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Page 1 of 25 Assessment and Analysis for Managers in Design and Media Arts

Blue Valentine Digital, LLC

Company Overview

The Business of Design and Media Arts

Creative work was once seen as a business with the least sustainable competitive advantage. Nevertheless, with the pace of technology, this perspective has changed significantly. Design and media arts businesses have now been placing emphasis on marketing, Internet viability, and all design and media impacts that follow to create the field as an ongoing enterprise choice.

Design is a strategic driver of organizations where designers and agencies propose solutions that help organizations achieve their strategic objectives. For instance, designers need to determine what the best communication tool is for a given objective. They would need to evaluate the communication angle of a design piece, whether it is the public relations angle or from the informational perspective.

As a student of design and media arts, you will be required to recognize what awaits you when your course is complete. This course will enable you to apply your talent in the marketplace by utilizing the principles of marketing, proposals, and business operations to make executive decisions.

To link creative skills with business understanding in order to be successful, the case study presented in this course explores various types of financial and accounting principles that are used in business. These principles will provide you with tools to examine and assess executive managerial decisions.

You will be presented with the case study of Blue Valentine Digital, LLC (BlueVal), a private digital media company, which has its headquarters in the West Village in New York City. This case study will provide you with the foundations to evaluate the company’s different projects, analyze their investment feasibilities, as well as make executive and managerial decisions. The objective of this case study is to understand accounting and finance decisions from the perspective of the owners and senior executives of the company.

The Market Need for BlueVal

With increasing global competition, digital media companies are now required to create a competitive advantage that goes beyond developing just a normal Web site with a header graphic and a three-column layout. Digital media companies are now required to specialize in interactive Web site design. A key aspect of establishing competitive advantage in the design and media industry lies in engaging in user-centered design. Companies that understand user-centered design are the ones that are able to develop customized solutions for clients, being on the highest end of innovation.

Such interactive, innovative, and aesthetic Web sites not only showcase clients’ products and services but also engage their potential customers in active discourse. As such, digital media companies that are diversely spirited as well as different often create titanic gaps between themselves and competitors. Moreover, the need for aesthetically eye-catching, user-friendly, and business-personality-linked Web sites has been the most significant modality of conducting business in the twenty-first century. Nevertheless, the greatest challenge in the business-

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customer relationship is demonstrating to clients the return on their investment while struggling to keep their projects under budget.

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An Introduction to Blue Valentine

Blue Valentine Digital, LLC, is a media design agency that provides interactive and digital marketing solutions. The company develops brand assets and Web sites that engage its client’s constituents as well as tracks blog discourse. Its solutions include technology-capable strategies such as user experience analysis, return on investment (ROI) and dashboard measurement, creative solutions (including video and animation), media buying, and planning solutions.

The Company’s Actors

The founder, Jason Viola, chairperson and CEO, is one of the preeminent authorities on digital strategy and Web application development in the world. He is consulted at the highest levels for S&P 500 leaders such as Lilly, American Express, Citigroup, Merck, Armani, Versace, and Dash. Jason is a frequent and highly welcomed speaker at major industry conferences and is regularly published in widely read trade journals. He is regarded as an expert in interactive marketing, regulatory compliance, and direct-to-consumer Internet marketing.

Prior to founding Blue Valentine in 2000, Jason’s career in digital development began in 1990 even before anyone outside the academic community had heard of the World Wide Web. He designed some of the earliest corporate Web sites and Web-based software applications and has won dozens of industry awards throughout his career, which spans over twenty years. Under Jason’s mastery, Blue Valentine has grown from a computer-laden office in a garage in Hoboken, New Jersey to a prominent New York City operation.

In 2004, Blue Valentine was in need of a media department, and so, Reese Miller was taken on to head the company’s media operations. Reese has had plenty of experience delivering exceptional media. In Blue Valentine, he challenged his media skills at delivering goods to some top brands. Within a short time he created a remarkable presence with a media machine.

At Blue Valentine, Reese uses his research and creative talent to develop dynamic media plans that put the client’s message out to the right audience for maximum impact. His vast, digital- media experience plays a significant role in launching brands, expanding databases, and strategic planning.

Lisa Angelica is Blue Valentine’s vice president and general manager. Lisa directs all aspects of interactive marketing production at Blue Valentine, consults with clients, and mentors a growing staff of the industry’s best project managers. As a champion of the user experience, her main goal is to provide digital solutions that offer constituent users a decidedly superior experience and achieve profound experiences with the digital brand.

Angelo Rico is the senior vice president and creative director of Blue Valentine. Angelo has been working in interactive and creative media since the 1990’s. As a former partner in a well-known company, Angelo has created groundbreaking, original work for A-list medical schools and hospitals since before the concept branded content was the industry buzzword.

