity

Order Value

1

01 / 1st Quarter

2

26

2

01/ 2nd Quarter

2

25

3

01 / 3rd Quarter

2

25

4

01 / 4th Quarter

2

26 =

Production Costs

Invoiced Orders

=

II. Checklist B at the end of the 1st year

..……………………………………………………………………………………

Task

Pay Interest for Long-Term Liabilities (10%) out of Cash and Cash in Bank Depreciate your Fixed Assets. Take the amount out of the value carriers: Depreciation of Buildings (1M) Depreciation of Machines (5M) Depreciation of Furniture and Fixtures (3M) Take a new value carrier and move values to Depreciation.

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6. What is Depreciation? Know-How

Depreciation reflects the loss of value of assets. The Depreciation distributes the cost of purchase (or costs of production) over the duration of the asset's working life. The loss of value can be caused by: • aging • wear & tear • technical progress • acts of God • decrease in profits

Straight-Line Depreciation (linear)

…………………………………………………………………………………….. Straight-Line Depreciation is a method of Deprecation, where equal amounts of Depreciation expense will be taken in each year of the asset’s useful life. The life time of different assets is listed in a depreciation table. Straight-Line Depreciation has the advantage of simplicity. Example: You buy a new machine for 100 M. The value of the company doesn’t change since we exchange one asset, cash money, against another asset of equal value, the new machine.

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One year later the machine has a value of only 90 M because of wear and use. The remaining value of the machine has been therefore reduced by 10 M. This Depreciation must be taken into account, amounting 10 M. The yearly Depreciation depends on the anticipated average working life expectancy of the asset. The anticipated average life of Fixed Assets can be taken from official tax office documents. In the case outlined above the average life is ten years.

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6. What is Depreciation? Accelerated Depreciation (degressive)

..……………………………………………………………………………………

Know-How

20 Depreciation

16

Residual Value

5 26

4

21

17

3,5 13,5

10th Year

7 33

9th Year

8

6th Year

41

5th Year

4th Year

10 51

8th Year

64

7th Year

In year 7 one can change to the Straight-Line method.

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3rd Year

80

2nd Year

1st Year

Investment in Fixed Assets

Another method is the Degressive Depreciation. Here, every year a certain percentage (e.g. 20%) of the remaining value is depreciated. Therefore the Depreciation is highest in the first year, then decreasing with each succeeding year. Accelerated Depreciation provides the most realistic assessment of the asset’s value over time.

3 10,5

In a Degressive Depreciation the loss of value is highest in the first year. Referring to the case above, the calculation is as follows: Year

Residurial Value

Remaining Time of use

Rate of Depreciation (deg.)

Rate of Depreciation (linear)

Change Yes/No

5 6 7

41 M 33 M 26 M

6 Years 5 Years 4 Years

8,2 M 6,6 M 5,2 M

6,8 M 6,6 M 6,5 M

No Yes Yes

In conclusion: Depreciation is the Accounting Procedure for an actual or assumed loss of value of an asset. They serve for: • Proper representation of the asset’s value. • Correct yearly distribution of expenses. Assets with low value are depreciated completely in the year of purchase.

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7. The Financial Statement Create the annual Financial Statement for the 1st year. Create the P&L Account for the 1st year.

Task

Profit & Loss Account (P&L Account) (in Mil.) Revenue

Year

Year

0

1

+

99

-

56

=

43

Overhead Costs (Indirect Costs)

-

24

Depreciation

-

9

=

10

-

10

=

0

-

0

=

0

Direct Costs (Cost of Production) Gross Profit

Operating Profit (EbIT) Interest Profit/Loss before Taxes Tax 33% Net Profit/Loss

Take account of your Provisions for Taxes. Take a coin (from outside) and place it on the field Short-Term Liabilities! Task

Create the Balance Sheet for the 1st year.

Task

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7. The Financial Statement Task

Balance Sheet Year 0

Year 1

ASSETS Current Assets Cash and Cash in Bank

24

Accounts Receivable

25

Inventory (Stocks) - Raw Materials and Supplies

9

- Work in Progress

26

- Finished Products

21

Total Current Assets

105

Fixed Assets Furniture and Fixtures

12

Machinery

20

Buildings

20

Land

10

Total Fixed Assets

62

TOTAL ASSETS

167

Liabilities Borrowed Capital Short- and Long-Term Liabilities Provisions Total Borrowed Capital

100 0 100

Equity Capital Capital Stock

60

Retained Earnings

7

Profit/Loss current year

0

Total Equity Capital

67

TOTAL LIABILITIES

167

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Factory