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Longenecker-Materi Komplemen
Longenecker-Materi Komplemen
31, 2013
2012
2013
Changes
Cash
150,000
125,000
s (25,000)
Accounts receivable
350,000
375,000
25,000
Inventory
475,000
550,000
975,000
Assets
s 2,425,000
Accumulated depreciation
(1,000,000)
s 1,050,000
$2,750,000
(1,200,000)
s 1,425,000
s 1,550,000
$2,400,000
$2,600,000
Equity
Accounts payable
200,000
Sbort-term notes
150,000
150,000
75,000
75,000
s 325,000
(200,000)
s 125,000
s~200,000
s (50,000)
150,000
s 100,000
200,000
300,000
Long-term debt
600,000
600,000
100,000
Total debt
800,000
900,000
s 100,000
Common stock
900,000
900,000
Retained earnings
700,000
800,000
owners' equity
$1,600,000
s 1,700,000
$2,400,000
S2,600,000
s 100,000
s~200,000
1 -December 2013
$1,450,000
Sales
Cost of goods sold
Gross profits
Operating expenses
Operating profits
Interest expense
(850,000)
s
s
600,000
(240,000)
360,000
(64,000)
296,000
(118,000)
Taxes
Net profits
178,000
178,000
Net profits
Dividends
0
100,000
paid
(78,000)
100,000
(Go to www.cengagebrain.com and select the Longenecker text to access the answers to these
questions.)
nce a firm's owner understands the content of the accounting statements. she or
he wants to know how management decisions impact the financial situation of
a business. An entrepreneur's decisions play out primarily in four ways when it comes
to finanoes:
Part 3 Developing the New Venture Business Plan
I. The firm'sability to pay its debt as it comes due. In other words, does the company
have the capacity to meet its short-term (one year or less) debt commitments?
2. The compnny's profitability from assets. ls the business providing a good rate
of return on its assets? There is no more important question when it comes to
determining if a business is strong economically.
3. The t1111fJ1111tof debt the business is using. Using debt increases a firm's risk. but
may also increase the expected rate of return on the owners' equity investment.
4.
The rate of return earned by the <111 11er.\on their equity investment, All deci
sions ultimately affect the rate of return earned by the owners on their equity
investment in the business.
1
Exhibit 10.8 provides a list offinancial ratios as they relate to the four issues just listed.
The name of each ratio is given, along with how it is computed. We illustrate the ratios
by using the 2013 financial data for Houser & Associates, as presented in Exhibit 10.2
(income statement) and Exhibit 10.5 (balance sheets). Finally, the last column shows an
industry average for each ratio, which comes from financial publications, such as Robert
Morris & Associates. Let's look at the ratios as they apply to Houser & Associates.
currem assels
curent liabilities
As you can see in Exhibit 10.8, for Houser & Associates the current ratio is 3.50.
compared lo an industry norm of 2.70. In other words, the firm has $3.50 in current
; :z:
liquidity
The degree to which a
firm has working capital
available to meet maturing
debt obligations.
current ratio
A measure of a company's
relative liquidity,
determined by dividing
current assets by current
liabilities.
Rnancial ratios
)(
..,
$350,000
---=3.50
$100,000
Industry Norm
2.7
~=10.87%
$920,000
13.2%
.
.
Operating profits
Operating profit margin =- -'---''-'---
$100,000 = 11.76%
$850,000
11.0%
Total assets
Sales
Sales
Total assets
~=0.92
$920,000
1.2
$300,000
---=32.61%
$920,000
40.0%
~=9.68%
$620,000
12.5%
Total debt
Total assets
J9
Net prof~s
Return
onequity=----Owners' equity
"'
ontheirequityinvestment:
279
assets for every$ I of short-term debt, compared to an industry average of $2. 70 of current assets for every $1 in short-term debt. Thus, based on the current ratio, Houser &
Associates is more liquid than the average firm in the industry.
Return on assets=
return on assets
A measure of a firm's
profitability relative to
the amount of its assets,
determined by dividing
operating profits by total
assets.