Planning a New Venture

Blue Valentine is a privately held company. Jason Viola is the owner and significant decision maker. Jason as well as other senior staff see the potential of Blue Valentine moving into the healthcare field and offering interactive healthcare solutions to major teaching hospitals not only throughout the U.S. but also globally. Currently, the company is pitching to well-known research

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institutions in the U.S. In order to achieve the goal of being a preeminent leader in healthcare solutions, senior staff members have decided that Blue Valentine should issue an initial public offering to raise capital or court private equity firms to ensure that these initiatives are sustainable.

Lisa suggests that BlueVal draft an executive summary, which will serve as the beginning of a prospectus and introduce the company to prospective investors.

Executive Summary

A. The Company

Blue Valentine is an interactive media agency specializing in sales and marketing solutions primarily to healthcare clients. It has won numerous awards, including some of the medical marketing industry’s top honors. The awards include patient-oriented Web sites on Crohn’s disease, physician information Web sites on asthma, and a campaign supporting a drug for rosacea. Blue Valentine performs the following services:

 Provides computer-related and Web site design services. It offers creative design, media buying, and planning search-marketing companies.

 The company conducts Internet research related to audience reach, search engine visibility, accessibility, and readability.

 Blue Valentine uses adaptive, conjoint analysis, natural language blog processing, clickstream tracing, and intercept surveys to monitor the audience’s habits.

 It offers video and animation, rich media advertising, and viral marketing services.

 Blue Valentine also provides data analysis and online advertisement campaign services.

B. Company’s Mission

Blue Valentine creates unforgettable brand knowledge for the significantly increasing digital world. A privately held, full-service agency, Blue Valentine is committed to technology-enabled research, strategic planning, creative design, messaging, and analytics. Equipped with the most sophisticated research tools developed from the world’s foremost professionals in the digital and social media landscape, Blue Valentine retrieves and assesses competitive audience insights from the complexity of the digital landscape.

Today, social and digital media is changing the relationship between designers and clients, allowing the opportunity to collaborate and to place designers as facilitators of complex design processes. Designers are becoming experts at the process of designing and not necessarily perceived as the experts who have all the answers to design questions. The complexities of the market make it a land of nonexperts.

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Operations and Market Opportunities

Blue Valentine—A Model of Sustainability

Blue Valentine provides the following services:

 Computer-related and Web site design services

 Aids organizations with creative design media and buying and planning search marketing companies

 Conducts Internet research related to audience reach, search engine visibility, accessibility, and readability

 Analyses intercept surveys to monitor audience’s habits

 Offers video and animation, rich media advertising, and viral marketing services

Blue Valentine’s plan is to target medical research institutions’ need for Web site design and social media solutions. There are many hospitals and healthcare organizations that utilize Web site services and digital media.

Jason Viola has consistently argued that marketing strategy is a critical business decision for healthcare organizations. He recently developed a white paper that supports the theory that healthcare marketing mechanisms—such as print media, television, and radio—are simply too expensive for the services healthcare organizations provide. Based on many conversations with doctors and administrators at leading healthcare institutions, he suggests that consensus grows among providers that these strategies are just too expensive to provide information that can be evasive.

Moreover, these types of channels do not forge bonds between the clients and their constituents. With the arrival of social and digital media, marketing strategists are now able to connect clients with their constituents. Jason still believes that healthcare information is still daunting; nevertheless, social and digital media mechanisms have provided ways to deliver specific information and improve relationships between medical service providers and their patients.

The white paper also suggests that entities embracing digital and social media can provide training opportunities for current staff to share information and best practices. Additionally, these organizations can use these platforms to recruit new employees. Considering the increasing cost of healthcare and the growing number of healthcare institutions, Web site design services, analysis, and social media tools will help hospitals and healthcare organizations stay up-to-date with their patients as well as stay connected to the healthcare community as a whole.

Generally, large-scale healthcare institutions typically have the technical infrastructure and capital resources necessary to build expansive media or technological systems. The decision to pursue large-scale medical institutions would benefit Blue Valentine’s design and consulting modalities. However, after conducting client surveys and evaluating the results, the senior management team identified that BlueVal’s skill would most likely excel in very specific healthcare markets.

At this point in the organization’s development, the team categorically decides that their best option would be to develop modalities for smaller healthcare institutions. As such, the

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development of these solutions would prepare them to enter the larger healthcare market. These smaller projects would generate income from Web site development, Web video, constituent feedback and interaction, and brand marketing; all of these activities are aimed at increasing clients’ ROI.

The following initiatives represent revenue optimization:

1) Revenue from Search Engine Optimization Modalities

Search engine optimization (SEO) is the process of refining a Web site’s place in search results. This is performed by increasing the information on the Web site to include keywords or phrases commonly used by individuals when looking for a particular Web site. Site structure, navigation, coding, and naming conventions are also important to consider when optimizing a Web site to improve its placement in search results. Results found through SEO are often called organic, natural, or algorithmic search results.

