Opening Issues Things we need to discuss! Opening Issues Things we need to discuss! • Lifforce the strange case of misconception! • Week 9 Assignments • Skill Module 17.2 Whole Life Costing • Inventory Valuation • Eli Consulting advice • The three books and what they said to Lensbabies Lifforce Or man is this strange! • Risk from most to least – 2 then 1& 3. – Why? In 2 Albert is risking almost 75% of his net worth and is risking none of it in the others. • Rewards from most to least – 2, 3, 1. – But that that far apart given case assumptions. • Revise based on the Theorem #6 makes 1 & 2 many times higher rewards than 3! – They are close enough together that risking net worth just doesn't seem worth it. Lifforce Theorem #6 • If Phase 1 fails everything is lost in all options. – Albert is worse off in 2. • If Phase 2 fails after 1 succeeds then everyone losses all those paper gains and are left with nothing. – Albert probably got enough out of IPO to recover his net worth and get some salary in Phase 2 though not stated in case. • BUT if Phase 2 Succeeds then the stock that Albert got at the end of Phase I IPO and had to leave in stock, would skyrocket in price at least 2-4x so his returns would be say $300 million or so depending. – This is far more than 3 making it a really bad deal all the way around. – This makes 1 and 2 generate huge returns. – To me 1 is the overwhelming choice – less risk with the same gain [about]! [But you could argue with me on the risk/reward of risking 75% of your net worth now verses gaining an extra $30 million! To me it depends on the probability of the successful outcome at the end.] Lifforce Misconceptions Abound! • Loan has no risk impact on Albert, they are debt of the company. D/E ratios are meaningless. Albert’s personal risk and reward is NOT = to the risk of the company. Loans are responsibility of company an interest paid by company. • Amount of control does NOT = Risk [he loses control in all options] • Amount of rewards does not = ownership % • The grant has nothing to do with risk except maybe increase it? • Don’t the family, wife and personal life have any risk? • Expected value is an important tool in these situations. [Maybe NPV does to!] [EV is the probability of an event happening times the return of that event.] Add that to PV and you have a winner! Lifforce Jonathan’s Insight • Even to the very end new insights emerge. I call this one “The Jonathan Insight”! • He ask me after class why alternative two had to go to an IPO, they didn’t need all that much money which they could get by a small IPO [I said not likely, too small but it could be raised with another investor which would cost a lot less than the first since Phase I successful! Amazing, I hadn’t thought of that. • Then Albert could keep a higher percentage and likely maintain control of the company and get a lot, and I mean a lot, more money if Phase 2 successful. • This was a really good insight and I thank Jonathan for it. Oh how binders can get in the way of good insight and analysis. Thanks, Jonathan! Skill Module 17.2 Whole Life Costing Kyrobi Delta Whole Life Whole Life Costs NPV-20% NPV 10% Costs NPV-20% NPV 10% Purchase Price 1 $ 110,000 $ 110,000 $ 110,000 $ 80,000 $ 80,000 $ 80,000 Shipping 1 $ 3,500 $ 3,500 $ 3,500 $ 1,000 $ 1,000 $ 1,000 Installation 1 $ 6,500 $ 6,500 $ 6,500 $ 4,000 $ 4,000 $ 4,000 Testing 1 $ 3,500 $ 3,500 $ 3,500 $ 4,500 $ 4,500 $ 4,500 Maintenance 1-10 $ 120,000 $ 50,310 $ 73,735 $ 149,000 $ 62,468 $ 91,554 Energy costs 1-10 $ 85,000 $ 35,636 $ 52,229 $ 130,000 $ 54,502 $ 79,879 Rebuilding 7 $ 25,000 $ 6,977 $ 12,829 $ 35,000 $ 9,768 $ 17,961 Disposal 10 $ 4,850 $ 783 $ 1,870 $ 6,000 $ 969 $ 2,313 Whole Life Costs $ 358,350 $ 217,206 $ 264,163 $ 409,500 $ 217,207 $ 281,207 Whole Life Costs Kyrobi is clearly the winner NPV At 20% COC Indifferent either one I NPV At 10% COC Kyrobi clearly the winner Why? The late year cost of the Delta is higher while the initial cost of Kyrobi is higher. With the higher the discount rate the last year costs count less and with a lower rate they count more. Inventory Valuation Beginning inventory 0 units Purchases 70 units 30@ $1.00, 20@ $1.10, 20@ $1.15 Ending inventory 25 units Inventory used 45 units LIFO - Last In First Out 25 @ $1.00 $ 25.00 FIFO - First In First Out 20 @ $1.15 and 5 @ $1.10 $ 28.50 Weighted Average 25 @ $1.07 $ 26.75 Weighted Average cost = [30x$1.00 + 20x$1.10 + 20x$1.15]/70 = $1.07 IMPACT LIFO Falling prices INCREASE value of inventory First cost more Leaves the first ones Rising prices DECREASES value of inventory First cost less FIFO Rising prices INCREASES value of inventory Last cost more Leaves the last ones Falling prices DECREASES value of inventory Last cost less Can have a major impact on asset valuation and on Gross Profit [Sales less Costs of Goods] If higher value then New worth up and income down. If lower Net worth down and income up! Just to remind you, Lisa said FIFO is most often used, others methods require much documentation. Eli Associates – Advise for Business! Deal with all parties – clients, employees, renters, partners Cover legal, ethical and professional issues • Get a good lawyer • Copyright everything automatically • Get a good accountant • Ensure terms with clients are clear on • Organize a professional corporation product ownership • General liability insurance for building • Be selective with clients • Professional business liability • Don’t promise what you can’t give just insurance to get a job • Standard contract terms and • Review process by owners of every conditions contract prior to signing • Non-compete, don disclosure and • Give specific rather than general client confidentiality agreements advise • All agreements in writing • Be sure in writing client know the • Accept a prime contractor only that recommendations based on facts and you trust and will accept your terms goals provided • Figure out ownership of writings, • Follow terms of contract consulting and copyrights. • Set up standard contract with conditions, ownership and payment What Did The Books Say? Just a few of the things that could impact Lensbabies! THE TIPPING POINT CROSSING THE CHASM • Just a few people determine the • The process of the diffusion of success of the “buzz” innovations • Know who the connectors [ones who • Chasm is the problem between the knows lots of people] and mavens early adopters and the early majority. [the ones that collect information] Critical for this product • Message must be in context • They have to figure out strategy to • Word of mouth as shows and make the leap across the chasm conferences and on line blogs • Product definition, positioning the product, channels all are key in finding E- MYTH the right people. • Have to get past the technician • Deal with the triad of management, entrepreneur and dreamer in the founders. Assets & Legal Issues Dr. Thomas Webb Week 9 Accounts Receivable • Critical to cash flow of business, never underestimate importance. • You need to now what appropriate goals are. • You must have a plan to control A/R. • Dalton example. • Check out www.allbusiness.com articles on A/R Dalton A/R Example • Goal less than 60 days given government clients • Call each client and determine their methods on AP. Bill to fit that. • Identify problem clients and get a strategy for each • Strategy to contact every client over 30-45 days. • Make collections part of PM job • Make A/R part of weekly management briefing. Inventory & Asset Value • Inventory – Huge consumer of cash – Keep it low and then get it lower – Different ways to value inventory and their impact. • Asset valuation – Remember have choices, correct isn’t always the best – Big impact on balance sheet and even income statement Capital Budgeting • You need a method to help you make choices. • Simple are “payback” and ROI. • More complex but better are NPV, IRR • Rent or buy decision • This is worth a course in itself, your job is Legal Issues • Lawyers – yes but must fit • Negotiation – everything! • Litigation, Arbitration, Mediation • Zorro Example There is just so much here and so little time. It is critical! Negotiate Everything Great Section! • Prepare • Position • Propose • Seek to create value • Seek long term solutions • Seek balance • Seek mutual safety • Seek outcomes commensurate with investment • Pounce! Never ever compromise unless it is part of the deal or they won’t accept it as a compromise. Gratuitous compromises will only hurt. Nice is not always good. Liabilities Excellent Section! • How to avoid torts in contracting. • Litigation vs. Arbitration vs. Mediation • Intellectual property – patents, secrets, copyright, trademarks. • The problem of infringement • The Zorro Example Litigation vs. Arbitration vs. Mediation • Litigation – Courts system, torts – Appeal, costly, slowest, public – Favors those with deep pockets • Arbitration – Outside courts, private judges – Mutual agreement to do it, binding decision – Confidential, costly, faster, balanced • Mediation – Outside courts, informal, mediation specialists or lawyers – Binding only if mutually agree, non binding – Confidential, least costly, fastest, best for small business, put it in contracts. Protection Never enter a relationship without protection! Zorro 25% of staff are lawyers and they are a profit center! WHAT DO WHY DO IT? • Warning on every page • Must protect rights through due • Clipping service world wide no diligence – or lose it! Must show name and similarities they make good faith effort. • Screen books, TV and movies • They have a few cases every year • Respond to 100% of possible that generate from $1,000 to infringements $10,000 in settlement. • If no response call and follow up • They have one or two cases a year that can be a windfall. They • Have all distributors and agents got $50,000 from Wal-Mart. sign agreements • In a TV show they where offered a • Investigates potential money settlement of $500,000. John issues – did infringer make wanted the millions and lost so it money? cost him $250,000. • File suit if necessary • Keeps his current wife busy and it’s a good business expense. The End!