Flashcards in BEC 6 Deck (110):
1
Business process management
- a management approach that seeks to coordinate the functions of an organization to customer satisfaction.
- process management seeks effectiveness and efficiency via promotion of innovation, flexibility and integration with technology.
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Business process management activities
1. Design
2. Modeling
3. Execution
4. Monitoring
5. Optimization
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Business process management techniques
1. Define - the original process is defined as a baseline for current process functioning or process improvement.
2. Measure - the indicators that will show a change to the process
3. Analyze - various simulations or models are used to determine the targeted or optimal improvement
4. Improve
5. Control - dashboards and other measurement reports are used to monitor the improvement in real time and apply the data to the model for improvement.
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Process management
1. Plan
2. Do
3. Check
4. Act
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Process measures
financial or non financial and should correlate directly to the managed process
1. Gross revenue
2. Customer contracts
3. Customer satisfaction
4. Operational statistics
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Process Management Benefits
1. Efficiency
2. Effectiveness
3. Agility - fast response
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Implications for business risks and controls
Consolidation of redundant services creates efficiency, but may also
1. Service flow disruption
2. Faulure demand
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Outsourcing
contracting of services to an external provider.
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Implications for business risks and controls
1. Quality risk
2. Quality of service
3. Productivity
4. Staff turnover
5. Language skills
6. Security
7. Qualifications of outsourcers
8. Labor insecurity
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Offshore operations
Outsourcing of services or business functions to an external party in a different country
1. Information technology outsourcing
2. Business process outsourcing
3. Software research and development
4. Knowledge process outsourcing
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Improvement Initiatives
1. Irrational - intuitive and emotional
2. Rational - Structured and systematic a. Strategic gap analysis
b. Review competitive priorities
c. Review production objectives
d. Choose improvement program
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Implementing improvement initiatives
1. Internal leadership
2, Inspections
3. Executive support
4. Internal process ownership
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Business process reengineering
- techniques to help organizations rethink how work is done to dramatically improve customer satisfaction and service
- business process management seeks incremental change
- business process reengineering seeks radical changes - fresh start
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Just in time
anticipates achievement of efficiency by scheduling the deployment of resources just in time to meet customer or production requirements
1. Inventory does not add value
2. Benefits
- synchronization of production scheduling with demand
- supplies arrive at regular intervals
- improved coordinations
- reduced set up time
- efficient use of skilled employees
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Quality
product’s ability to meet or exceed customer expectations
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Quality control principles “Cost of “Quality"
costs associated with activities related to conformance with quality standards and opportunity costs or activities associated with correcting nonconformance with quality standards
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Conformance costs
1. Prevention costs - prevent the production of defective units - training, inspection, maintenance, redesign etc
2. Appraisal costs - discover and remove defective parts before they are shipped to the customer or the next department- testing, inspection, statistical quality checks, maintenance of the laboratory
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Nonconformance costs
difficult to compute because most of these costs are in the form of opportunity costs
1. Internal failure - costs to cure a defect discovered before the product is sent to the customer - rework costs, scrap, tooling changes, costs to dispose etc
2. External failure - costs to cure a defeat discovered after the product is sent to the customer - warranty costs, cost of returning the good, liability claims, lost customers
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Quality reporting
- inverse relationship between conformance and nonconformance costs.
- Increased investment in conformance costs should result in decrease in nonconformance costs,
- reduced investment in conformance costs may result in increased nonconformance costs
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Total quality management
represents an organizational commitment to customer focused performance that emphasizes both quality and continuous improvement
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Quality management factors
1. Customer focus
- external customers
- internal customers
2. Continuous improvement
3. Workforce involvement - quality circles
4. Top management support - delegation and empowerment
5. Objective measures
6. Timely recognition
7. Ongoing training
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Quality audits and gap analysis
1. Quality audits - technique used as part of the strategic positioning function in which management assesses the quality practices of the organization
2. Gap analysis - determines gap or difference between industry best practices and current practices of the organization
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Lean manufacturing
use of only those resources required to meet the requirements of customers
1. Waste reduction
2. Continuous improvement Kaizen
3. Process improvements/Activity based management
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Demand flow
manages resources using customer demand as the basis for resource allocation
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Theory of constraints
organizations are impeded from achieving objectives by the existence of one or more constraints.
