Archive for category material costs
Synergy between various types of credit
Posted by admin in manufacturing, market demand, market forecasts, marketing, material costs on April 17th, 2010
Now that you’ve formalized your partnership—and are in a position to capitalize on it—start planning for the future. Strategic planning is the best way for partners to envision what will happen in the next few years.When partners plan together strategically, the synergy created is enormous. And the outcome is something your competitors can’t replicate because it exists only in the context of your partnership. No matter how hard they try, they cannot re-create that unique set of dynamics that is uniquely yours.
Some time ago I witnessed an example of this type of partnership synergy. At the time, I was participating in a workshop for a multimember partnership including the National Highway Safety Board, the California Department of Transportation, several automobile manufacturers, and some computer and software designers. They are dedicated to increasing auto safety and using technology to improve efficiencies. Their vision is to create a systemto provide interaction between the automobile and the road to enhance safety and performance. Electronic sensors embedded in the road surface will monitor traffic, surface conditions, and other useful information and relay it to the driver via a computer in the car. This data will be projected via a dashboard monitor or onto the windshield and also signal the optimum speed the car should be traveling under these conditions. Such a system could also indicate alternate routes should there be traffic delays or other obstacles.
Fundamental models for loans spreads
Posted by admin in Companies, Money Tips, consulting, credit, liability, management skills, manufacturing, material costs on October 25th, 2009
A popular approach to estimate the credit risk of an issuer is the use of z-scores. In this context, Altman’s five components framework has attracted particular interest. On the company level, it is based on the five metrics.
Replacing the company-specific metrics by macroeconomic factors yields a fundamental model for the credit market. Because of the required minimum history and data reliability we will focus on the US market. Data for this procedure is taken from the flow of funds statistics and the national accounts of the United States.
The ratio of working capital to total assets measures the net liquid assets of a firm relative to the sum of financial and tangible assets. We isolated net liquid assets for the US nonfinancial corporate sector from the flow of funds statistics by subtracting mortgages, consumer credit, trade receivables and miscellaneous assets from total assets and subsequently adding inventories, trade and tax receivables.
The large fall in 1974 is due to a significant decline in the value of trade payables. Usually, the ratio of working capital to total assets falls in a recession. But there also seems to be a secular downtrend in this ratio.
How to compensate for default payday risk
Posted by admin in Global Markets, Money Tips, financial information, fixed costs, marketing, material costs on October 23rd, 2009
The spread needed to compensate for default risk depends upon future default rates, recovery rates and ratings transition probabilities. The rating agencies publish their forecasts of future default rates based on historical data. Usually required spreads come out significantly lower than current spreads for investment grade companies. For high yield, however, observed spreads tend to be too low, given the actual risk of default. While over the long term buy-and-hold strategies may earn an excess return over government bonds for pure investment grade portfolios, this strategy is not appropriate for high-yield portfolios. Here, investors need to focus much more on the process of selecting the right companies and avoiding the blowup names. A look at historical data shows that market spreads tend to overshoot at the end of credit cycles, especially in the wake of a recession.
For example, even if the historically high default rates of 1990/91 had persisted over the following years, investors should have required a BBB credit spread of only 115 bps for medium-term bonds. At that time the average market spread for BBB-rated issues, however, peaked at more than 180 bps.
Consequently, the market was much too bearish in 1991. Conversely, in 1997, at the beginning of the severe bear market for credit, spreads were too tight for the period of downgrades and credit blowups that followed. Note that these observations apply for bonds with a maturity of roughly 4 years.
While the cushion is not as comforting as for shorter maturities, even at the long end the spread levels reached in recessions provide sufficient protection, even when assuming that default rates stay high for a sustained period of time.
Particularly troubling stock options
Posted by admin in material costs, ownership, performance objectives, production cycles on September 7th, 2009
Stock options are particularly troubling. In theory, employees who own stock will work to make the price of the stock rise. Therefore they are given the right to buy shares at a discount. Unfortunately, when new stock is issued to employees who exercise their stock options, your interest is diluted. In some companies, you will find your interest cut in half in a few years. CEOs of large companies average $4 million a year in stock options.
In addition, studies show that the share prices of companies that issue large amounts of stock options underperform the market. Even worse, employees benefit when the stock price collapses. Stock options are repriced or new stock options issued so employees can dilute your interest at a fraction of the cost. You get no benefit from a stock price collapse.
