Opening IssuesThings we need to discuss!

Opening IssuesThings 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

LifforceOr 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.

LifforceTheorem #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.]

LifforceMisconceptions 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!

LifforceJonathan’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

Costs NPV-20% NPV 10%Whole Life

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 moreLeaves the first ones Rising prices DECREASES value of inventory First cost lessFIFO Rising prices INCREASES value of inventory Last cost moreLeaves 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• Get a good accountant• Organize a professional corporation• General liability insurance for building• Professional business liability

insurance• Standard contract terms and

conditions• Non-compete, don disclosure and

client confidentiality agreements• All agreements in writing• Accept a prime contractor only that

you trust and will accept your terms• Figure out ownership of writings,

consulting and copyrights.

• Copyright everything automatically• Ensure terms with clients are clear on

product ownership• Be selective with clients• Don’t promise what you can’t give just

to get a job• Review process by owners of every

contract prior to signing• Give specific rather than general

advise• Be sure in writing client know the

recommendations based on facts and goals provided

• Follow terms of contract• 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• Just a few people determine the

success of the “buzz”• Know who the connectors [ones who

knows lots of people] and mavens [the ones that collect information]

• Message must be in context• Word of mouth as shows and

conferences and on line blogs

E- MYTH• Have to get past the technician• Deal with the triad of management,

entrepreneur and dreamer in the founders.

CROSSING THE CHASM• The process of the diffusion of

innovations• Chasm is the problem between the

early adopters and the early majority. Critical for this product

• They have to figure out strategy to make the leap across the chasm

• Product definition, positioning the product, channels all are key in finding the right people.

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 EverythingGreat 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.

LiabilitiesExcellent 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.

ProtectionNever enter a relationship without protection!

Zorro25% of staff are lawyers and they are a profit center!

WHAT DO• Warning on every page• Clipping service world wide no

name and similarities• Screen books, TV and movies• Respond to 100% of possible

infringements• If no response call and follow up• Have all distributors and agents

sign agreements• Investigates potential money

issues – did infringer make money?

• File suit if necessary

WHY DO IT?• Must protect rights through due

diligence – or lose it! Must show they make good faith effort.

• They have a few cases every year that generate from $1,000 to $10,000 in settlement.

• They have one or two cases a year that can be a windfall. They got $50,000 from Wal-Mart.

• In a TV show they where offered a settlement of $500,000. John wanted the millions and lost so it cost him $250,000.

• Keeps his current wife busy and it’s a good business expense.

The End!