1. Constraints - impedes the accomplishment of an objectives.
- internal constraints - market demands more than the system can produce
- external constrains - system produces more than the market requires
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Theory of constrains steps
1. Identification of the constraint
2. Exploitation of the constraint
3. Subordinate everything else to the above decision
4. Elevate the constraint
5. Return to the first step
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Buffer
mangers add buffers before and after the constraints to ensure that there are enough resources to accommodate the constraint either before or after the constraint is encountered
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Six sigma
use of rigorous metrics in the evaluation of goal achievement.
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Existing product and business process improvements
1. Define the problem
2. Measure key aspects of current process
3. Analyze data
4. Improve or optimize current processes
5. Control
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New product or business process development
1. Define design goals
2. Measure critical to quality issues
3. Analyze design alternatives
4. Design optimization
5. Verify the design
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Globalization
distribution of industrial and service activities across an increasing number of nations. It produces deeper integration of the world’s individual national economies and make them more interdependent. Reduced barriers to trade have created opportunities to conduct operations in multiple countries or conduct import/export operations within context of a traditional domestic operations.
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Globalization measurement
by world trade as a percentage of GDP, the greater percentage the greater globalization
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Factors that drive globalization
1. Improvements in transportation
2. Technological advancements
3. Deregulation of international financial markets
4. Organizational/Operational options for international business
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Globalization promotes specialization
Economies of scale are larger in a global economy. Specialization that leverages comparative advantage is a natural outcome
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Globalization imparts responsibilities of world citizenship
- duty to act responsibly regarding environmental issues
- promote political stability and cooperation among nations
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Motivations for international business operations
1. Comparative advantage
2. Imperfect markets
3. Product cycle
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Methods of conducting international business operations
1. International trade
2. Licensing
3. Franchising
4. Joint ventures
5. Direct foreign investment
6. Global sourcing
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Relevant factors of globalization
1. Political and legal influence
2. Potential for asset expropriation
3. Taxes and tariffs
4. Limitations on asset ownership or joint venture participation
5. content or value added limits
6. Foreign trade zones
7. Economic systems
a. centrally planned economies
b. market economies
c. conglomerates
8. Culture
a. Individualism vs Collectivism
b. Uncertainty avoidance
c. Short term vs Long term orientation
d. Acceptance of leadership hierarchy
e. Technology and infrastructure
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Inherent risks of international business operations
1. Exchange rate fluctuation
a. Transaction risk
b. Economic risk
c. Translation risk
2. Foreign economies
a. Foreign demand
b. Interest rates
c. Inflation
d. Exchange rate
3. Political risk
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Complications of global sourcing
1. Global sourcing anticipates multiple sources for materials
2. Global sourcing anticipates multiple exchange rates
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Unipolar distribution
the dominance of one country as the world’s lone superpower
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Multipolarity
power is distributed among many nations
43
National power’s dimensions
1. Geography
2. Population
3. Resources
4. Economy
5. Military
6. Diplomacy
7. Identity
44
Multipolarity and interdependence
1. Functional interdependence
2. Systematic interdependence
3. Multipolarity
45
Dynamics of the balance of power
1. Developed vs emerging nations
2. Trade deficits
3. Balance of power
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Project
temporary undertaking intended to produce a unique service, product or result
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Project management
1. Authorization
2. Planning
3. Implementation
4. Monitoring
5. Closing
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Project charter
project charter is a document that contains a business justification to fulfill the needs and expectations of initial stakeholders by carrying out a statement of work
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Statement of work
describes the product or services the project must deliver at completion
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Risk preference
1. Risk indifferent behavior
2. Risk averse behavior
3. Risk seeking behavior
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Diversification
1. Diversifiable risk
2. Nondiversifiable risk
3. Managing different types of risk
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Types of risk
1. Interest rate risk
2. Market risk
