The Du Pont formula for financial analysis and strategy formulation

Every generation needs a revolution - an entrepreneurial revolution

We discussed this this morning in order to expand our understanding of business and why there is outsourcing or bpo.

Objectives:

    1.  To increase our knowledge

    2.  To understand why it is better to outsource -  to focus on our key competencies, lessen headaches and over head

    3.  To help us appreciate why there is a prevalence of bpos and outsourcing

    4.  To understand how various business processes and strategies contribute to higher ROI and to better managers Principle No. 1

Background:

   1.   We suggested that MM and other parties can outsource our interment at following rates:

        MM -  excavation and ISG work at 3,600.

                 We suggest:  whole interment work   P10,000 included ang vault

                                                                                5,000 with backhoe but to be amortized

                Computation:           Revenues:                                                                          P10,000.00

                                                

                                                Expenses:     Vault                       P5,300

                                                Excavation    (with backhoe

                                                       labor   P500.00

                                                      diesel     100.00

                                                      amort   1,000.00                      1,600

                                             Budget for repair  500                          500

                                                          Total                                     7,400

                                             GP                                                                                        2,600   x     40 interments   =   91,000    x 12   =  1,092,000   THIS IS A BIG BUSINESS FOR HER

                              (It should be 12,000 because the labor of other personnel of interment has not been covered)

           (This is in fulfillment of our mission -  giving jobs and employment)

           Kanya ang backhoe at the end of 2 years, we lessen our head ache

What:

    1.  What is du pont formula:    Dupont Formula

       1.  This is taught at MBA, and SEC in the annual report does computation of  du Pont

    2.   It is an ROI formula:     Net income / Stockholders equity

    3.  It is however a long formula that covers the entire spectrum of business operations:

         Margin                                     Turn over                                Leverage

        (Patong)                                    (Paikot)                                  (Laway)

      Net Income/                                Sales/                                      Total Assets/

      Sales                                           Total Asset                              Stockholders equity

      When we cancel numerator and denominator, we are left with Net Income/Stockholders equity

               Net Income/                                Sales/                                      Total Assets/

               Sales                                           Total Asset                              Stockholders equity

   4.  The various items can be improved/increased

               Margin                                                               Net Income/sales

              Net income can be increased by                       1.  Advertising

                                                                                        2.  Having more sales personnel

                                                                                        3.  Being in more geographical areas

                                                                                        4.  More product offerings

                                                                                        5.  Value adding to the product -  more uses, more value for money  ----->  price increase

                                                                                        6.  Reducing operational expenses:   utilities, rent,  repairs OH, GA

                                                                                        7.  Reducing COGS   Direct Labor and Materials

           Turn over                                                             1.  Increasing  cash sales -  offering discount for cash sales

                                                                                       2.  Collecting AR promptly

                                                                                       3.  Having a third party finance the purchase/discounting of receivables

                                                                                       4.  Reducing asset size ie by outsourcing

                                                                                       5.  Reducing inventory by just in time, and/or pass through strategy (pasa buy) 

                                                                                       6.  Focusing on trending and fast selling products;  dispose by sales those that are not

         Leverage   -  this is to be practiced only in low interest environment; 

                              focus on service or those that rely more on intellectual capital

       Outsourcing, by reducing the total assets increase the asset velocity by reducing the Total Assets.  The wasteful use of asset that can be dissipated by interest income can thus be reduced.

        Thus if there is an investment of $100 million  and this is leased back to the computer supplier, the  asset is reduced and instantly the turn over is increased.

                  Say         Sales     P200M/Total asset  =   P100 million

                  When the denominator P100 million is removed  the turn over becomes infinity.  What to do with the cash?  Return to stockholders in stock buy back or invest in other products and revenue generating project

     In the Philippines, BPO is equally made tantalizing by various EPZA zones and current business support:

      1.  EPZA offers 5 years RPT free operation

      2.  Gross taxation of say 5%   

      3,  Cheap A -1 fiber optic lines to handle thousands of telephone voice calls

      4.  No need to put up your own building:

           1.  Available cyber offices for lease (built by business men

           2.  FFE for lease:   office tables partitions and computers

    5,  Huge savings for labor and wages    $400 - $500 /month   (P21,600 to P27,000)    tax  free (and attractive to our P14,000 a month wage earners)    vs   $20.00 per hour x 8 hours x 20 days   =  $3,200  (or a savings of $2,700 per month) x 12 =   $32,400 /year /emp

     ITS A WIN WIN SITUATION FOR EVERY ONE.    THAT IS WHY BPO FLOURISHES.  

