MGMT 1 Final Study Guide

Ch. 17- Accounting

  • Accounting

    • Often times called the language of business

    • Meant to help stakeholders make better business decisions by providing them with financial information

    • Provides information needed to evaluate a company’s financial performance

  • Accountants (work in two fields)

    • Management Accountants

      • provide information and analysis to decision makers inside the organization in order to help them run it (helps keep the business rubbing)

    • Financial Accountants

      • furnish information to individuals and groups both inside and outside the organization in order to help them assess its financial performance (how well it’s doing)

  • Management Accounting

    • Prepare tailored reports for management to make decisions about the business. 

  • Financial Accounting

    • Prepare the company’s financial statements (Cash flows, Balance Sheets, Income statement, owner’s equity) that are typically accessible to the public and done on a 12 month basis (fiscal year)

      • Fiscal years can vary because companies generally pick a fiscal-year end date that coincides with the end of a peak selling period

    • Accountants must abide by GAAP (Generally Accepted Accounting Principles) issued by the FASB (financial accounting standards board)

    • International Accounting Standards board for international businesses

  • People who use Financial Accounting Information

    • Owners and Managers

      • Use it to see if profits were made and where to take corrective action

    • Investors and Creditors

      • Since they provide money, they want to know how the business is performing

      • They study financial statements to assess a company’s performance and to make decisions about continued investment.

    • Government Agencies

      • Publicly owned companies must provide annual financial reports to the Securities and Exchange Commission (SEC), a federal agency that regulates stock trades and which is charged with ensuring that companies tell the truth with respect to their financial positions. 

      • Companies must also provide financial information to local, state, and federal taxing agencies, including the Internal Revenue Service (IRS)

    • Suppliers

      • need to know if the company to which they sell their goods is having trouble paying its bills or may even be at risk of going under

    • Employees and labor unions 

      • Are interested because salaries and other forms of compensation are dependent on an employer’s performance.

  • Accounting Equation

    • Assets = Liabilities + Equity

      • Assets are things a business owns

      • Liabilities are things a business owes

      • Assets must come from somewhere; investments made by the owners (owner’s equity) or from loans (liabilities)

  • Income Statement

    • shows revenues, or sales, and expenses

      • Cost of goods sold (COGS): the total cost of the goods that you’ve sold

      • Operating expenses: the costs of operating your business except for the costs of things that you’ve sold

      • Gross Profit/Gross Margin: difference between sales revenue and COGS

      • Net income/Profit: difference between gross profit and operating expenses

  • Credit

    • Unsecured Credit

      • Unreliable source of money because there is no guarantee that it’ll be paid

    • Secured Credit

      • Has collateral, such as a bank taking your car if you fail to pay the loan

  • Breakeven analysis

    • To break even (have no profit or loss). 

    • Total sales revenue must exactly equal all your expenses (both variable and fixed)

      • Variable costs

        • Costs that depend on the quantity produced and sold;

      • Fixed costs

        • Costs that don’t change as the quantity sold changes, such as advertising expense

  • Types of Financing used by Companies

    • debt financing

      • Borrowing money from loans or bonds and at the end of the life of the bond, the borrower would repay the principal, i.e., the amount borrowed

    • Equity financing

      • selling an ownership stake in the company

  • Ratio Analysis

    • How to compare a business’s financial results with those of other companies in your industry or with the other companies whose stock is available to investors

    • Ratios are just a number divided by another number

    • a technique for evaluating a company’s financial performance

  • 4 types of ratios mentioned in the book

    • Profitability ratios -tell you how much profit is made relative to the amount invested (return on investment) or the amount sold (return on sales).

    • Liquidity ratios- tell you how well positioned a company is to pay it’s bills in the near future (how fast their assets can be turned into cash)

    • Debt ratios - look at how much borrowing a company has done in order to finance the operations of the business. The more borrowing, the more risk a company has taken on, and so the less likely it would be for new lenders to approve loan applications

    • Efficiency ratios tell you how well your assets are being managed.

  • The Financial Manager’s Responsibilities

    • main goal of the financial manager

      • to maximize the value of the firm to its owners. The value of a publicly owned corporation is measured by the share price of its stock. A private company’s value is the price at which it could be sold.