3. Credit risk
4. Default risk
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Computation on return
return compensates investors and creditors for assumed risk
1. Stated interest rate
2. Effective interest rate = Amount of interest paid / Net proceeds received
3. Annual percentage rate = effective periodic interest rate x # of periods in a year
4. Effective annual percentage rate = (1+(stated interest rate /compounding periods per year)) p - 1
5. Simple interest = Original principal x interest rate per time period x number of time periods
6. Compound interest
7. Required rate of return
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Required rate of return
1. Maturity risk premium
2. Purchasing power risk or inflation premium
3. Liquidity risk premium
4. Default risk premium
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Required rate of return formula
Real rate of return
+ Inflation premium
= Risk free rate
+ Risk premium:
Interest risk rate
Liquidity risk
Default risk
= Required rate of return
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Factors influencing exchange rates
1. Trade factors:
a. Relative inflation rates
b. Relative income levels
c. Government control
2. Financial factors:
a. Relative interest rates
b. Capital flows
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Transaction exposure
1. Project foreign currency inflows and foreign currency outflows
2. Estimate the variability risk associated with the foreign currency
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Economic exposure
1. Currency appreciation and depreciation
2. Impact of currency appreciation
3. Impact of currency depreciation
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Translation exposure
1. Degree of foreign involvement
2. Locations of foreign investments
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Measuring specific net transaction exposure
1. Selective hedging
2. Identifying net transaction exposure
3. Adjusting invoice policies
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Techniques for transaction exposure mitigation
1. Futures hedge
2. Forward hedge
3. Money market hedge
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Short term financing strategies
- anticipate higher levels of temporary, working capital that require greater agility and flexibility
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Advantages of short term financing
1. Increased liquidity - higher turnover of financing instruments and matching of receipts and disbursements within a year
2. Increased profitability - rapid conversion of operating cycle components into cash carries the potential of increased profitability
3. Decreased financing cost - lower rates than long term
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Disadvantages of Short term financing
1. Increased interest rate risk - may abruptly change
2. Increased credit risk - lender evaluation of creditworthiness may change and make financing impossible
3.
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Long term financing characteristics
- rates associated with long term financing tend to be higher than short term rates and presume less liquidity on the part of the organization using long term financing
- strategies - depends on both the amount of current assets it maintains and the risk tolerance of management.
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Long term financing advantages
1. Decreased interest rate - long term financing locks in an interest rate over a long period and reducing the exposure to fluctuations in rates
2. Decreased credit risk - securing long term debt guarantees financing over a long period and reduces the company’s exposure to any risk that refinancing might be denied
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Long term financing disadvantages
1. Decreased profitability - increased financing costs in combination with an increased time span for conversion of operating activity into cash reduces profitability
2. Decreased liquidity - longer term financing commits organizations to payments over a longer period and reduces flexibility and liquidity
3. Increased financing costs
a. Interest rate risk - Lender’s perspective - higher financing charges compensate the lender for increased interest rate risk
b. Interest rate risk - Borrower’s perspective - lock themselves in a long term interest rate to eliminate exposure to interest rate risk
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Short term debt
1. Lower rates
2. Increased liquidity
3. Increased profitability
4. Increased interest rate risk
5. Increased credit risk
6. Use with higher levels of temporary working capital
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Long term debt
1. Higher rates
2. Decreased interest rate risk
3. Decreased credit risk
4. Decreased liquidity
5. Decreased profitability
6. Use with higher levels of permanent working capital
70
Working capital financing
working capital financing contemplates the spontaneous financing of current assets with trade accounts payable and accrued liabilities with the expectation that the maturities of current assets will coincide with the maturities of current liabilities
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Letter of credit
a third party guarantee, generally by a bank, of obligations incurred by the company
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Line of credit
a line of credit represents a revolving live of credit with bank that is generally renewable annually
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Leasing options
the owner of an asset, the lessor, allows another party, the lessee to use the property in exchange for lease payments.