2) Revenue from Open Platforms—Facebook, Twitter, and YouTube

Social networks provide a meeting place for consumers to share experiences. Consumers, especially medical consumers, are willing to share information with one another. BlueVal understands that these platforms allow healthcare providers access to real-time feedback so that they can adjust their processes and train staff accordingly.

3) Revenue from Web 3.0 Applications

Web 3.0 succinctly introduces a person behind the Web. As such, the Internet can provide the capacity to track, gather, and synthesize information about the user’s history, favorites, likes, and dislikes and then provide helpful suggestions.

Team BlueVal has developed a software to provide these capabilities, but it is still in the testing stages, hampered by a lack of investment as well as the political will of senior management. However, newer team members firmly believe that by providing this modality, end users can simply enter two or three part questions and the search capabilities of the solution will be able to synthesize the information quickly and astutely.

4) Revenue from Branding

Creating strategic content network solutions.

Revenue Streams from Future Innovations

Blue Valentine is committed not only to developing applications for healthcare providers, permitting digital and social media, but it also explores ways to help clients differentiate themselves from their fellow providers by developing their own communities as well as offer groundbreaking features and applications that will greatly benefit all healthcare community members.

As difficult as it is for Blue Valentine team members to gather data to estimate costs and revenues, the opportunity for growth in digital and social media is extremely evident. In the 1990s, the US market for interactive healthcare digital and social media solutions was growing rapidly, paralleling the growth of the Internet capabilities (Hawn, 2009).

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Angelo Rico cited market projects estimating a large transition from current to future capabilities. A few examples of these projects are as follows:

 Rate My Doctor: This Web site will permit doctors and other healthcare service providers to anonymously rate their medical care with doctors and hospitals using criteria provided by the National Institute of Health (NIH).

 Chat Capabilities: This application will permit patients to send and receive instant messages as well as enable video chat with their doctors to receive immediate answers to healthcare questions. In rural areas, where sophisticated medical procedures are limited, this modality will connect patients to larger medical teaching hospitals.

 Online Administrative Applications: The addition of certain applications to a healthcare provider’s already established social network can be expensive. Nevertheless, in future social networking Web sites, similar to Facebook, consumers will be provided with the ability to schedule appointments, view and pay their medical bills, and see portions of their medical records.

The Health Insurance Portability and Accountability Act (HIPPA) and confidentiality laws have prohibited general access to this information without permission. However, once protocols are in place, healthcare providers may consider uploading, to a social media Web site, new patient or other informational forms that can be downloaded and printed in order to make a patient’s check-in smoother on arrival at the healthcare provider’s office.

 HealthMatch.com: Similar to dating service Web sites, which require personality tests to match compatible users in order to form a successful relationship, social networks or networks within institutional Web sites could be devised the same way to match patients to the right doctor.

Jason researched criteria provided by the American Medical Association. Based on this information, he developed surveys that will be sent to regional healthcare providers and healthcare consumers. Once information is gathered and analyzed, he hopes to develop algorithms to match patients with doctors.

 Game Design: This Web site will encourage the pharmaceutical companies to connect with doctors and consumers, finding new ways to evaluate combinations of treatments that will take into account specific characteristics of patients, such as weight, blood pressure, etc.

Blogging—A Potential Project

BlueVal professionals are encouraging the utilization of blogging for its healthcare organizations to reach out to their community as well as new audiences to share educational and thought- provoking information about procedures and healthcare. Blogging allows for industry networking, quality discussion, and interaction where patients and families can share their experiences with each other and with the public.

BlueVal is looking toward creating the following for its client:

 Tools and best practices in pursuing interactive communication

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 Creating a blog that meets the constituents’ needs

 Physician blogging capabilities

 Controlling negative feedback

This initiative was developed after demographic targets were identified and numerous surveys were sent to healthcare facilities throughout the country. Relative data was then collected and analyzed.

Market Demand and Managerial Decision Making

Blue Valentine’s senior management knows that the approximate costs associated with development and implementation of these new protocols may not be that easy to gather. Nevertheless, they need to put together a demand analysis for their products and services to develop accurate forecasts.

Lisa is aware that BlueVal requires a significant accounting platform to keep track of various market factors that could affect profitability. Typically, the factors include the following:

 Digital branding preferences

 Intellectual property

 Patent control over products and technology

 Exclusive ownership over popular digital and social media protocols

 Inability of firms to acquire capital and skills to develop and implement the same technology

 Superior access to financial resources

 Economies of scale from platforms in place relative to higher start-up costs for newer firms

Demand Analysis

Sudden shifts in demand for their technology solutions could contribute to Blue Valentine’s risk. Lisa informs the team that a demand analysis would serve two of their managerial objectives:

1) It would provide the insights necessary for effective management of demand—to determine whether office space is suitable—as well as the need to hire additional project managers and staff.