Operating profits
Total assets
Operating
Profit Margin
Operating profits
Sales
Total Asset
Turnover
Sales
Total assets
The first component of the expanded equation, the operating profit margin
(operating profits e- sales), shows how well a firm is controlling its cost of goods sold
and operating expenses relative to a dollar of sales. The second component of a firm's
return on assets, the total asset turnover (saes-s total assets), indicates how efficiently
management is using the firm's assets to generate sales.
The operating profit margin and total asset turnover for Houser & Associates,
along with industry averages, are presented in Exhibit I0-8 and shown again below.
You can also see how they relate to Houser & Associates' return on assets, as well as
to the industry:
Return on assetl)Ho~.
Return on assetl)lodus'Y
=
=
Operating Profit
Margin
11.76%
11.00%
Total Asset
Turnover
x
x
0.92
1.20
=
=
Return on
Assets
10.87%
13.20%
Based on the operating profit margin, Houser & Associates is competitive when
it comes to managing its income statement-that is, keeping costs and expenses low
relative to sales. However, Houser & Associates' total asset turnover shows why the
firm is not earning a good return on its assets. The firm is not using its assets efficiently.
The company's problem is that it generates $0.92 in sales per dollar of assets, while the
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competition produces $1.20 in sales from every dollar in assets. Management needs
10 assess what is causing the problem, looking carefully al how they are managing the
different types of assets, namely, the accounts receivable, inventory. and fixed assets.
The low 101al asset turnover, showing that Houser & Associates is using more assets
per sales dollar than its competitors, possibly indicates one or more of the following
problems:
I. The firm is no! collecting its accounts receivable as quickly as the competition. By collecting its receivables on a more timely basis, ii would release
money that is currently lied up.
2. Given the amount of sales, the owners have 100 much money tied up in
inventory, which suggests 1ha1 some inventory is slow moving or even
obsolete.
3. II is possible that the company has overinvested in fixed assets (such as facilities) compared 10 the compel ii ion.
Clearly, the Houser sisters need 10 investigate why their firm is not competitive when
ii comes 10 managing assets. After all. entrepreneurship is about doing more with less
when ii comes 10 managing resources.
Total debt
Tola! assets
Refer again 10 Exhibit 10.8, which shows llouser & Associates' debt ratio as
32.61 percent, compared 10 an industry norm of 40.0 percent Since I louser& Associates
uses less deb! than tbe average firm in the industry, ii has less risk. After all, borrowed
money mus! be repaid regardless of how much money the business makes. All is
if
the company prospers and repays the loan. Bui if 1101, watch out!
'"~II
debt ratio
A measure of what
percentage of a firm's
assets is financed by debt,
determined by dividing
total debt by total assets.
return on equity
A measure of the rate of
As you can see in Exhibit I0.8. the return on equity for the I louser sisters is
9.68 percent. while the industry average for return on equity is 12.5 percent. Thus, it
appears that the Houser sisters are not receiving a return on their investment equivalent
281
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to that of owners of comparable businesses. Why not? To answer this question, consider the following:
I. A firm with a high (low) return on assets will have a high (low) return on
equity. It simply is not possible to have a good return on equity if you are not
financial leverage
The impact (positive or
negative) of financing
with debt rather than with
equity.
Our analysis of financial statements is now complete. llopefully, you are now
better prepared to know what financial statements can tell )'OU about a businessknowledge that can be found in no other way than by interpreting the numbers.
In this chapter, we focused on understanding financial statements related to a
firm's historical financial performance. We were essentially looking back to see how a
business performed in a previous time period. In the next chapter, we will continue to
work with financial statements, but this time we will be looking forward. In writing a
business plan, you need to show convincingly how your plans will play out in terms of
the firm's financial future.