74
Debentures and bonds
longer term indebtedness that is generally supported by formalized agreements known as indentures, which specify the terms and conditions of the bond
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Debentures
- unsecured obligation of the issuing company
- if defaulted, the holder of a debenture has the status of a general creditor
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Subordinated debentures
- a bond issue that is unsecured and ranks behind senior creditors
- higher interest rates than debentures to allow for additional risk
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Income bonds
securities that pay interest only on achievement of target income levels
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Junk bonds
- unsecured
- high risk
- high return
- non-investment grade
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Mortgage bonds
- protected from default by a lien on assets of the issuing company
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Equity financing
- issuance of non debt securities that represent different forms of ownership of the company
- degrees of ownership interest increase as rights to income decrease
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Preferred stock
- hybrid security that shares the features of both debt and equity
- like debt, because they require fixed payment
- like equity, because the timing of the payment is at the discretion of BOD and the payments are not deductible
- cumulative dividends
- participating feature
- voting rights
82
Common stock
the basic ownership security of a corporation
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Debt covenants
creditors use debt covenants in lending agreements to protect their interests by limiting the actions of debtors that might negatively affect the positions of the creditors
84
Common debt covenants
1. Limitations on issuing additional debt
2. Restrictions on the payment of dividends
3. Limitations on the disposal of certain assets
4. Minimum working capital requirements
5. Collateral requirements
6. Limitations on how the borrowed money can be used
7. Maintenance of specific financial ratios
85
Violation of debt covenants
the debtor is in technical default and the creditor can demand repayment
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Probability
- is the chance that an event will occur
- probabilities are assigned values between zero and one
- a zero probability - no chance the event will occur
- a one probability - the event will always occur
87
Expected value
weighted average of the probable outcomes of a variable where the weights are the probability of an outcome occurring
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Calculation of expected value
probability of each outcome x its payoff
5% chance of earning $0 profit
10% chance of earning $100 profit
(0x.05) + (100x.1) + (200x.35) + (300 x .2) + (400 x .2) + (500 x .1)
89
Shortcomings of probability concepts and expected values
- expected value is based on repetitive trials
- expected value represents the average outcome, not actually observed outcome
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Benefits of probability concepts and expected values
- expected values provide an objective framework for assessing risks and probable outcomes and are useful in decision making
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Economic rate of return on common stock
(Dividends + change in price) / beginning price
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Floating rate
automatically adjust the return on a financial instrument to produce a constant market value for that instrument
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Annuities
a series of equal cash flows to be received over a period
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Calculating the present value of an annuity
Annuity present value = Amt of annuity x (1-Present value factor / Rate of return)
95
Annuities assumptions
1. Recurring amount of the annuity
2, Appropriate discount rate
3. Duration of the annuity
4. Timing of the annuity
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Perpetuities (Zero growth stock)
when the periodic cash rows paid by an annuity last forever, the annuity is called a perpetuity or perpetual annuity
97
Perpetuities per share valuation
Present value of a perpetuity = Stock value per share = Price = Dividend / Required return
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Assumptions
- never changing dividend
- required rate of return
- stock price will not increase
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Constant growth (Dividend discount model)
dividend payments are the cash flows of an equity security and that the intrinsic value of the company’s stock is the present value of the expected future dividends
100
Per share valuation with assumed growth
Stock value per share with assumed growth = Current price = Dividend one year after period t / (Required return - growth rate)
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Price earnings (P/E) Ratio
P/E Ratio = Pice / Expected earnings in one year
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PEG ratio
PEG = (Price / Expected earnings in one year) / Growth rate
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Price to sales ratio
Price to sales = Price / Expected Sales in one year
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Price to cash flow ratio
Price to cash flow ratio = Price / Expected cash flow in one year
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Internal auditing
an independent and objective assurance and consulting activity designed to add value and improve an org’s operations
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Code of ethics
1. integrity
2. Objectivity
3. Confidentiality
4. Competency
107
Endorsed and recommended guidance
1. Position papers - form part of the International Professional Practices Framework
2. Practice Advisory - address approach, methodology and considerations, but not detailed processes. Application of Code of Ethics and the Standards
3. Practice guides
108
Internal Audit Standards
1. Attribute standards
2. Performance standards
3. Implementation standards
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Attribute standards
engagement definition, auditor independence and objectivity, auditor proficiency and professional care, and quality assurance including continuing professional development
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