2) It would aid in forecasting sales and revenues.

A major uncertainty for the managers is the digital and social environments. Blue Valentine managers are uneasy regarding the demand for their technological solutions. The team plans to use forecasting, prediction, and estimation to reduce their uncertainty. Having this information would allow them to prepare for their business needs, that is, capital and labor requirements as well as cash flow and funding needs.

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Reference:

Hawn, C. (2009). Take two aspirin and Tweet me in the morning: How Twitter, Facebook, and other social media are reshaping health care. Health Affairs, 28(2), 2361–2368.

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Marketing the Company

Each potential project of Blue Valentine would need a customized presentation. Senior management needs to expand and hire professionals in the digital and social media industry to market the company’s products and services. The new hires must possess the right qualities and qualifications for the job.

They would need to understand the following clients’ needs and wants:

 Based on the relative size and needs of the client, select certain healthcare solutions that would fit with client operations.

 Create a specific product or service that will meet the healthcare needs identified.

 Communicate the concept of the healthcare solution to the client in a way that makes sense for them and their business.

 Deliver the solution to the client in a way that will be convenient.

 Solicit feedback from the client about how the solution would continue to improve the client’s ROI.

The creative executives and solution engineers in the company would continue to identify and implement new product ideas. Senior management understands that certain conditions must be met and certain organizational resources need to be acquired to help the teams develop optimum solutions. In order to start the process, Angelo Rico understands that the following concepts should be executed:

 Goal clarity must be clearly understood

 Encouragement must be given by senior management and colleagues

 Congruity should be clear—the match between what senior management states and what it does

 Suspended judgment must be implemented—maintaining an open market place for ideas in which the potential strengths of new ideas are always identified before their potential weaknesses.

In keeping with the recruitment needs and with the help of Angelo Rico, three project managers were recruited to travel the country marketing the healthcare digital and social technological services Blue Valentine has to offer.

Blue Valentine’s initial development, Search Engine Optimization (SEO) Version 2, effectively positions healthcare institutions through impact content and reduces competitor encroachment. The senior management has defined two phases to begin launching strategies to market SEO Version 2 and the other new initiatives.

Phase I involves the testing of SEO Version 2—before and after implementation—to determine the extent of its viability with clients and client constituents.

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Phase II involves raising additional resources for the projects in the prelaunch stage or have at least 80 percent completed. With each project, the managers are required to evaluate project cash flows and determine the present value of each project compared with the upfront costs. They are asked to develop a capital budget and start a risk management plan. With each project, the managers are responsible for reviewing the financial projections and submitting budgets to senior management so that the team can make sound managerial decisions.

For most managers, financial criteria are the prescribed method to evaluate projects. Such methods are appropriate when there is a high level of assurance associated with estimates of future cash flows. Lisa and Angelo are considering two financial models: the Payback Model and the Net Present Value Model.

The payback model determines the amount of time it takes to recover the initial project investment. Shorter time periods to obtain the additional investment are more desirable than longer payback periods. The payback model is the most widely used model because it is the simplest to calculate. It focuses on cash flows, which is a significant criterion in business investment. Accordingly, some managers use the payback method to primarily reject the more risky projects.

The net present value (NPV) model uses management’s least desired rate-of-return on investments to measure the present value of all net cash inflows. This entails using a discount rate to adjust for today’s dollars. If the result is positive, that is, the project meets the minimum desired rate of return—cash inflows exceed cash outflows—the project is considered for adoption. However, if outflows exceed inflows, then the project is rejected.

Lisa understands that qualitative criteria must also be evaluated. Firms must endeavor to reject lucrative initiatives that are outside the scope of their strategic plan and mission statement. Understandably, BlueVal cannot support projects that do not have high profit margins but support strategic reasons including:

 To capture larger market share

 To make it difficult for competitors to enter the market

 To develop core technology that will be used in next generation products

 To reduce dependency on unreliable suppliers

 To prevent government intervention and regulation

Generally, most of the company’s business decisions are long term. Nevertheless, the objective always remains the same—to protect the corporate image and enhance brand recognition. In making sound, managerial decisions, the team understands that thorough portfolio management requires multi-criteria models.

While Jason, Angelo, and Lisa believe that it is important for the company to be profitable, they also believe that the organization should develop a relationship with the community. They feel socially responsible to the community to do no harm. Together, they have written a vision statement for the organization:

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 BlueVal will provide high-quality products and services that will not harm the environment.

 BlueVal will ensure that personnel will be effective and reliable.

 BlueVal will set reasonable goals for staff and clients.

 BlueVal will be a responsible member of the community.

As the number of projects successfully develop to fruition, project managers will be promoted to regional managers and relocated to where healthcare solutions are demanded. Once domestic infrastructure is established and operating for these clients, the management team can survey international markets.

