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Part 1 Welcome to: Building Business Acumen ® Marine Civil Aerospace Energy Nuclear Defense Aerospace Rolls – Royce Engine Services Oakland RRESO
Only 5-10% of business start-ups survive past 5 years. 16% of CEOs lose their job every year. Booz Allen Hamilton 5 th annual Study 70% of merger and acquisition activity do not live up to expectation. Wall Street Journal 2007 Business can be tough! So why do businesses fail?
Every business must focus on five business drivers. If they do, they will be successful. If they don’t, they’ll fail. Let’s Start a Business! Business Acumen: 4
Acumen means? …the ability to make good business decisions in a timely manner with an understanding of how the decision should impact the business. 3
Every business must focus on five business drivers. If they do, they will be successful. If they don’t, they’ll fail. Let’s Start a Business! Business Acumen: When it comes to running a business successfully, the street vendor and the CEOs of some of the world’s largest and most successful companies talk and think very much alike. -Ram Charan
Cash Definitions Definition of Cash: Cash is the bills and coins in the register, petty cash, and cash in the bank. It also includes cash equivalents, like Certificates of Deposits (CD’s) and other highly liquid investments (i.e. easily converted into cash within 90 days. (Also see: Appendix: Cash, Page 58) Definition of Cash Flow: Cash generation is the difference between the cash that flows into the business and the cash that flows out of the business in a given period of time, such as a quarter or a year. Can a company be profitable and go out of business? (Page 8)
Cash is King! “Cash is more important than your mother.“ -Al Shugart Former Seagate CEO “Cash Flow is more important than profit.” -Peter Drucker “Cash is a company’s oxygen supply.” (It gives you the ability to stay in business) -Ram Charan Cash: (Savings Account) Cash Flow : (Checking Account) $5,000 On hand $100,000 Salary - $90,000 Expenses $10,000 ??? Put in Acct. Spend it Invest it
Cash & Cash Flow How to obtain Cash Can a company have too much Cash? 9 Earn it Cash from Operation Sell Assets Cash from Investing Borrow it Cash from Financing Pro: No Cost -Con: Time Pro: Immediate -Con: Reduces Assets Pro: Immediate -Con: Cost (Interest) How much is too much/little?
What do shareholders generally want a company to do with its extra cash? 1. 1.Invest in the stock market. 2. 2.Stock pile as much as it can so that is can earn more interest. 3. 3.Pay off all of its debt. 4. 4.Either invest it or return it to shareholders 5. 5.None of the above.
When a CEO refers to cash flow or cash generation, they are likely referring to: 1.How much cash is in the bank. 2.How much cash you made from selling assets. 3.The cash generated from your core business. 4.The interest earned on your cash.
Profit is what is left over after you have paid your expenses. It can be expressed in dollars ($ Profit) or as a percent (% Margin). The types of expenses you deduct determine which margin you are calculating. Most common margin calculations are: Gross Profit: deduct cost of goods only Underlying Operating Profit: (?) Net Profit: deducts all expenses Definition of Profit:
28% 32% 22% WHY? They sell commodities. “If you’re not unique, you better be cheap!” To drive Profit($) you need either: High Margin (%) or High Velocity (Volume) High Margin vs. Low Margin (Take notes on Page 11) 3.6% 8.0% 1.7% High MarginsLow Margins WHY? They offer something Unique!
UPS: Fuel Conservation by avoiding left-hand turns: 92,000 trucks Saved over 28,541,472 miles Saved 3 million gallons of fuel Reduce insurance premiums Airplanes taxi with one engine General Mills: Hot’n Spicy Chex Mix: “We had 14 different pretzel shapes. By getting rid of some of them, we save $1 million a year.” Yoplait: Ditched multicolored lids, saving $2 million a year: Examples of PROFIT In Action Airlines: Baggage Fees fatten airline revenues by $3.8B
Assets (Guide book p.12) Balancing… Asset Strength Asset Utilization
Example: & Example: Profits & Assets “In 1912, the Model T for the first time cost less than the prevailing average annual wage in the United States.” “Ignoring conventional wisdom, Henry Ford continually sacrificed margins to increase sales. In fact, profits per car did fall as he slashed prices from $220 in 1909 to $99 in 1914.” “But Sales Exploded!” “Ford demonstrated that a strategic, systematic lowering of prices could boost profits, as net income rose from… $3 million in 1909 to $25 million in 1914.” ~Daniel Gross, Forbes Greatest Business Stories
Moody’s A3 S&P A- Stable How does this help our financial strength?