How to Forecast in Capsim and 7 Deadly Sins

Goals for analytical writing (3)1. The reader should recognize your conclusion or recommendation
2. The reader should be able to judge the quality of the underlying analysis
3. The document should be an effective tool for the reader
The Seven Deadly Sins of Analytical Writing1. Extravagance- too many words
2. Gluttony- too much information
3. Sloth- making the reader do your job/ write clearly
4. Confusion- Lack of clarity or purpose
5. Anger- Vague or emotional language
6. Pride- style over function
7. Arrogance- Disregarding instructions
The Executive SummaryIdentifies critical support for the recommendation. Also the identification of one important constraint, as opposed to an extensive listing, illustrate the writes ability to make judgement
Ratios can be classified as :Leverage, Liquidity, activity, and profitability
Working CapitalCurrent assets- current liabilities
ROS: Return on salesNet Income (before interest and tax) /sales
ROANet Income /Total assets
EPSNet Income/average common shares outstanding
Liquidity Ratios (cash to pay debt on time)– Acid Test Ratio
– Current Ratio
– Working Capital Ratio
– Quick Ratio
Current RatioCurrent Assets/Current Liabilities
a.Ability to pay short & long term debt obligations (next 12 months)
Quick Ratio= Cash+ Marketable securities + Receivables / Current Liabilities
a.Ability to meet short-term obligations
Operating Cash Flows:Flows= Op Cash Flows/ Current Liabilities
a.Amount of cash a company generates from the revenues it brings in
Inventory to Net Working Capital= Inv/ (Current Assets- Current Liabilities)
a.% of the firms capability to finance its inventories from available cash
Profitability Ratios1. ROE- return on equity
2. ROA – return on assets
3. Profit Margin
Activity RatiosDays Accounts receivable outstanding
Sales ForecastSegment demand X (1+ growth rate) X (Market Share % next year)
Production Next YearSales forecast + ( Desired ending inventory)- (beginning inventory)
DuPont Analysis1. ROE= ROS x TAT x Leverage
2. Leverage= Assets/ equity
3. Leverage Increases as ROE increases ROA remains constant
Cash Conversion CycleDIO+DSO- DPO >>>>
– Days Inventory Held+ Days Accounts receivable outstanding= Operating cycle- Days Accounts Payable Outstanding= CC
– Measures management effectiveness, the lower the CC cycle the better. Good to compare to competitors
Inventory Turnover= Sales/ Average Inventory
a.How many times a company’s inventory is sold and replaced over a period
b.Amazon has a high IT while Boeing has a low IT
Days Inventory Held=365/Inv Turnover
a. raw materials into cash
Accounts Receivable Turnover= Net Credit Sales / Average AR
a.# of times per year a business collects its avg. accounts receivable
Days AR Outstanding (DSO)= 365/AR Turnover
a.Avg. # of days company takes to collect revenue after a sale
Accounts Payable Turnover= Inventory Purchases/ Average AP
a.How many times per year company pays its suppliers
Days AP Outstanding365/AP turnover
a. Average number of days a company takes to pay its suppliers
Leverage (mix of equity and Debt)1. Debt to Asset= total debt/ total assets
a. Indicates a company’s financial strength
2. Interest coverage= EBIT/ Interest Expense
a. Company’s ability to meet its interest payments
i. Leverage= total assets/ equity
ii. Times interest Earning= EBIT/ Total Interest payable on debt
iii. Operating cash flows to total liabilities
Profitability (earning achieved)1. contribution Margin= (Sales- Variable costs)/ Sales
a. per unit measure of a products gross operating margin
2,. Return on Assets= Net income/ Assets
a. How efficient a company is using its assets to generate earnings
3. Return of Equity= net income/ total equity
a. How efficient a company is using its equity to generate earing
Dupont AnalysisProvides a basis
6 Basic Strategies1. Broad Differentiator (Presence in every segment)
2. Niche Differentiator (High End, Performance, Size)
3. Broad Cost Leader (Presence in every segment)
4. Niche Cost Leader (Traditional, Low End)
5. Cost Leader with Product Lifecycle Focus (High End, Traditional, Low End)
6. Differentiator with Product Lifecycle Focus (High End)
Capstone Courier includes:– Public Financial Records
– Product Positioning
– Customer Buying Patterns
Customer survey scorescan be found in the Courier’s segment analysis
R and D controls:Changes in performance, size and MTBF
Completely new products:Generate 25% awareness without spending any money
MTFBis measured in hours
Customer Buying Criteria– Positioning and price criteria change every year
– Age and MTFB criteria remain constant
Segment prices fallat a rate of $50 per year
Performas and Reports are:– Projections for the upcoming year
– results from the previous year
4 department/ functional areas1. R&D
2. Marketing
3. Production
4. Finance
Customer Segments– High end
– Performance
– Size
– Traditional
– Low end
4 Buying criteria of Customers– Price: inexpensive or advanced technology for higher price?
– Age: brand new tech or proven tech that has been around for years?