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Quality and Regulatory Management

Whether online or offline, the healthcare industry is heavily regulated. Therefore, team Blue Valentine has to be familiar with industry standards and develop digital media guidelines to adhere to these industry standards and regulatory agencies monitoring the healthcare environment. BlueVal has to develop good policies as well as training to pursue the benefits and mitigate the risks.

For example, contractors who develop solutions may not grasp the ability to publish comments. One incorrect or flippant remark can become indelible, reaching audiences who lack the ability to see the body language or read the facial expressions connected to the remark. Therefore, Angelo suggests that the company perform a risk assessment.

Blue Valentine needs to educate its employees on privacy practices to encourage responsibility during solution development. They must also diligently monitor implementation and testing to ensure that information posted does not violate privacy regulations and other laws.

Some of the guidelines that should be developed focus on the following:

 Who in the company has access to platform development.

 Activation of solutions should only be accessed by designated staff to protect individuals’ privacy and confidentiality.

 Inappropriate uses, divulging trade secrets and other proprietary information.

 Ramifications for inappropriate use, which should relate to existing company policy stating a violation can and may lead to discipline, up to and including termination.

 Responsibility of team members who witness inappropriate use.

 Ensuring that staff members understand and acknowledge that they are not speaking on behalf of the organization when they are uploading and implementing solutions.

Given that technology is outrunning regulations, continually updating and educating the team is critical. Blue Valentine management will have to consistently update its policies and procedures and engage in discussions with regulators from the US Food and Drug Administration, Health and Human Services, the National Institute of Health, as well as the American Medical Association to ensure that the company is complying with current regulations and mandates.

Company Improvements

Senior management at BlueVal realizes that selecting the appropriate product is critical and requires comprehensive knowledge of systems, processes, and priorities of the business. Lisa suggests that the company implement the six-sigma quality process.

Six-sigma is a database approach that relies heavily on the voice of the client as a focus for improving operational businesses and work environments. When employed effectively, six-sigma becomes a part of a company’s culture. From an organizational perspective, this translates to solutions that significantly improve the efficiency and effectiveness of business practices.

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As a result, the process is less subjective than other quality-type programs and recognizes that measured results are significant to the culture of change. Moreover, six-sigma has been fine tuned to be more specific and dynamic to individual business models and has made tools more appropriate for service-oriented businesses that create logic as its product.

Teams utilizing the six-sigma approach for their projects undergo a rigorous process of data collection, review, and analysis. Although it is not important for the team to go into much detail, relevant and reliable documentation of the process is needed to properly analyze the interactions and variables that comprise the different procedures.

After analyzing the pros and cons of the six-sigma approach, BlueVal decides to implement it. Given that the approach focuses on the customer and improves processes enabling the delivery of quality services and a competitive edge, Lisa and Angelo believe that implementing the six- sigma approach will clearly add value to company solutions.

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The Multi-Project Environment

Most digital and social media companies exist in a multi-project environment. This type of environment develops problems of project interdependency and constraints of sharing resources. For example, if BlueVal digital designers were selected to create solutions for Johns Hopkins Hospital in Baltimore, MD, what would be the impact to the other jobs in production? Further, if the company wins the bid, will the existing employees be adequate to deal with the potential new project, given the completion date? Will projects in the process be delayed? Will subcontracting projects help existing deadlines? Will competition among managers have an adversarial impact given that all the project managers will seek the very best people for their project?

For BlueVal, the problems of sharing and scheduling resources across committed projects would magnify as the number of projects rises.

In addition, resource sharing also leads to multitasking. People working on several tasks concurrently are far less proficient, particularly where conceptual or physical shutdowns suggest a problem. Nevertheless, multitasking leads to setbacks and delays. Rearranging priorities magnify multitasking problems. In the same way, multitasking becomes more evident in organizations that have too many projects for the current resources they utilize.

The amount of minor and major assignments in a portfolio almost always exceeds existing resources. The surplus amount more than likely leads to confusion and ineffective utilization of resources. In addition, the existence of power politics as well as multitasking augments the problem of which projects are allotted resources first. Employee optimism and buoyancy suffer because it is difficult to make sense of a vague system. Therefore, a multi-project organization environment encounters significant problems if it does not have a system that is clearly linked to financial and nonfinancial criteria.

At this point in BlueVal’s trajectory, the company would have to develop a system to ensure consistency and governance. Lisa understands the significance of establishing a set of integrative criteria and a system for examining and assessing projects that support senior management strategies and objectives. Consequently, she proposes that the organization adopt a project- portfolio system based on selection criteria.

