SWOT and Strategy

GLOSSARY

Cash  

(Cash on hand) The balance in the company’s checking account at the end of the period. This number is always zero or greater than zero. If it is zero, the company has drawn against its credit line. When the credit line is used (drawn upon) Short Term Debt will be non zero. Reference: credit line, short term debt

Common Stock

This is the total amount of money the shareholders have invested into the company. At the start of the exercise, this investment came exclusively from a small number of private investors. As time unfolds, other investors may be interested in your company. Their interest will be stimulated by favorable returns such as ROI, ROS and ROA.

Contribution

Margin ($ and %)

For purposes of the simulation:

Contribution Margin $ = Gross Margin $

Contribution Margin % = Gross Margin %

Cost of Goods Sold

The direct cost of labor and material content that were allocated by the Inventories method chosen by your company, i.e. average cost method. Assume that the COGS

in the  simulation  is  the  same  as  Variable  Costs.  Reference:  Finished  Goods

Inventories

Credit Line

An Asset Based Loan Facility has been established with State Street Bank & Trust. This is the limit that the bank will provide to your company. Your company uses this much short-term debt before it will violate the covenant. If the covenant is violated, the bank will have the right to take additional steps to insure solvency.

Receivables     

This is the amount of dollars that the company is owed by its customers. The primary path to market is through distributors; hence the distributors owe the company this amount of dollars at the end of the period. General Rule:

Beginning Receivables + Sales = Receivables + Collections

Dollar Market Share

The percentage of Dollar Value of unit sales obtained by your company in relation to the total Dollar Value of unit sales achieved. This Market Share result is published by NEMA (National Electronic Manufacturer’s Association), and only takes into account sales by domestic manufacturing firms.  All sales from foreign firms are excluded in this number.

 (Price)(Number Sold) / (Sum of Sales billed by all other domestic manufacturers)

Effectiveness

The effectiveness of the work force measured by the ratio.

(Planned Time to build one Reader) / (Actual Time to build one Reader)

Employees when originally hired are measured to have an effectiveness of 50%. Experience has shown that it takes approximately 180 days (two periods) to achieve 100% effectiveness. Labor effectiveness can be influenced by outside forces of change. Effectiveness is also impacted by the addition of Inspection lines to the factory floor.

 

Finish Goods Inventory

Inventory in general is defined by two dimensions: a physical and a monetary dimension, i.e. units and dollars. The monetary dimension is defined by the inventory valuation method. In this simulation the method that was chosen is called the average method. Other methods commonly used are LIFO and FIFO.

Consider the expression:

Beginning Units + Units Produced = Units Sold + Ending Units

and the expression

Beginning Value of Units + Value of Units Produced =

Value of Units Sold + Ending Value of Units

The first expression is the physical axiom of inventory and the second is the monetary axiom when Value is assumed to be measured in the like of dollars.

One can calculate the physical Ending Units by evaluating

Ending Units = Beginning Units + Units Produced - Units Sold

But the monetary valuation is not so straightforward. One begins by calculating the cost of goods produced (COGP).

Production in this exercise is described by the term manufacturing process.

By definition the COGP is the total direct cost associated with the aforementioned manufacturing process. The two direct components of this process are:

                               Direct Labor

                               Raw Material (viz.: Pick-up Cells supplied Hamada)

The Direct Labor Cost is the salary paid the assembly workers in the period the goods (readers) were manufactured. The Raw Material Cost is defined in Raw Material Inventory and is termed Transferred to Production.

The COGP is then computed by adding the salary paid to the labor to the cost of the pick-up cells used in production. Please note one cell is utilized in producing one reader of finished goods.

To calculate the value of units sold (often termed the cost of goods sold COGS) when one utilizes the average Inventory method one applies the following:

First calculate the available number of units for sale and their value.

What is available for sale is the F/G that exist at the beginning of the period plus what is produced in the period; algebraically one could write as the physical expression:

Goods Available for Sale = Beginning Inventory + Goods Produced

Value of Goods Available = Beginning Value + Value of Goods Produced

The average value would then simply be

(Average Value Available) = (Value of Goods Available) / (Goods Available for Sale)

The Value of the Goods Sold (COGS) computed by the Average Value Method would then be

COGS = (Number Units Sold)  *  (Average Value Available)

One can then compute

Ending Value of Units = Value of Goods Available – COGS

Gross Margin

The difference between the selling price and the COGS/unit multiplied by the number of units sold.

Gross Margin %

The formula used to calculate this ratio is

(Sales - Costs of Goods Sold) / (Sales)

Idle Time

The percentage of available labor days that are not directly utilized in the production of Finished Goods.

Lines

A summary of the inspection line capacity. All lines are leased; the sole manufacturer does not offer lines for direct purchase.

