BUSINESS DECISIONS

MODULE 1

THE BOOK

Financial Decision-Making for

Engineers Author: Colin K. Drummond

Yale University Press

ISBN-10: 0300192185

ISBN-13: 978-0300192186

Everyone has the book?

DID YOU REVIEW CANVAS?

• All the materials for your assignments are found in Canvas

• If you don’t find something, please ask!

• All assignments will be submitted in Canvas > I will not accept any assignments in class!

• I will post announcements when necessary

IMPORTANT MESSAGES

1. Late Assignments will not be accepted

2. Most students who do poorly in the class usually have a poor homework and

assignment grades.

3. I want you to learn – in principle there is no reason you cannot get an “A” if you

work hard! I am here to help you.

Focus and finish!

THE ROAD AHEAD – DECISION MAKING

• Focus on Key Aspects of: ❖ Accounting

❖ Finance

❖ Engineering Economics

• Chapter 1: Decision Making

• Chapter 2: Financials Statements

• Chapter 3: Time Value of Money

• Chapter 4: Applications of Time Value of Money

• Chapter 5: Comparing Alternatives

• Chapter 6: Intellectual Property

• Chapter 7: Concept Maps

• Chapter 8: Risk and Uncertainty

• Chapter 9: Capital Budgeting

• Chapter 10: Leadership

HOW DO YOU MAKE DECISIONS IN BUSINESS?

• Internal Perspective ❖ Management decisions convert assets into

products

❖ Products lead to customers

❖ Transactions to be analyzed, Categorized,

recorded, synthetized and reported

• Business must be: ❖ Profitable (Revenue greater than expenses)

❖ Solvent (pay bills on time)

• Customers want your product and are willing to pay a price

(greater than the cost)

• These activities generate transactions that can be: ❖ Captured

❖ Analyzed

❖ Understood

❖ Communicated

BUSINESS OBJECTIVES

TRANSACTION CONSIDERATIONS

• Long term success

• Magnitude

• Type (pay now or later)

• Value (Market Preference)

❖ Profitable (Revenue greater than expenses)

❖ Solvent (pay bills on time)

• Accounting is the key information system to analyze and

measure

ENGINEERING MANAGEMENT TOOLS

• Accounting has central role in communications with

stakeholders. Provides reports to: ❖ Tax Authorities

❖ All Stakeholders

❖ Management

❖ Regulatory Agencies

SECONDARY MANAGERIAL PERSPECTIVES

• Taxes: ❖ Consider just a simple understanding

❖ Corporate Tax Department

• Regulatory Matters: ❖ Can have a significant impact on a business

❖ Minimized for this course

• Stockholders: ❖ Central to the business but consider as an environmental issue

❖ Case studies have incorporated stockholders direction

EXTERNAL VS INTERNAL COMMUNICATIONS Accounting Roles

Identify, Measure, Communicate

Economic information about an entity

For decisions and informed judgments

Financial Accounting

• External stakeholder

• Focus on financial statements

• Preparation of the Annual report

• CPA licensure

Managerial Accounting

• Internal stakeholder

• Focus on management decisions

• Cost accounting

• Certified Financial Manager

FOCUS ON DECISION MAKING

• Outcomes must be established

• Outcomes must be prioritized

• A set of alternatives must be identified

• Alternatives must be examined against the objectives

• A tentative decision is an alternative that matches the objectives

• Actions are taken to implement

PATENT EXAMPLE

Patent Analysis

• Idea for a Patent Claim

• Search USPTO database for claim

• If a match, restart

• If not a match, proceed with claim

Patent Development

• Avoid patent infringement

• Search similar claims

• Launch new product

• Possible positive or

negative financial impact

• Engineering Manager

evaluates alternatives

HOW TO “LEARN” DECISION MAKING

• It depends…on the complexity and the context

• Academic skills

• College internships to view practice and theory:

❖ Framing the problem

❖ Prioritizing inputs and outputs

❖ Determine actions

• Intuitive

• Experience

ENGINEERING FOCUS

• Operating: ❖ Know how to communicate company results via financial reports

• Investing: ❖ Determine best use of company assets (Human, Capital, Financial)

• Financing: ❖ Typically involves long term considerations and are not managed day-

by- day

Finance -The study of assets and the way in which organizations

manage assets, resources and risks over time to

accomplish organizational objectives.

Engineering Economics - Application of engineering or

mathematical tools in the quantitative analysis of the

economics of engineering alternatives.

Accounting - The process of identifying, measuring, and

communicating economic information to permit informed

judgments and decisions. (Not extensively covered in this

course.)

THREE INTERRELATED COMPONENTS

• Integrity: Honest and forthright in dealings

and communications

• Objectivity: Impartiality and freedom from

conflict of interest.

• Independence: In appearance and “in

fact” to assure results are free of bias

• Competence: Knowledge and

professional skills to perform the work.

ETHICS

SUMMARY

1. Managerial decisions drives the conversion of assets into goods

and services

2. Market interest leads to customer transactions

3. This produces revenue and data to be converted into

information

4. Information is organized and communicated to managers to

support decision making

QUESTIONS?