As such, the aim of BlueVal’s portfolio management system would be to ensure that projects are aligned with senior management goals. Portfolio management provides information that would allow managers to make better business decisions. Since projects are always clamoring for funding and projects usually outnumber skilled digital designers, it is important for the company to follow a logical and defined process for selecting the projects to implement. Although there are many criteria for selecting projects, selection criteria are typically identified as financial and nonfinancial.

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Looking into Numbers

Break-even analysis (BEA) is not a complicated process to approach profit planning. BEA explores relationships among sales, fixed costs, and variable costs. As the name implies, break- even analysis requires the derivatives of several relationships—among revenue and fixed and variable costs—in order to determine how to cost a project.

There are four major applications of break-even analysis:

1) New product decisions

2) Pricing decisions

3) Systems solutions conversion and upgrades

4) Expansion decisions

Having identified the healthcare industry as a viable market, Lisa decides to look more accurately at the projected numbers. She examines the company from the lens of a prospective investor and thinks about the information an investor would want before making a decision to seed the business.

Before making any decision about any project, BlueVal has to perform some type of break-even analysis. Moreover, they need to understand how all the projects would be linked through the organization. Therefore, it would be better to simply develop a break-even analysis for each project separately.

What is clear is that senior management, along with the company’s project management, will need to approach every project as an investment decision, and consequently, they will require separate break-even analyses. This strategy will certainly be beneficial for the company concerning joint ventures with other digital media management companies, which will require more costs and a higher level of funding. Accordingly, the team sees joint ventures as a way to hedge against risk.

Cost Accounting

Costing projects can incorrectly lead to lower gross profits reported on the income statement. Companies can also face scrutiny from auditors who question how the company allocates its costs. Cost accounting is a traditional managerial accounting process and its purpose is to allocate costs to all its product solutions. BlueVal’s project managers can contribute to the company’s improvement by finding the best allocation method possible and remove unnecessary activities from the process.

Cosmetic Surgery Solutions

BlueVal has bid on a project that will provide digital consulting between Central Pennsylvania’s plastic surgery community (patients and vendors) and regional plastic surgeons. The Central Pennsylvania Society of Plastic Surgeons is underwriting this project.

Many people ask, "How can you 'market' digital consultation?" However, digital consulting is not that different from in-person consulting. Patients have needs, but they also have time, travel, and cost constraints.

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Moreover, all through history, medicine in America has always been a face-to-face business. However, in today's costly healthcare environment, it makes sense that the first visit to a plastic surgeon, which is usually free, can be via interactive digital media.

With these requirements, there is clearly a need for analysis, strategy, and communication to make the most of limited resources available while providing compassionate healthcare. This is what digital interactive consulting is supposed to do.

The First Digital Consultation Project—Central Pennsylvania Plastic Surgery

Total revenue from interactive site 145,000

Direct costs for digital designers 80,000

Direct overhead 20,000

General and administrative overhead (20 percent of total direct costs)

16,000

Total costs 116,000

Profit (20 percent) 29,000

Total bid ?

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Financial Statement Ratio Analysis

BlueVal understands the importance of creating a positive working capital to sustain its business. In fact, creating a positive cash flow is a substantial risk to all businesses. The team recognizes that a negative working capital would lead to bankruptcy.

The senior management team has agreed to expand its operations; therefore, additional capital resources will be required sooner than anticipated. If the additional capital is not available, it would more than likely curtail the company’s strategic plans. Lisa reasons that the company’s future capital requirements will depend on many factors including market acceptance of services as well as effective sales that are based on a creative marketing strategy.

Moreover, Lisa suggests that because BlueVal’s future relies on continuously developing new generations of its media solutions, it is likely that the company will have to expand its capacity to generate new clients to support the company’s investment. Accordingly, the company will have to move out of its West Village headquarters and hire additional media designers. Lisa has informed Jason and Angelo that they need to carefully consider the risks and difficulties of expansion. She has persuaded them to hire an outside accounting firm to provide audited financials of the company’s activities to demonstrate the efficacy of BlueVal’s business model to prospective investors.

The company’s internal financial statements, along with the independent audited financial statements will provide important information to potential investors. Many of these statements include a verbal statement that is often presented as a letter from the president. It describes the firm’s operating results during the past year and discusses new developments that will affect future operations. The other information presented is quantitative. It consists of the balance sheet, the income statement, the statement of cash flows, and the statement of retained earnings. Together, these statements give an accounting picture of the company’s operations and financial position.

Specifically, BlueVal will need to perform a financial ratio analysis. Financial ratio analysis is the use of financial accounting and other information to assess a company’s financial performance and financial conditions. Financial ratio analysis particularly uses comparisons of financial data in the form of ratios to assess a company’s financial health and profitability.

There are many ratios that companies perform based on available financial data. The question to be considered is which ratios are the most appropriate. Accordingly, if the purpose of the analysis is to understand a company’s profitability—the ratios that relate to returns—profit margins and asset utilization would be the most significant. If management wants to assess a company’s effectiveness concerning its credit policies and collections, it would focus on ratios involving its accounts receivable. Moreover, when evaluating a company’s credit worthiness, the task at hand is to assess the company’s debits and compare them with the company’s ability to satisfy those particular obligations.