    • Financial planning: Preparing the financial plan, which projects revenues, expenditures, and financing needs over a given period.

    • Investment (spending money): Investing the firm’s funds in projects and securities that provide high returns in relation to their risks.

    • Financing (raising money): Obtaining funding for the firm’s operations and investments and seeking the best balance between debt (borrowed funds) and equity (funds raised through the sale of ownership in the business

Ch. 6 - Forms of Ownership

  • Types of Ownership

    • Sole Proprietorship- owner has complete control over the business, responsible for all day-today operations, receive all the income generated from the business, your business doesn’t pay state or federal taxes because it’s a “personal income”

      • Disadvantages

        • rely on your own resources for financing

        • bears unlimited liability for any losses incurred by the business

    • Partnership

      • business owned jointly by two or more people

      • partnership agreement

        • specifies everyone’s rights and responsibilities

      • Disadvantages: 

        • unlimited liability: each partner is personally liable not only for his or her own actions but also for the actions of all the partners

    • Corporation

      • a legal entity that is entirely separate from the parties who own it

      • can enter into binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and be taxed

      • owned by shareholders who elect a board of directors, a group of people (primarily from outside the corporation) who are legally responsible for governing the corporation

      • attract more skilled and talented employees

      • Disadvantages:

        • Not owned by a single person

        • agency problem: where there’s conflicts of interest in a relationship in which one party is supposed to act in the best interest of the other

        • more costly to set up

        • double taxation: Corporations are taxed by the federal and state governments on their earnings

    • Limited-Liability Companies

      • provides business owners with limited liability and no “double taxation”

      • owners (called members rather than shareholders) are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level 

      • Disadvantages: A business owner can be held personally liable if they:

        • Personally guarantees a business debt or bank loan which the company fails to pay.

        • Fails to pay employment taxes to the government.

        • Engages in fraudulent or illegal behavior that harms the company or someone else.

        • Does not treat the company as a separate legal entity, for example, uses company assets for personal uses

  • A merger occurs when two companies combine to form a new company. 

  • An acquisition is the purchase of one company by another

  • Companies are motivated to merge or acquire other companies because:

    • Gain complementary products

    • Attain new markets or distribution channels

    • Realize synergies (where they save resources or staff if they merge)

    • Disadvantages: 

      • hostile takeover—an act of assuming control that’s resisted by the targeted company’s management and its board of directors

Ch. 10 - Operations Management

  • operations management (OM)

    • consists of all the activities involved in transforming a product idea into a finished product

  • operations managers

    • manage the process that transforms inputs into outputs

    • 3 important responsibilities:

      • Product planning

        • Determining how goods will be produced, where it’ll take place, and how facilities will be laid out

      • Production control

        • managers must continually schedule and monitor the activities that make up production, ask for advice to make adjustments, oversee purchasing of raw materials and handle inventories

      • Quality control

        • Must ensure that goods and services are produced according to specifications and that standards are met

  • Manufacturers

    • Transform resources into finished goods

    • must continually strive to improve operational efficiency to succeed in today’s business environment

  • production planning

    • Production process

    • Facilities decisions

    • Purchasing and Supplier Selection

  • 3 types of production process

    • Make to Order

      • Aka make to stock

      • products that are customized to meet the needs of the buyers who ordered them

      • commonly used by such businesses as print or sign shops that produce low-volume, high-variety goods according to customer specifications

      • often results in a longer production and delivery cycle than other approaches

    • Mass Production

      • Aka “mock to stock strategy”

      • practice of producing high volumes of identical goods at a cost low enough to price them for large numbers of customers

      • Goods are made in anticipation of future demand and kept in inventory for later sale

      • particularly appropriate for standardized goods ranging from processed foods to electronic appliances and generally result in shorter cycle times

    • Mass customization

      • a company interacts with the customer to find out exactly what the customer wants and then manufactures the good

      • Uses efficient manufacturing to hold down the costs

      • A common method is to mass-produce a product up to a certain cut-off point and then customize it

  • Facilities decision

    • Site selection

      • Managers consider proximity of the site, population of available workers, cost of resources and expenses, business climate

    • Capacity planning

      • Deciding on the quantity of products produced by forecasting demand, calculating capacity requirements (the maximum number of goods that it can produce over a given time under normal working conditions)

  • Purchasing and Supplier Selection

    • Purchasing

      •  process of acquiring the materials and services to be used in production

      • costs of materials typically make up about 50 percent of total manufacturing costs, requiring a lot of attention from Op. Man.