Balance
Assets
2013
Cash
12S,OOO
Accounts receivable
37S,OOO
Inventory
S50,000
s 1,050,000
2,750,000
Accumulateddepreciation
(1,200,000)
s 1,S50,000
s 2,600,000
150,000
Short-term notes
1 S0,000
300,000
Long~term debt
600,000
Total debt
900,000
Commonstock
900,000
800,000
Retained earnings
s 1,700,000
Sales
Cost of 9oodssold
s 2(>00,000
s 1,450,000
(850,000)
Gross profits
600,000
Operating expenses
(240,000)
Operating profits
360,000
Interest expense
(64,000)
296,000
Taxes
(118,000)
Net profits
178,000
Industry norms
Current ratio
3.2S
Return on assets
1S.0%
20.0%
0.7S
Debt ratio
0.20
Return on equity
9.0%
(Go to www.cengagebrain.com and select the Longenecker text to access the answers to these
questions.}
283
LO
1111
Understand howtedlnology
can be used to rnplOYe
custOO'l('I teiateonsh.,sand
the techniques used to aeate
a rustunetdaubase.
hen it comes to analyzing and making use of customer data, a small business
has options. A startup can easily manage the amount of data available, but this
situation changes as the company grows and the contacts and accounts become more
complex. For that reason, it's best to start thinking about available analytical technologies-from basic spreadsheets to very sophisticated CRM software packages-from
the very beginning.
Many small companieskeep track of their CRM numbers in a simple spreadsheet
that can be expanded and updated as the business grows. The next step up would be
to use a database management package like Microsoft Access. This offers greater utility and flexibility, as it can store large amounts of data and match data from multiple
tables. Though not designed specifically for CRM programs. Access can certainly
help you manage the data needed to guide customer care, basic advertising campaigns,
and other marketing-related initiatives.
The most powerful tools available for customer relationship management are
software programs designed specifically for CRM. According to recent research,
42 percent of small businesses have a CRM system already in place, and another
25 percent are planning to deploy such a program in the near future." These packages
allow companies to gather all customer contact information into a single data management program. Web-based marketers, in particular, are attracted to such technology, because it helps to make their complex job far more manageable. Most online
shoppers expect to receiveexcellent customer service, and companies are much better
positioned to give it if they use the options for interaction and personal attention that
are designed into the software. Expertspoint out that customers typically appreciate
the conveniences that are built into many company websites, but they can quickly
become frustrated when the experience does not go exactly as planned. The burden of
coordination is greatly eased when software can be used to help manage it.
Deciding which marketing activity should get initial CRM support is not always
easy. I lowever, the sales department is a popular place to start, because its personnel
nearly always generate the most customer contact. CRM emphasizes such sales activities as filling orders promptly and accurately, managing follow-up contacts to ensure
customer satisfaction, and providing user-friendly call centers to handle all inquiries,
including complaints. It's a complex mix of tasks, but technologies are available to
support all of these activities and many others.
To find the CRM software package that may provide the best fit for you and
your firm. consider the included features, accessibility of buyer data, integrated
sales and marketing tools, ease of use, and the help and support provided by the
manufacturer. It might be wise to narrow down your search from the start by
checking recommendations from the editors of CRM magazine, especially those
specifically for small businesses (see Exhibit 14.5). These experts have declared
Zoho to be the "king of the CRM software hill" because it's highly functional,
cost-effective, easy to use. and expandable to accommodate a growing company."
Niche products that do exactly what you need them to do may also be available. For
example, both CAR-Research XRM and Reynolds and Reynolds provide CRM
software solutions for car dealers, with high-performance features designed specifically for that industry.
Concerns about having ample resources to support CRM technologies have led
some small business owners to outsource certain applications. For example. hosted
call centers, which handle e-mail and other online communications for clients, may
Part 4 F'ocusing on the customer: Marketing Crowth Strategies
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CRM Package
Summary Description
ZohoCRM
Webbased, simple to set up and use free for up to three users (small monthly charge for additional
users), no long~tenn contracts. expandable to accommodate business growth, integrates seamlessly
with Google applications and other Zoho programs.
Microsoft Dynamics
Very well supported, popular because of its overall functionality, hosted ("in the cloud"') and on-premise options, interfaces with Microsoft Outlook and 'Web browser. monthly fee based on number of
users.