– MTFB (mean time before failure): reliably measured in hours
– Positioning: Size and Performance (speed/sensitivity with which they respond to change in physical conditions)
Over time customers expect:Product that are smaller and faster
Perceptual maps can be used:to plot any 2 product characteristics
Customer Survey score:– Drives product demand (higher the score, higher the demand)
– Calculate 12 times a year
Customers prefer products:within the fine cut circle, but will buy products within the rough cut circle as well
Price ranges in all products segments:drop $.50 per year
R&D– Invention projects take 1 year to complete
– Each 1,000 hours of reliability (MTFB) ads $.30 to the material cost
– Segment circles on the perceptual map move between .7 and 1.3 units each year
– Project lengths can be as short as 3 months or as long as 3 years
– Changing the MTFB alone will not effect a products age
– Re positioning the product cuts the products age in half
Marketing– Promotion and Sales budgets
– From one year to the next 33% of people who knew about the product last year forget about it
– Promotion determines awareness
– sales budget determines acceptability
– You must have 2 or more products in the segment fine cut to achieve 100% accessibility
Production– Capacity
– each new unit of capacity costs $6 for the floor space and $4 x (automation rating)
– can be sold for $.65/ unit
– If you sell all the capacity on a sensor, capstone will interpret this as a product liquidation and will sell your inventory for half the cost of production
– Labor costs increase each year
– Automation costs $4/ unit
Finance4 ways to acquire capital needs
1. Current Debt
2. Stock Issues
3. Bond Issues (Long term Debt)
4. Profits
Positioning ScoreMust understand both what customers want and their boundaries in terms of products size and performance
1. Rough Cut Circle
2. Fine Cut Circle
3. Ideal Spot
Rough Cut Circle– Dashed outer circle defines the outer limit of the segment, customers WILL NOT purchase a product outside this boundary, radium of 4.0 units
– In the rough cut, products are poorly positioning and have reduced customer survey scores
-Just beyond the fine cut score drops 1%, half way through the rough score drops 50%, and almost at the dashed line scores drops 99%
Fine Cut Circle– Solid inner circle defines the heart of the segment, customers prefer products within the circle, “make the fine cut”, radius of 2.5 units
– For inexpensive tech, the idea spot is to the upper left of the segment, where material costs are lower
– For cutting- edge tech, idea spots is the lower right of the segment, where material costs are higher
Ideal SpotPoint is the hear of the segment. All other things being equal, demand is highest
Price ScoreEvery segment has a 10 dollar price range. Customers prefer products towards the bottom of the range. Price ranges in all segments drop 50 cents per year.
– Segments that demand higher performance and smaller sizes will be willing to pay a higher rice
Price rough cutsensors riced $5 above or below the segment guidelines will not be considered for purchase. products fail the price rough cut
– sensors priced a dollar above or below guidelines will lose about 2% of their customer survey score for each dollar above or below, up to 4.99
Price Fine CutPrices follow a clasic economic demand curve, as price goes down, the price score goes up
MTBF– Each segment sets a 5,00 hour range for Mean Time before failure
– the number of hours a project is expected to operate before it malfunctions, customer prefer products towards the top of the range
– as MTFB increases, the score increases. Customers are indifferent to MTFB above the segment range
MTFB rough cutProducts with MTFB 1000 hours below the segment guideline lost 20% of their customer survey score, for every 1,000 hours below the guideline, on down to 4,999
– At 5,000 hours below this range, demand for the product falls to zero
MTFB fine cutthe customer survey score improves as mtfb increases, however material cost increase .30 cents for every additional 1,000 hours of reliability. customers ignore reliability above the expected range
Age Score– criteria does not have a rough cut, product cannot be too young or too old to be considered for purchase
-Cutting edge tech- prefer newer tech (1.5 years or less)
– Proven tech- seek older designs (2 or more years)
Customer survey scoreyour score/ (sum of your score+ competitors scores)