    • Supplier selection

      • Responsibility of the OM who must ensure that they find the best supplier who provides quality, on time deliveries, favorable reputation, etc.

  • E-procurement

    • When companies use the Internet to interact with suppliers

    • Using the Internet for business purchasing cuts the costs of purchased products and saves administrative costs related to transactions

    • faster for procurement and fosters better communications

  • Inventory control

    • The balance a company must maintain between buying inventory to keep in stocks and preventing it from going to waste

    • Without inventory control companies would lose production time because they’ve run out of materials or waste money because they’re carrying too much inventory

  • Just in time Production

    • When the manufacturer arranges for materials to arrive at production facilities just in time to enter the manufacturing process

    • requires considerable communication and cooperation between the manufacturer and the supplier

  • material requirements planning (MRP)

    • A software tool that relies on sales forecasts and ordering lead times for materials to calculate quantity of components needed for production and when they should be ordered/made

  • master production schedule (MPS)

    • An MRP is turned into MPS which then explodes into a forecast for the needed parts based on the bill of materials for each item in the forecast

      • bill of materials

        • a list of the various parts that make up the end product

  • Scheduling techniques

    • 2 common types

      • GANTT charts

        • Named after Henry Gantt, the designer

        • an easy-to-use graphical tool that helps operations managers determine the status of projects

        • useful when the production process is fairly simple and the activities aren’t interrelated

        • Ex)

        •  

      • PERT (Program Evaluation and Review Technique) charts

        • diagrams the activities required to produce a good, specifies the time required to perform each activity in the process, and organizes activities in the most efficient sequence

        • identifies a critical path (the sequence of activities that will entail the greatest amount of time)

        • ex)

  • Total Quality management

    • all the steps that a company takes to ensure that its goods or services are of sufficiently high quality to meet customers’ needs

      • Customer satisfaction

      • Employee involvement

      • Continuous improvement

  • statistical process control

    • This technique monitors production quality by testing a sample of output to see whether goods in process are being made according to predetermined specifications

Ch. 8- Management and Leadership

  • Effective performance of a business requires solid management

    • Management- process of planning, organizing, leading and controlling resources to achieve specific goals. 

    • 4 Key management functions: 

      • Planning

      • Organizing

      • Leading

      • Controlling

  • The Management process

    • Planning

      • Done so that everyone should know what should be done, how to do it, and who has to do it

    • Strategic Planning

      • The process of establishing an overall course of action

        • 1. Identify the purpose of the company

        • 2. Mission statement that communicates purpose

          • Can be concise or detailed (short or long) 

          • Some companies no longer use mission statements

        • 3. Identify core values/beliefs

          • Guides the organizations actions

        • 4. Assess SWOT

          • Helps assess the company’s fit with its environment

        • 5. Establish goals/objectives/performance targets

          • Does what the mission statement doesnt–shows you how to carry out your commitments instead of just affirming them

          • Tend to change over time as the company grows/suffers

        • 6. Develop and implement operational plans

    • Tactical Plans

      • The overall plan is broken down into manageable, short term components (called tactical plans)

      • Long range strategic plans are often broken into several tactical plans

    • Operational Plans

      • Tactical plans are broken down into operational components that provide detailed steps 

      • Only cover a brief period of time (e.g. a month or two)

Example: At Notes-4-You, note-takers might be instructed to submit typed class notes five hours earlier than normal on the last day of the semester (operational guideline). The goal is to improve the customer-satisfaction score on dependability (tactical goal) and, as a result, to earn the loyalty of students through attention to customer service strategic goal)

  • Contingency Planning

    • Identifying aspects of a business that are most likely to be adversely affected by change and developing alternative courses of action in case an anticipated change occurs

