Finding: Money

FINDING MONEY and MOTIVATION FOR CHANGE

The fallacy of averages •Burden as a percentage of •Material •Labor •Cost of Goods sold as a percentage of Sales

With one foot in boiling water and one foot in freezing water, on average …….

Outrunning the Bear

STRATEGIC VS. TACTICAL ELEMENTS OF ENTERISE LAUNCH OR PROCESS IMPROVEMENT

STRATEGIC ELEMENTS

S

W

O

T

INDENTIFY AND DOCUMENT THE DESIRED OUTCOME DEFINE AND DELINEATE THE FIELD OF ENGAGEMENT DEFINE AND ENFORCE THE RULES OF ENGAGEMENT DEFINE DIVISIONS OF LABOR AND SPAN OF CONTROL DEFINE AND ACQUIRE THE SKILL SETS DEFINE AND ACQUIRE COMPETIVE WEAPONRY EXECUTE

EXECUTE

EXECUTE

TACTICAL ELEMENTS PERFORMANCE STANDARDS SKILLS KNOWLEDGE ATTITUDE PLAN AND EXECUTE MANAGE CHANGE AFTER ACTION (BODY COUNTS)

PRACTICE

PRACTICE

PRACTICE

SHOW ME THE

ON THE MORNING OF MM/DD/YYYY OUR WORLD WILL LOOK LIKE THIS:

• IMPROVEMENTS REFLECT IN FINANCIAL PERFORMANCE AND • IMPROVEMENTS RESULT IN SUSTAINABLE COMPETITIVE

ADVANTAGE

HURDLE RATE The required rate of return in a discounted cash flow analysis, above which an investment makes sense and below which it does not. Based on The cost of capital OR The weighted average cost of capital Plus or minus a risk premium to reflect the project's specific risk characteristics. also called required rate of return and return on investment (ROI). AND WHAT SHOULD THE NUMBER BE?

General Terms Risk Class

Project Category

1 2 3

Cost Savings Revenue Expansion Research/Development

Minimum Acceptable Rate of Return 15% 20% 26%

to to to

19% 25% Above

COST OF CAPITAL ELEMENTS FACTOR

VALUE

ANTICIPATED BORROWING COST E.G. DEBT COST

10%

TAX RATE

40%

PERCENT OF TOTAL FINANCING FROM DEBT

30%

WEIGHTED DEBT FINANCING

1.8%

ANTICIPATED RETURN ON EQUITY( BALANCE SHEET HISTORY)

15%

PERCENT OF TOTAL FINANCING FROM EQUITY

70%

WEIGHTED DEBT FINANCING

10.50%

ACCOUNT BALANCE

$ 10,000

YEAR ONE

YEAR TWO

YEAR THREE

YEAR FOUR

$ 2,250

$ 6,750

$ 11,250

$ 15,750

IMPROVEMENT INVESTMENT

$ 10,000

DURATION OF IMPROVEMENT

INDEFINITE-------------------------------------------~

ANNUAL IMPROVEMENT

$ 4,500

$ 4,500

$ 4,500

$ 4,500

But is that all there is?

Does a dollar at some point in the future have the same value as a dollar today?

How much less is the value of a dollar in the future ? Considering: Time and Risk

P=F n

1 ─────── (1 + i)

n

P = Present value F = Future cash inflow in time period n i = Discount rate n = number of years

PRESENT VALUE DISCOUNT TABLE Years 1 2 3 4 5

18% 0.848 0.718 0.609 0.516 0.437

20% 0.833 0.694 0.579 0.482 0.402

22% 0.82 0.672 0.551 0.451 0.37

24% 0.807 0.65 0.525 0.423 0.341

25% 0.8 0.64 0.512 0.41 0.328

26% 0.794 0.63 0.5 0.397 0.315

YEAR ONE ACCOUNT BALANCE IN CURRENT $’S ACCOUNT BALANCE IN DISCOUNTED $’S

YEAR TWO

YEAR THREE

YEAR FOUR

$ 10,000

$ 3,500

$ 10,500

$ 17,500

$ 24,500

$ 10,000

$ 2,778

$ 7,187

$ 10,870

$ 13,464

IMPROVEMENT INVESTMENT

$ 10,000

DURATION OF IMPROVEMENT

INDEFINITE-------------------------------------------~

ANNUAL IMPROVEMENT

$ 7,000

$ 7,000

$ 7,000

$ 7,000

26% HURDLE RATE

0.7937

0.6299

0.4999

0.3968

DISCOUNTED IMPROVEMENT

$ 5,566

$4,409

$ 3,499

$ 2,778

THE QUESTION: At the end of four years would you rather have…. The process improvement

and the MONEY

OR No process improvement

and no MONEY