CPAs and all financial professionals are required to take an active, if not leadership, role in numerous activities for their organizations. This course is designed to introduce and explore analytical tools and techniques to assist them in both routine and nonroutine situations. These include: identifying and addressing structural blockages to decision-making, data management, providing information and analysis, improving operations, model building, designing tests, valuing and financing acquisitions and divestitures, as well as evaluating capital programs and other long-term investments.
OBJECTIVES
PREREQUISITE: Experience in finance, operations or accounting.
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Overview
Course Objectives
Remember the old saying "If the only tool you have is a hammer, all problems look like a nail". Hopefully, the following brief "test" will assist in establishing the necessary detective's mindset.
Chapter 1
Environmental Forces Affecting Decisions
Learning Objectives
A scientific approach to decision making must address these environmental issues, as well as to provide analytical tools and techniques to assist in the decision process. Chapter 1 begins the overall management of decision making by identifying a number of the structural issues/forces, and the influences they can have. In this way, we can also understand how to better manage their impact.
After working through this chapter go back and ask yourself the following question.
Are there policies in my organization which interfere with arriving at and implementing decisions?
For example, do we extend our depreciation period for assets too long, and thereby keep sunk costs on our books which support the status quo? How about our compensation programs? Do they encourage desired behavior?
Historic Focus of Financial Decisions
The development of financial decision tools and techniques has moved from external financing
(1920s) and survival (1930s) to encompass all aspects of a modern organization. The acceptance
of new ideas concerning economic theory in the 1950s, probably did more, than any other event,
to increase the use of analytical techniques. This evolutionary process has resulted in a
significantly expanded role for financial professionals, and the development and use of decision
tools to address an ever-widening range of issues.
The period of growth and innovation in the 1920s created a need for additional capital. This resulted in the predictable focus on liquidity and financing. The events of the 1930s directed the study of finance to defensive/survival issues. The corporate collapses and fraudulent actions by some management resulted in government regulations. Thus, significantly increasing the amount of financial data provided externally. This led to increasing the role of financial analysts, as they were better able to compare the financial condition and performance of companies.
Throughout the next two decades, financial analysis looked at issues within companies from an outsider's viewpoint. The experiences of the 1930s, educated financial professionals to review issues as a third-party lender or investor.
During the 1950s to the early 1960s, budgeting (operating and capital) and cash flow analysis and control became the vehicles which expanded the role of analytical tools. Over the next 1-2 decades, models were developed to value firms from a lenders and/or investor's viewpoint (valuation models). This led to calculating the impact of internal decisions on valuations and linking the previous external focus to an internal awareness. The formulation of portfolio and efficient market theories helped to complete the basic "tool box".
Increases in inflation and an expanding global marketplace (both first became noticeable during the 1970s) drove the next stage of analysis. Fluctuations in inflation resulted in significant increases in interest rates and capital replacement costs, as well as increasing reported profits from the sale of older assets, including inventory. While inflation has been considerably tamer in recent years, the CPI in 1980 was in the mid-teens.
The development of a global marketplace with competition from nontraditional sources has and continues to increase the number and frequency of decisions. In addition, as technology changed at an increasing rate, financial decision making tools had to be adapted to an ever-widening array of situations. The singular focus of the 1920s on financing has been replaced by a growing and changing list of issues ranging from new product development to production and capital programs. The risk of making a poor decision has never been higher, nor has the number of required applications for analytical tools.
Decision Making - Art and Science
Making decisions and taking action is fundamental for all management. Therefore, the outcome
of analysis must have a direct implication for management's actions. Hopefully, it is understood
that analytical tools and techniques cannot provide the entire basis for every decision. Managers
are constantly called upon to make decisions. At any given instance, the use of an analytical
decision tool may result in the same decision an experienced executive would make. However,
would you recommend that the future direction of an enterprise be dependent upon a single
manager's, or small group of managers', experiences? Using the right tool provides the
discipline required when faced with complex problems.
The advent and expanded use of computers virtually assures the existence of volumes of data at any time. At times, the sheer volume of data can confuse and delay decisions. Selecting and managing the significant data (evidence) and transforming it into information is key to making good/accurate decisions.
The use of the correct tool can
Behavioral Finance
The study of behavioral finance has exploded in the past decade. Behavioral finance attempts to
explain how emotions and psychology influence our investment decisions. The famed investor,
Warren Buffet, often comments that a successful investor needs a temperament to control urges
that lead to trouble in investing. The toughest part of investing is not the intellectual analysis, but
the emotional aspects.
Some of the factors which significantly influence our interpretation of data and therefore decision making, fall into the following areas:
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