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Profit after tax

Among qualitative factors that Minnetonka should consider include the ability of the binding suppliers to produce the binding. Minnetonka should consider whether (i) the outsourced firm could increase production of the bindings, in the event Minnetonka faces an increase in demand for its skis, (ii) Minnetonka will have obligations to the bindings supplier if it won’t be able to sell the bindings, (iii) Minnetonka will be required to purchase a minimum number of bindings every month.

First, to be able obtain competitive advantage in outsourcing the bindings, Minnetonka should enter into favorable contracts with its suppliers. Among other things, given that the ski-business is still a start-up business, and still has not generated profits for the company, it should make sure that there will be provisions that allow Minnetonka to cut business with the supplier, without any expensive or obligations or default-payments, in the event that it elects to exit the ski business. Second, Minnetonka should also make sure that the supplier has the ability to perform business in the long term.

If it contracts with a struggling supplier, Minnetonka might be unable to sell its skis, if it doesn’t have any bindings once the supplier closes shop. One alternative would be for Minnetonka to diversify its sources for the bindings. Third, Minnetonka should make sure that the supplier signs a contract that (i) won’t allow it to assess unreasonable increases, or (ii) would allow Minnetonka to seek price reductions for the bindings, in the event the price of bindings in the market decreases. Otherwise, if the bindings are expensive, it will be of no use for Minnetonka to outsource the bindings.

Unit 3 – Assignment 2 — Balanced Scorecard According to Ian Cobbold and Gavin Lawrie, the Balanced Scorecard is a report containing financial and non-financial measures, which help managers of a firm make decisions. Unlike other tools, the Balanced Scorecards not only focuses on financial outcomes and measurements, but also on the marketing, development, training and learning inputs that affect those outcomes. Robert S. Kaplan and David P. Norton of the Harvard Business School introduced the concept when they pubilshed a series of articles and and a book titled The Balanced Scorecard.

Messrs. Kaplan and Norton asserted that a firm should identify certain goals or objectives, find how those goals relate, and devise measures for those objectives. They proposed a “4 box” method for measuring performance (Kaplan and Norton, 1992): 1. financial perspective 2. customer perspective 3. internal business perspective 4. innovation and learning perspective The financial perspective involves objective related to adding value to shareholders. Internal business perspective would involve finding ways to for the company to excel in order to improve productivity and efficiency.

Innovation would involve finding means to improving and creating value. Customer perspective would involve addressing customers’ and clients’ needs. For example, Delphi Corp. ,the primary producer of component parts to General Motors Corp. , has been in bankruptcy protection since 2005. It can create a Balanced Scorecard in order to help it stem its losses. Financial perspectives for Delphi would include finding ways that it would increase operating margins for its mobile electronics and transportation systems.

For customer perspective, it could focus on checking its market share for its component parts by entering into supply contracts with GM and Ford. Internal perspectives could focus on improving quality and productivity of its plants. As for the learning and innovation perspective, it could focus on developing new competencies and improving its processes. — Economic Value Added Most people look at a firm’s net profit, or earnings per share items in the firm’s income statement to determine whether a firm is worth investing.

However, earnings per share or net profit, however, might not be helpful for shareholders in making investment decisions. For example, if General Motors post a net profit of $40 million, and Zuzuki posts a $5 million profit, does it mean that investors should invest in GM? For some yes. But what if shareholders have invested a total capital of $4 billion for GM, and just $100 million for Zuzuki. Assuming that all profits are earned by shareholders, it looks like there’ll be a 1% return on capital for GM, but a 5% increase in capital for Zuzuki.

Investing in Zuzuki yields a 5% return, but what if investing in government bonds provides for a 6% return, would not it be better for the investor to place its money on government bonds, given that those bonds are guaranteed and risk-free? Such concerns have led to some that EVA should be used. Economic Value Added is a computation of the amount by which earnings or profits exceed or fall short of the required minimum rate of return for shareholders at comparable risk (Value Based Mgt. ). Economic Value Added can be computed as: EVA = NOPAT – Cost of Capital * K Where: NOPAT is the net operating profit after tax

K is the capital employed by the firm. EVA was devised based on the principle that the primary objective of a firm is to maximize wealth of shareholders. The cost capital term (Cost of capital * Capital employed) in the equation takes into account the expected return of shareholders. For example if a company has $3 million in net operating profit after tax, and cost of capital is 5% and capital infused is $120,000,000, EVA will be -$3,000,000. This means that the investment is reducing shareholders’ wealth as it only generates a 3% return, when the money could be invested elsewhere and could get a return of 5%.

References

Cobbold, I. and Lawrie, G. (2002a). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002 <http://www. 2gc. co. uk/pdf/2GC-PMA02-1f. pdf> Kaplan R. S. and Norton D. P. (1992). “The Balanced Scorecard – Measures That Drive Performance”, Harvard Business Review, Vol. 70, Jan-Feb “Economic Value Added”. Value Based Management. net. <http://www. valuebasedmanagement. net/methods_eva. html> “Economic Value Added”. 12Manage. <http://www. 12manage. com/methods_eva. html>

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