NetSulte CRM+
Best for larger small businesses, excellent built-in e-commerceapplcetions, more expensive than
other options, additional charges forvarious add-ons.
Salesforce.com
A very popular package, considered a topinnovator by CRM experts, many features and functions,
expandable to accommodate business growth, some find it to be complicated to use.
SugarCRM
Good first CRM package. easy to set up and configure, tutorials available for assistance, basic package
is free,charge for Professional Edition that offers access to many additional tools.
be more cost effective than comparable in-house centers. a crucial consideration for
many cash-strapped small businesses. In addition to cost, a lack of internal expertise
can justify using these outside services.
Many companies have decided to control the cost of customer assistance by
using alternatives like automated Web-based self-service systems. sometimes called
customer information 111011age11u~11t systems. When a customer service rep handles
a single telephone call. text chat, or e-mail, it can cost the company an average of
$5 to $7, but self-service inquiries handled on the Internet cost less than 6-0 cents
per contact. One popular self-service option is to post a list of Frequently Asked
Questions (FAQs). and more than 40 percent of organizations have these on their
websites. But even this simple tool is becoming more sophisticated. For example.
a company can buy smart software that recognizes the questions its website visitors are most interested in and places those at the top of the list. Such systems can
cut down the cost of serving customers while taking some of the repetition out of
tending to their needs."
The list of tools supporting CRM grows longer every day, and they are becoming
much more user-friendly as time goes on. Executives and managers in large and small
enterprises are tapping the power of the Internet to support the biogs, wik is, social
networking sites, and other online communities that allow people to build social as
well as business connections, to share information, and to collaborate on projects.
The real power of these Web applications comes in the form of building relationships
with customers.
A leadinggreeting-cardand gi/i company ... is one of 111tu1y that have set up an online
communny-ea site where it con talk to consumers anti the tfJJ1Sr1111ers can talk to each
other. The company solicits opinions on various aspects of greeting-carddesignand 0t1
ideasJi,, gifts and their peicing. It also asks the consumers to talk about their ifestytes
and even upload photos of themselves so that it con better understand its market, 27
Such online communities can provide a rich source of feedback and ideas for product
development, and in a form that is much faster and cheaper to use than the focus groups
and surveys that have been a staple of common marketing practices. But perhaps more
Chapter 14 Building Customer Relationships
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377
important, Web tools can be used to give customers a sense of connection with the
enterprise, an identity that results from their active participation in the company's
business. For this, there is no substitute.
segmentation and other data analysis purposes. such as age, marital status,
names and ages of family members, geographic location.
Lifestyleand psychographic data. Homeowner versus renter status, car
CRM data can almost always be collected at any touch point, which provides an
occasion for contact between the business and its customers, whether in-person or
online. Touch points can include interactions resulting from a phoned-in request for
product information, completed and returned warranty cards, responses to online
surveys. a visit from a salesperson, orders placed on the company's website-even a
text message from a customer service representative. As indicated previously, some
small companies prefer to collect data and feedback from customers using comment
cards or questionnaires. While these can be effective, contact via the Internet is fast
becoming the touch point of choioe for companies as well as the customers they serve.
customer database
A collection of information
about a customer. including
demographicdata,
attitudes, preferences.
and other behavioral
characteristics, as defined
Instead of wasting time with phone 11111nbe,.s and mail sun:ey.t. c'>111pt111ie.\are
publici=ing their Websites as thefirst touch pointfor customer interactions. Web
use,.s can evaluate 1111d purchase products, 11111ke reservations. indicatepreferenttat
data. and provide customerfeedback 011 services and products. Data from these
U!eb~b11setlinteractions 11,.e then captured. compiled,111u/usedto segment customers;
refine marketing efforts; develop new products, and deliver a high degree of indivit/1111/customization to i111p,.01:e customer re/at ionships. 29
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customer
segmentation strategy
A processof identifying
customers that fit
into smaller, more
homogeneous groups.