Ratios are classified into several types based on the company’s performance and conditions. They are

 Activity ratios, which are used to evaluate a company’s effectiveness in putting its asset investments to good use.

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 Liquidity ratios, which measure a company's ability to meet its short-term and immediate obligations.

 Solvency ratios, which gauge the company’s ability to meet its debt obligations.

 Profitability ratios, which analyze a company’s ability to manage its expense to generate profits from its sales.

Below are BlueVal’s financial statements for the year ending 2011.

Blue Valentine, LLC: Balance Sheet as of December 31, 2011 (In US Dollars)

Cash 77,500 Accounts payable 129,000

Receivables 336,000 Notes payable

84,000

Inventories 241,500 Other current liabilities

117,000

Total current assets (cash, receivables, and inventories)

655,000 Total current liabilities (accounts payable, notes payable, and other current liabilities)

330,000

Long-term debt 256,500

Net fixed assets 292,500 Common equity

361,000

Total Assets 947,500 Total Liabilities

947,500

Blue Valentine, LLC: Income Statement for Year Ended December 31, 2011 (In US Dollars)

Sales 1,607,500

Cost of goods sold -1,353,000

Gross profit 254,500

Fixed operating expenses except depreciation -143,000

Earnings before interest, taxes, depreciation, and amortization 111,500

Depreciation -41,500

Earnings before interest and taxes (EBIT) 70,000

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Interest -24,500

Earnings before taxes (EBT) 45,500

Taxes (40 percent) -18,200

Net Income 27,300

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Project Cash Flows and Risk

BlueVal is evaluating whether it should bid on developing a new interactive digital solution in a regional teaching hospital located in New York. This new solution will require an initial outlay of $1,000,000 to hire additional media designers. According to Jason Viola, CEO, this new solution will put BlueVal on the map as the premier hospital social and digital media consultants. The future revenue stream from this project alone would boost the company’s profits significantly.

During the past few weeks, Lisa talked at length with the company’s designers regarding the costs of producing this new design solution. She then compiled her conversations with the experts and additional information she researched from independent sources and put together a rather detailed forecast of the solution’s outlay and future income streams. The final report, which includes only the forecasted cash flows and explanations for the forecast, was submitted to Jason Viola and Angelo Rico. The report does not include the net present value analysis of the new solution because another department conducts this analysis.

A few days ago, the investment officer called Lisa to tell her that he thought that the cash flow forecasts she submitted were incorrect. Lisa explained that her forecasts were based on a significant amount of data that she gathered and verified with independent sources. She told the investment officer that her estimations were based on confident growth rates in revenue streams in the subsequent ten years. The investment officer said that he thought the growth figure could be higher and asked Lisa to provide cash flows using different estimation figures.

It is clear from this example that the most difficult step in the analysis of a new project is estimating its cash flows. This data includes the investment outlays needed to develop the project solutions and the net cash flows the project is expected to generate after it is completed. Many variables are involved in cash flow estimation and many individuals in BlueVal have participated in this ritual of gathering and assessing relevant information. Given that it is inherently difficult to estimate the costs and revenues connected with large complex projects, forecasting errors can be very significant.

As such, the financial staff’s role of forecasting cash flows is critical and includes the following steps:

1) Coordinating the efforts of the other departments such as design management and marketing.

2) Ensuring that everyone involved with the forecast uses a consistent set of economic indicators.

3) Ensuring that no biases are inherent to the forecasts, given that managers have pet projects that they push toward implementation.

Embedded in many decision rules are two of the most significant factors:

 Project implementation decisions must be based on cash flows after taxes, not accounting income.

 Only incremental cash flows, i.e. cash flows that change if the project is implemented, are relevant to accepting or rejecting a decision.

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Capital Sources and Structures

BlueVal decides on an expansion strategy; however, senior management realizes that they do not have enough cash on hand to finance a major expansion of the business. Nonetheless, they do have a very good balance sheet with a solid debt-to-equity ratio. After a preliminary analysis of current cash flows, it shows that BlueVal will need $2 million for additional property as well as plant and equipment in addition to more working capital to finance any type of expansion.

Being on good terms with the local bank was a good strategy on Lisa, Angelo, and Jason’s part. As a result, they believe that they should not have any trouble securing and carrying additional debt. In addition, venture capital investors have also expressed an interest in purchasing more stock in BlueVal if the price is right.

More Debt for BlueVal?

In an unstable business environment, banks will not lend unless they are almost positive that businesses will be able to repay the loan, and this applies to BlueVal as well. The amount of equity capital (stock) in a business acts as a safety cushion for the bank. The stockholders will lose everything before the bank would lose anything. Generally, debt is a cheap form of financing if the company has access to it.