    • “Backup” or “fallout plan”

  • Crisis Management

    • Some companies prepare for crises by practicing and training teams to deal with emergencies

    • Crisis may impact reputation and sales, so companies do best to avoid it or be prepared for it

    • Key members gather information quickly as everyone else resumes their normal duties to keep the flow going

    • The public, press and employees are updated on a situation and the company’s response to it

  • Leading

    • Providing focus and direction to others and motivating them to achieve organization goals

    • Different Types of leadership styles:

      • Autocratic style- managers make decisions without soliciting input from subordinates. Expect employees to take responsibility for performing required tasks

      • Democratic style- Managers seek input from subordinates while retaining authority in making final decisions. More likely to keep subordinates informed about things that affect their work

      • Free-rein style- Managers are “hands off”, provide little direction to subordinates, may advise employees, give freedom to solve problems

  • Leadership Theories

    • Transactional Leaders

      • Exercise authority based on their rank in the organization

      • Let subordinates know what’s expected of them and what they’ll receive in return

      • Focus on identifying mistakes and disciplining employees for poor performance

    • Transformational leaders

      • Mentor and develop subordinates

      • Stimulate employees to look beyond personal interests to those of the group

      • More effective than transactional leadership 

  • Controlling

    • A five step process where you make appropriate adjustments on a particular aspect of performance based on sales:

    • Benchmarking

      • A specialized kind of control activity

      • Aims to improve a firm’s overall performance

      • Can be done in numerous ways, such as 

        • Keeping tabs on the competition

        • Working directly with companies in unrelated industries to exchange ideas at low cost and no risk

        • companies may enter into benchmarking consortiums in which an outside consultant would collect data and analyze it to gauge how they compare to others in the industry without revealing their own performance to others.

  • Technical Skills

  • Interpersonal Skills

  • Conceptual Skills

  • Communication skills

  • Time management skills

  • Decision making skills

    • Six step approach: 

Ch. 9- Structuring Organizations

  • layers of management

    • Top managers

      • set the objectives, or performance targets, designed to direct all the activities that must be performed if the company is going to fulfill its mission

      • Mostly spend time planning and making major decisions

    • Middle managers

      • developing and implementing activities 

      • allocating the resources to achieve objectives

    • First Line managers

      • supervise employees and coordinate their activities to make sure that the work performed throughout the company is consistent with the plans of both top and middle management

  • Specialization

    • Organizing activities into clusters of related tasks that can be handled by certain individuals or groups 

    • leads to efficiency

    • disadvantages: Doing the same thing over and over sometimes leads to boredom and may eventually leave employees dissatisfied with their jobs

  • Departmentalization

    • grouping specialized jobs into meaningful units

    • two types—functional and divisional organizations

      • functional organization 

        • groups together people who have comparable skills and perform similar tasks (all accountants, etc)

        • drawbacks: it can hinder communication and decision making between units and even promote interdepartmental conflict

      • Divisional Organizations

        • Mix of specialists (1 accountant, 1 finance, 1 manager, etc)

        • can be formed according to products, customers, processes, or geography

          • Product division means that a company is structured according to its product lines. results in higher costs

          • customer division structure enables them to better serve their various categories of customers

          • Process divisions If goods move through several steps during production

          • Geographical division enables companies that operate in several locations to be responsive to customers at a local level

  • Types of organization command

    • Delegation of authority

      • the process of entrusting work to subordinates

    • Matrix organization

      • employees from various functional areas (product design, manufacturing, finance, marketing, human resources, etc.) form teams to combine their skills in working on a specific project or product

    • Chain of command

      • the authority relationships among people working at different levels of the organization

      • show who reports to whom.

    • Span of control

      • measures the number of people reporting to a particular manager

      • new organizations have only a few layers of management—often called flat

      • taller=more levels of authority

      • narrow span of control (with few direct reports) or a wide span of control (with many direct reports)

  • Types of Decision making

    • Centralized

      • decision making is concentrated at the top, is called centralization. 