Lost Sales

Additional Finished Goods that would have been sold this period by your company if it had additional available product (readers) in Finished Goods Inventory.

Manufacturing Expense

The    non-Variable  quarterly cost   associated  with   the   production  process. Component costs are Building Lease and Utility, Inventory Carrying, Equipment Rental and Hire / Layoff Expenses. The auditors suggested that the  discretionary Lean Six Sigma  component should also be included. However, they accepted the exclusion and cautioned that this component must be considered when performing any analysis.

A three-phase process within which each phase possesses an independent capacity.

                           

Capacity Limitation Factors

      Available Raw Material            Employees          

     Inspection Lines                    Planned Time

      Labor Effectiveness                Average Line Capacity

                                                                                               

The phase with the minimum capacity limits the output of the reader manufacturing process (unless requested production is less than the minimum of the three constraints).

Net Income

The Bottom Line, which is left for the shareholder to be reinvested into the company after all expenses are paid.

Net Profit = Sales - COGS - Operating Expenses – Interest – Taxes

Where

                               COGS = Cost of Goods Sold

Operating

Margin $

The formula used to calculate this is

(Sales – Costs of Goods Sold – Operating Costs)

This is often referred to as Operating Margin or Net Operating Profit or EBIT.

Operating

Margin %

The formula used to calculate this ratio is:

(Sales - COGS - Operating Expenses)/Sales

Planned Time

The ideal amount of time required to build one unit of finished goods. This is measured in labor-days per unit. The measurement can be influenced by expenditure in Lean Six Sigma as well as technology advances.

Raw Material Inventory

The Raw Material accounting is similar to the finished goods computation. A few physical processes differ. Instead of producing pick-up cells, one purchases the same from Hamada. Hence the new RM is delivered.

The physical equation becomes:

Beginning RM + RM Delivered = RM Transferred to Production + Ending RM

To compute the RM transferred to production, one finds the RM that is available for transfer and then computes its average value:

RM Available for Transfer = Beginning RM + RM Delivered

The average value of RM available is then found by computing

(Value RM Available for Transfer) / (RM Available for Transfer)

To compute the value of the RM Transferred to Production, i.e. the direct material cost of goods produced, multiply the average RM Available Value by the number of Readers produced.

The Ending RM material is simply the result of what one had at the beginning plus what was delivered less what was used.

Ending RM = Beginning RM + RM Delivered - RM Transferred to Production

The same expression is used whether one calculates physical or monetary RM Inventories value.

Retained Earnings (Loss)

This account reflects the Net Profit not distributed to shareholders via dividends. When a company does not distribute dividends (most start-ups do not), the Retained Earnings are the sum of the net profits.

Return on Sales

The formula used to calculate this ratio is:

(Net Profit) / (Sales)

The Return on Sales is a financial measure of cost efficiency. The principle drivers are price (inflation/deflation), volume and cost productivity. An improving Return on Sales over time is a favorable signal and enhances the competitive position of the business.

Sales or

Revenues

The sales in dollars generated by your company from reader sales to the distributor.

Share Owners' Equity

The combined sum of the retained earnings and common stock accounts.

Short-Term Debt

The short-term debt account becomes non zero when the company utilizes its credit line. The credit line places a cap on the available short-term debt. This limit is dependent upon the company's Inventories and receivable values. The formal term describing this limitation is called Asset Based Lending. If your company exceeds the use of this line of credit excessively, the lender, State Street Bank and Trust has the power to take additional steps to protect their interests.

Short-Term Interest

The quarterly interest rate charged by the bank on the outstanding Short Term Debt at the beginning of the quarter. The Asset Based loan is based upon no interest being paid by the lender if the borrower has a positive cash balance. No unused line fees were negotiated to counter this non-interest payment.

Stock Financing

This account shows the combined value of any new investment by shareholders in the current period.

Taxes

The tax rate of your company is currently 50%. This is a double-edged sword. While in the loss position due to other operations, your company is rewarded a tax credit of 50% on its losses.

Total L+E

Total Liabilities + Equity is the basis for this side of the output being called a Balance Sheet.

The equation that defines this balance (and it looks similar to the Laws of Electricity, i.e. the sum of the voltages around a loop equals zero) is:

Liabilities + Equities – Assets = 0

Unit Market Share

The percentage of unit sales obtained by your company in relation to the total number of unit sales achieved. This Market Share result is published by NEMA (National Electronic Manufacturer’s Association), and only takes into account sales by domestic manufacturing firms.  All sales from foreign firms are excluded in this number.

(Number Sold) / (Sum of units sold by all other domestic manufacturers)

Variable Costs

For purposes of the simulation:

Variable Costs = Costs of Good Sold