The grant of stock options also increases the volatility of your shares. Stock options are only valuable if the price of the stock rises above the option price. If the value declines, the options are worthless, and employees will not spend money to exercise them. This gives employees an incentive to bet the company on risky ventures such as mergers, acquisitions, untested products, untested markets, untested technology, and untested corporate structures. Employee stock options are no benefit to you whatsoever.
What’s So Important About Accounting? – part 1
Posted by admin in Global Markets, effective budgeting, incentive, material costs, paperwork on August 2nd, 2009
For accountants, the i proof is in the y paperwork. Accurate, well-organized records are a must. Sloppy bookkeeping is the road to financial failure—or at least to slowing down success, perhaps a lot. As a first step in becoming “accounting literate,” take the time to write down all business activities, and make sure your records are accurate.
Good salespeople know all about the items they’re selling. Really good salespeople know the engineering calibrations, size, velocity coefficients, or other technical data about their product.
Why do salespeople need to know these things? Here are some reasons:
Extensive product knowledge impresses the customer.
Product knowledge gives customers faith in the salesperson’s claims that the product is exactly what they’re looking for.
It gives the salesperson better insight into the product and its uses, which makes him or her better able to help customers believe this product is the solution to their problems.
It makes the salesperson more successful. That means higher income, greater job security, and better opportunities for promotion, besides the obvious benefits for the company.
The same argument holds true when it comes to accounting knowledge for nonfinancial managers. The more a manager knows about how the people who deal in numbers handle department finances and the methodologies they use, the more that manager will be able to intelligently work with them, making everyone’s job a little easier. So, let’s take a few steps into that world of accounting.
The Management Function in Budgeting – part 2
Posted by admin in incentive, market demand, material costs, performance objectives, profit projections on August 2nd, 2009
Shipping/Delivery seems to have climbed precipitously in the last year. Why? Clearly, this is a case where vendor price had exceeded market value. It may be a case of a long-term supplier who has gotten used to raising its prices a certain percentage each year with little incentive to remain competitive. Management should review any contracted relationship with the vendor and check the last three years’ delivery and shipping charges to note the percentage increase. Chances are it’s time to put the service out for competitive bid.
There are dozens of questions that can and should be raised, but the preceding three make the point: Setting up the budget is only half the task. The document must then be put through management scrutiny, not only to check the accuracy of its numbers and suppositions, but also to raise those issues that will enable the company to be more efficient and cost-effective.
If these questions aren’t part of the budget creation, then management is doing only half its job.
Fixed and Variable Costs in fiction – part 3
Posted by admin in management skills, manufacturing, marketing, material costs, performance objectives on August 1st, 2009
Decisions over semi-variable costs, such as marketing expenses, may be made based on the number of units you need to sell, but they likely are not unit-specific—unless, for example, the marketers decide to give away something free with each purchase. However, if we were to add an additional $5,000 in marketing expense to our 5,000-unit run, we add an additional dollar in semi-variable cost to each item. The same $5,000, spent on the 10,000-unit run, would add an additional 50 cents per piece.
The net cost, then, on the 5,000 unit run jumps to $8 per unit. Costs for the 10,000 unit run jump to $6.50. The net profit margins are $1 and $2.50 per unit, respectively.
Even with these costs applied, it should be evident that the higher this particular production run, the wider the profit margin. That’s all part of the sales income, to be sure. But the profitability per unit is determined primarily by the fixed and semi-variable costs. And that’s influenced by the budgeting procedure.
Fixed and Variable Costs in fiction – part 2
Posted by admin in Companies, effective budgeting, equity, material costs, profit margin on August 1st, 2009
But now let’s say each one of these units requires $3 worth of raw materials and another $2 in assembly charges to create, or $5 per unit. Since those costs are based on the number of units being produced, those costs are variable with the production flow. If you produce 5,000 units, that’s a variable cost of $25,000. Add to that your $10,000 per year in fixed costs, and you have overall production costs of $35,000, or $7 per unit. At a sales price of $9, the profit margin is $2 per unit.
But let’s increase production to 10,000 at $5 per unit in materials and assembly charges. That’s $50,000 in variable costs, plus $10,000 in fixed costs, for a total of $60,000 for 10,000 units. The price per unit is now $6, which yields a profit margin of $3 per unit.