      • advantage of consistency in decision-making

      • key decisions are made by the same top managers

      • Disadvantages

        • lower-level managers will feel under-utilized and will not develop decision-making skills that would help them become promotable

    • Decentralized

      • spreads decision making throughout the organization

      • Could create conflict among divisions

Ch. 7- Entrepreneurship

  • Entrepreneurship

    • the study of how people turn an idea into reality to create a new social agreement or institution (most often a new business)

    • Entrepreneurs act under conditions of uncertainty rather than risk

      • Risk is something you can guess the results

      • Uncertainty is a kind of knowledge problem that doesn’t have probabilities and can’t really be guessed

    • requires working with others in some way

  • Entrepreneurial

    • proactive process of overcoming constraints to create value in new ways

  • 3 characteristics of entrepreneurial activity

    • Innovation

      • Offering something new, whether it be product, technology, market or organization

    • Running a business

      • combines resources to produce goods or services and make a profit

    • Risk taking

      • many of the steps taken are motivated mainly by their confidence in the innovation and in their understanding of the business environment

  • Reasons to start a business

    • Be your own boss

    • Achieve a desired lifestyle

    • Achieve financial independence

  • Small Business Administration (SBA)

    • Suggests assessing strengths and weaknesses before starting a business

  • founding team

    • can be comprised of two (most common) or more co-founders that own the company together, take the chance to capitalize on an opportunity and are usually working for free as things get off the ground.

  • Organization Lifecycle

    • the different stages that organizations and sometimes products and indsutries pass through

      • startup phase

        • The beginning, when the idea is turned into an organization

        • characterized by large amounts of uncertainty of customer demand, operational capabilities, and the financial feasibility of the business model

        • Encounter of Knowledge Problems

          • Uncertainty

            • happens when you cannot know what action is likely to lead to a desired outcome

          • Complexity 

            • occurs because of the number of variables that make up a problem and the number of interactions between those variables that could influence outcomes

          • Ambiguity 

            • occurs when there isn’t clarity around what is important or even what might happen.

          • Equivocality 

            • occurs when there are multiple meanings or interpretations of what is important and what is possible

      • Growth phase

        • Product is produced profitably

        • More effort in reaching more customers

      • mature phase

        • growth slows 

        • focus is more on optimization and resource allocation rather than exploring how to create additional value

      • decline or rebirth stage

        • negative growth or profits

        • An attempt to change what they do and find new customers

        • This is when corporate entrepreneurship happens but absence of uncertainty marks the end of entrepreneurship

  • Types of Entrepreneurship

    • lifestyle businesses

      • Aka small businesses

      • create value for a niche group of customers

    • high-growth ventures

      • tend to create value for much larger sized markets and become or are acquired by large and often publicly-traded corporations

  • Social entrepreneurship 

    • seeks to use a startup or company to not only generate enough profit but also enough social and/or environmental impact

    • provide a service at a price that normally wouldn’t be sustainable

    • might look like a charity or non-profit that uses donations and grants instead of service or product revenue to address a social issue

    • triple bottom line

      • Measuring success through profits, social impact and environmental impact

  • Corporate Entrepreneurship/Intrapreneurship

    • entrepreneurship that happens within an existing organization as well

    • An organization redeploys resources to make additional products or improve upon old ones to extend the lifecycle of the organization

      • Can happen before or during falling demand

    • Entrepreneurs within corporations must instead deal with constraints like institutional inertia (reluctance to try something new) and internal politics

  • Health Entrepreneurship

    • Health industry is very regulated, so it requires extra time to bring a new product to market

    • Costs time and money for additional testing and safety 

  • Digital entrepreneurship

    • create value by leveraging existing technological platforms or services

    • encompasses the use of digital products that only exist and can be used online

      • Lowers the cost but increases complexities

      • also introduces additional security concerns of protecting data

  • entrepreneurial ecosystem 

    • refers to a community or network of people, spaces, and available resources that interact around the creation of new ventures

      • Coworking spaces

        • open areas where entrepreneurs and business professionals can work out of

        • The spaces can be free or accessible by paying for a membership to get access

        • Usually, those just getting started or solopreneurs tend to leverage these spaces

      • Incubators

        • a bunch of offices in the same area that are rented out to particular startup companies

        • rent is usually below what you would find out in the current market to provide low-cost options for those getting started