80/20 principle
A principle that maintains
that 80 percentof a
company'ssales will come
from 20 percent of its
customers.
recency-frequencymonetary analysis
An analysis that reveals
customers most likely
to buy from a firm in
the future because they
have made purchases
recently, frequently, and in
amounts thatexceed some
established minimum.
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379
reveals those who are most likely to buy from you in the future because they have
made purchases recently, frequently, and in amounts that exceed some appropriate
minimum. Whatever method is used to identify them, you should go the extra mile
with these customers to keep them happy and coming back to do more business. This
might include anticipating their needs and tailoring product or servioe offerings to
suit them, providing intensive customer service, or offering loyalty rewards to build
long-term relationships. As for those who require intensive and costly effort but offer
litrle to no potential to generate profits, it is best to find a way to reduce their cost to
the company. perhaps by steering them to low-cost, self-servioe options on line. Some
businesses may even chose to end the relationship altogether.
As indicated in this chapter's Spotlight feature, Chris Zane knows that it is crucial
to estimate the Customer Lifetime Value (CLV) for those who buy from his cycle shop
if he is to create an effective CRM plan. The CLV is the total profit expected from
all future sales to a customer and underscores the long-term value of each customer,
which can then be communicated to others. Losing a sale today might not seem all
that costly-until you factor in the likely loss of all future sales that can result from
one interaction gone wrong. And sinoe it can cost a lot more to acquire a new customer
than to hold on to the ones you have, the loss can be greatly compounded. Everyone
in the company needs to understand this so they will be more com milled to treating
customers well. The CLV can also give sales and service employees a belier idea of
how much they should spend to acquire and retain customers. Let's say you own a pizzaria and one of your loyal diners gets upset over a $12 meal. Before you decide how
to handle the situation, keep in mind that his CLV could be as much as $8.000 (Pizza
Hut's estimated CLV for its best customers). That's why having good data and knowing what to do with them can be so important.
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purchase data from third parties to fill gaps in any database being built, it can be
quite tempting to misuse the data. But the trust of the customer is at stake, as well as
the reputation of the company, and these must be protected. The long-term success of
a CR M program depends on it.
Privacy concerns have grown tremendously with the rapidly expanding reach of
computer applications and the mind-boggling growth of e-commerce, which make
data collection easy and nearly cost-free. The risks to the customer are considerable,
as some CRM experts have reported:
Online users have compluined of being "spammed," and Web surfers, i11c/11di11g
dutdren, are rout inely asked to divulge personal i11fi>r111'1tion to access certain screens
01 purchase goods or services. Internet users are disturbed by the t11nou111 of information businessescollect 0111he111 ns they visit varioussites iJ1 cyberspace Indeed, 11u111y
u\ers (Ire 111u1wttre of how 1Je1Jo11td informat ion is collect ed, used, and distributed. 11
Because of the sharp escalation in data collection and use, online and offline privacy practices are coming under increasing scrutiny. Though U.S. companies have, for
the most part, been able to get away with self-policing, increased regulatory attention
i~ coming. More than 50 nations now have or are in the process of enacting legislation
designed to safeguard the handling of customer data in firms that do business internationally. Those that do business in the European Union or trade with a European
company, for example, must comply with strict laws regulating these practices. Many
countries are modeling their own systems after the European standard, so the burden
of privacy protection is sure to rise."
xhibit 14.2. on page 369. shows that the second primary building block supporting a successful CRM program involves knowledge of customer behavior. The
three interrelated "materials" that combine to form that particular building block
include the decision-making process, psychological influences, and sociological
influences. Offering an expanded view, Exhibit 14.6 illustrates how consumer decision making flows through four stages: (I) need recognition, (2) information search
and evaluation, (3) the purchase decision, and (4) post-purchase evaluation.
We'll use this widely accepted model to examine decision making among small
business customers.
E)lfari hOW(OOSllTlefS
aredectsioo makefsand
wf thn inp()nant il
understandingrustomer
relatioosh\i<
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381