BlueVal’s Debt Cost

Therefore, what will bank financing actually cost BlueVal? The local bank sets its interest rate by two components. They add the current risk free lending return from government bonds to risk premium based on how risky they judge the company to be.

For example, if government bonds are yielding 2.3 percent and the loan officer sees BlueVal as a moderate risk and underscores 3 percent risk, then BlueVal’s total interest rate will be 5.3 percent.

More Equity for BlueVal

Lisa, Jason, and Anglo meet with their friendly venture capitalist, Suzie Bucks, who fully supports BlueVal’s expansion plans. She is willing to buy more stock and will invest an additional $80,000 at a pre-money valuation of $2.5 million and thus a post-money valuation of $3.3 million.

The team does not completely understand these terms. They return to the firm and contact their chief finance officer to find out exactly what Suzie Bucks is suggesting.

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The Cash Budget

The team at BlueVal realizes that the most significant component to proper budgeting is the ability to estimate the cash flows of the company in order that the company can make plans to borrow when cash is deficient or to invest when cash is in excess. For a long time, the budgeting process at BlueVal was rather haphazard with inefficient predictions pieced together calling it a cash budget.

With plans for expansion, a well-defined and composed cash budget will help management plan investment and borrowing strategies. It will also be used to provide feedback and control to improve the efficiency of managing cash assets over time.

Budget

Lisa knows that a cash budget will provide a critical roadmap for upcoming expenditures. On one hand, the budget will place some constraints on the company’s operational activities, but on the other hand, executives will be less uncertain about costs and profits. Ideally, the team will want to devise a budget that identifies the lowest amount of money the company can use to accomplish its strategic and tactical goals.

Variance Analysis

A close task related to budgets is variance analysis. Lisa wants to review the company’s cash budget against actual expenditures. She would like to find out if there were any major discrepancies or if there are opportunities to improve business activities. By comparing the actual numbers with the budget forecasts, Team BluVal can determine whether variances are favorable or unfavorable. That is, whether less or more money is needed to complete the significant projects.

In a cash budget, the cash surplus or required shortfall (loans) is usually provided in the bottom line. A positive value indicates a cash surplus, whereas a negative value indicates a loan requirement. The senior management decides that if cash surpluses exist, they will pay down loan balances and then invest in short-term securities.

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Summing Up

Regardless of the type of company, similar hurdles need to be cleared to create successful companies. Every business starts with driven people to make a product or provide a service that clients will want. In addition, every company should spend as little money on inefficiency as possible; the goal is profit maximization.

Often, individuals do not need to develop brilliant ideas to manage companies. Businesses become profitable because they offer their clients better technology and/or solutions than they already have.

BlueVal’s plan, for example, was simply to build on the idea of digital design sustainability. Accordingly, the company wants to continue to:

 Provide computer-related and Web site design services.

 Aid organizations with creative design media buying and planning search marketing companies.

 Conduct Internet research related to audience reach, search engine visibility, accessibility, and readability.

 Analyze surveys to monitor audience’s habits.

 Offer video and animation, rich media advertising, and viral marketing services.

In addition, in the future they would like to keep with the times to develop technically adept solutions that will aid their client organizations. This is because senior management has realized that there are plenty of areas that are open for new technological development.

Finding Additional Partners

Jason Viola understands that every person in a company brings different types of expertise and experiences: Angelo Rico, the creative vice president, and Lisa Angelica, the business manager. Further down the road, this could all change depending on the company’s growth. If the company cannot build the healthcare solutions project currently on its drawing board then additional partners will need to be added, those who can deliver the expertise they seek. Nonetheless, a balance of technical knowledge, business acumen, and creativity will propel BlueVal forward.

Raising Money

Venture capitalists, bankers, and a public offering may be needed to raise enough capital to ensure research, development, and implementation of a company’s initiatives. Some investors, especially individuals such as Bill Gates and Warren Buffet, may be satisfied with informal meetings and Microsoft PowerPoint presentations. However, other lesser-known investors may want a copy of the entity’s business plan if only to remind themselves of what they invested in.

At the initial stage, or with the inception of the idea, most investors expect a brief description of the initiatives and how money is to be made as well as the background of key staff. Simply writing down the idea would be motivation to developing the business plan.

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Not Spending It

In nearly every business that fails, the proximate cause is not simply a lack of planning or inadequately monitoring cash position. Every decision, whether financial or operational, should be evaluated as if it were an investment, and only when feasible should the expenditure be approved. Moreover, the investment should be approved by more than one individual.

Finally, business is not something you have to be an expert in to be able to do. The key is to be creative and develop something your end users will truly appreciate. Nevertheless, learning from previous experiences may be the difference between being successful or not.