      • Accelerators

        • programs that provide money, space, services, and some sort of training or mentoring to startups selected to participate in their program usually in exchange for equity

  • Bootstrapping

    • when the founders use their own funds to start a company

  • crowdfunding platforms

    • founders can pre-sell their ideas getting the money prior to building a product

  • two primary types of investors

    • Angel investors 

      • invest their own money either on their own or with a group of others

      • often hoping to get a return on their money in a three to a five-year window

    • Venture capitalists 

      • invest primarily other people’s money promising high returns in seven to ten years to those individuals who contribute to their fund

      • search for a portfolio of high-growth ventures and hope that they will be acquired and that at least one of them will get really big so they can cash out and return the promised money to their clients

  • Entrepreneurs

    • are innovators who start companies to create new or improved products. They strive to meet a need that’s not being met, and their goal is to grow the business and eventually expand into other markets

  • Small business owners

    • Aim to provide an income for themselves and their families. They do not intend to be particularly innovative, nor do they plan to expand significantly

    • Can become one through three options:

      • starting a new business

        • Riskiest option

        • allows you to build the business the way you want

      • buying an existing business

        • You’ll already have a proven product, current customers, active suppliers, a known location, and trained employees

        • You must determine the value willing to pay for it

        • There may be performance problems you won’t be aware of until you own the business

      • obtaining a franchise

        • You get the right to use a brand name and to sell its goods or services

        • Available in a variety of industries

        • Incredibly expensive

        • You as the franchisee gets help in picking a location, starting and operating the business, and benefits from advertising done by the franchiser

        • Required to pay two other fees on a monthly basis

          • a royalty fee (typically from 3 to 12 percent of sales) for continued support from the franchiser and the right to keep using the company’s trade name

          • advertising fee to cover advertising done on your part

  • small businesses

    • business that is independently owned and operated

    • Generate about 47.3 percent of jobs in the US

    • Spark innovation

    • Provide opportunities

  • Industry

    • a group of companies that compete with one another to sell similar products

    • Two broad types

      • goods-producing sector 

        • includes all businesses that produce tangible goods

        • manufacturing, construction, and agriculture.

        • About 20% of businesses in the US

      • service-producing sector

        • businesses that provide services but don’t make tangible goods

        • Ex. transportation, finance, entertainment, retail

        • Consists of about 80% of US businesses

        • Retailers

          • they buy goods from other firms and sell them to consumers, in stores, by phone, through direct mailings, or over the Internet

        • Wholesalers

          • they sell products to businesses that buy them for resale or for company use

  • Why businesses fail

    • Bad business idea

    • Cash problems

    • Managerial inexperience or incompetence

    • Inability to handle growth

    • Etc

  • Small business Administration SBA

    • offers an array of programs to help current and prospective small business owners. 

    • Offer a loan guarantee program 

      • SBA won’t loan you any money, rather it will increase the likelihood that you will get funding from a local bank by guaranteeing the loan

  • intellectual property

    • If your idea is innovative enough, it may be considered a right that can be protected under the law such as a new electronic gadget you invent

Ch. 18- Personal finances

  • Credit

    • credit rating

      • your ability to borrow in the future

    • three national credit bureaus

      • Equifax, Experian, and TransUnion

      • Use a FICO score

        • ranges from 300–850, with the majority of people falling in the 600–700

        • Considers payment history, total amount owed, length of your credit history, amount of new credit you have, and types of credit you use

  • The Financial Planning Life Cycle

    • Provides recommended changes in the focus of the individual’s financial planning

      • Stage 1 

        • focuses on building wealth.

      • Stage 2

        • shifts the focus to the process of preserving and increasing wealth that one has accumulated and continues to accumulate.

      • Stage 3

        • the focus turns to the process of living on (and, if possible, continuing to grow) one’s saved wealth after retirement

  • Compound Interest

    • the effect of earning interest on your interest

  • time value of money

    • the principle whereby a dollar received in the present is worth more than a dollar received in the future

    • a dollar received today also starts earning interest sooner than one received tomorrow

  • Diversification

    • a fancy way of saying not to put all your eggs in one basket