                                                                                        

ReplyReply allForward

Pranav New York Case Analysis by: Rophele Ocampo

Prof Jorge,

Please see my assigment on the Pranav New York case analysis SPADA.

SPADA Case Analysis: Pranav New York

Situation:

Karlo Nisce and Mark Orbos, MBA students at AIM opened a first male spa business (inspired in New York) in the Philippines last quarter of 2004 at Robinsons Galleria as part of their course requirement for graduation.

Problem:

The business incurred immense losses after its 3 months of operations due to the following:

A. Wrong Location

·         The spa's stall is located in the body senses section at the 3^rd floor where mostly females' market concept stores are open and is not an easy access.

·         The body senses section is located at the opposite of the foot traffic.

·         The mall's demographic mix is dominated by the female segment.

B. Poor Quality of Service

·         Employees are all females where needs of men are not properly delivered such as shaving and strength/pressure for massage.  

·         Chairs used are not barber's chairs which the effect is that simultaneous service process is suffered.

·         Spacing of chairs is too narrow and not conducive for working.

·         Air conditioning of the spa is too cold which customers might not like the experience of shivering while having a massage.

C. Poor Marketing

·         Due to net loss, marketing was taken for granted and was removed from their solutions since it they have considered it as an additional expense.

D. Business was not systematically studied

·         The partners rushed in opening the business due to their considerations of rent expense, season's demand, excitement of their venture concept, and requirement for their graduation without carefully studying it.

Alternatives:

A.  Close the Shop

·         Since the business is not profitable and to further not incur additional losses and waste money.

B.  Re-locate

·         Since the location is a mistake, better find another location to which the business is more suitable. Location preferably on the Fort area or Makati CBD area since these area is also a good marketplace. Place should be of easy access preferably not a stall in the mall but in a standalone commercial establishment which is dominated by their primary target market.

C. Re-position

·         Remove the spa services since this is the service that occupies a lot of space and has the lowest revenue and focus on the strength of the business which is their salon services.

D. Improve Quality of Service/Re-branding

·         Undergo employees with an intensive training to produce quality service. With quality service brings word of mouth advertising which is the most powerful promotional marketing.

·         Consider male crew to create additional market and address other needs of the customers which also understands the male segment needs.

·         If to maintain the all female crew strategy, make sure to train and delight the service that the men segment needs.

·         Chairs to be changed to the appropriate barber's chair.

·         Temperature of the spa room should be suitable for massage.

·         Interior of the spa and spacing should be conducive to working and favourable for their primary target market.

E. Re-positioning

·         Changing the concept from an all male spa to a unisex spa to widen the market and generate more income. Revenues over anything else.

F. Marketing

·         Strengthen the Marketing of the business, Pranav has remove its marketing since the business

Decision:

With the alternatives mentioned, alternative B and D will be the most recommended in my opinion. Maintaining the concept of an all male spa is a very appropriate move since this concept creates originality and uniqueness. This is actually one of the strengths of the business but the wrong location and quality of service is the reason why the outcome of revenues is not what is expected.

A good Location is a very important consideration when opening a business because it is where the need and demand is being conceptualized. Improving the quality of service on the other hand also plays an important role in generating customers, maintaining their loyalty and loyal customers to help you market new customers.

Action:

The business is really feasible. As indicated in the study and as mentioned by the professors at AIM, the concept is actually a good business venture.  Applying the recommended alternative decisions with an excellent marketing strategy will help the business eradicate its losses and incur profit; the business will eventually have its place in the market. Marketing has always been an essential tool in having the business become profitable.  As Marketing major, you see to it that in every business you always analyse the SWOT (Strength, Weakness, Opportunities, Threat) of the company, turn the Weakness and Threat to Strength and Opportunities.

Submitted By:

Rophele Louie C. Ocampo

AGSB – Clark Campus