Decision Making and Quantitative and Qualitative Factors in Decision Making:

Decision Making

Decision making is the cognitive (outcome of mental process) process of selecting a course of action from among multiple alternatives.

Quantitative and Qualitative Factors in Decision Making:

The Quantitative Factors are:

Investment appraisal
Break-even analysis
Sales forecasting
Critical path analysis
Decision trees etc.

The Qualitative Factors are

Stakeholder analysis
SWOT( Strengths , Weaknesses, Opportunities and Threats )
etc.

Decision-making process

A) Intelligence

It is Identifying the problems occurring in an organization. MIS is the major source for the
managers to be aware of problems.

B) Design

It is the inventing, developing, and analyzing possible courses of action.

C )Choice

It is selecting a course of action from those available i-e what kind of strategies there are.

D) Implementation

It is implementing the selected course of action & its proper communication to all.

E) Monitoring

It is checking the consequences of the decision made after its implementation (qualitative as well as quantitative).


Type of Decisions

1) Structured decisions

Where problem is recurring and repetitive, the common factors can be identified in order to identify a course of action. Due to which defined set of procedure can be devised for their solution. So it leads to clearly specified inputs and outputs & objectives.

2) Un-structured decisions

When problems are non routine, critical and novel in nature, they require individual judgment, evaluation and insight varying on case-to-case basis. There is no well defined procedure for treat these problems. For such situations, predefined policy cannot be devised. However, once the problem has been figured out, a policy may be devised to handle the problem in future.

3) Semi-structured Decisions

The term is used to refer to the grey area of decisions which lie between the two extremes. Some (but not all) structured phases and often solved using standardized solution procedures and human judgment.
Similarly problems are also categorized as structured, Semi structured & unstructured.
Nature of problem determines the approach to decision making to be followed to solve it

DECISION TIME FRAMES


To study the relationship between a firm’s output decision and its costs, we distinguish between two decision’s time frames:

(1) The Short Run

It is the time frame in which the Qty of at least one factor of production is fixed. For most firms, capital, land and entrepreneurship are fixed factors of production and labor is the variable factor of production. We call the fixed factors of production, the firm’s plant. In the short run, a firm’s plant is fixed.

(2)The Long Run

It is the time frame in which the quantities of all factors of production can be varied. I.e. the long run is a period in which the firm can change its plant. To increase output in the long run, a firm is able to choose whether to change its plant as well as the quantity labor it lines.

FLOAT,DISBURSEMENT FLOAT AND COLLECTION FLOAT

FLOAT,DISBURSEMENT FLOAT AND COLLECTION FLOAT

FLOAT

The difference between bank cash and book cash, representing the net effect of
cheques in the process of clearing is called float.

DISBURSEMENT FLOAT

Cheques written by a firm generate disbursement float, causing a decrease in the
firm’s book balance but no change in its available balance.

ABC LTD has $150,000 on deposit with its bank.
• On June 15, it buys some raw material and pays with a cheque for $150,000. reducing
the book balance by $150,000 immediately.
• ABC’s bank is unaware of this activity until the cheque is presented, say June 29 and
the firm’s available balance is greater than it’s book balance by $150,000.
• Before June 15, the ABC’s float is zero:
Float = Firm’s available balance –Firm’s book balance
= $150,000 – 150,000 = 0
• Form June 15 to June 29, the position is:
Disbursement Float = Firm’s available balance –Firm’s book balance
= $150,000 – 0 = 150,000

COLLECTION FLOAT

Cheques collected by the firm create collection float, which increases book balances
but does not immediately change available balance.

NET FLOAT

In general, the firm’s payment activities generate disbursement float and its collection
activities generate collection float.

• The net effect, the sum of both floats is the net float, equal to the overall difference
between the firm’s available balance and its book balance.

• If net float is positive, then the firm’s disbursement float exceeds its collection float
and its available balance exceeds its book balance, and vice versa.

• Suppose you have $50,000 on deposit.
• One day, you write a cheque for $10,000 and deposit $20,000.
• What are your disbursement, collection and net floats?
• After writing the cheque, you show a balance of $40,000 on your books, but bank
shows $50,000 while the cheque is clearing. So you have a disbursement float of
$10,000
• Depositing $20,000 increases the book balance to $60,000, but the available balance
remains the same until the cheque clears. So collection float is -$20,000.
• Net float = $10000 + (-20,000) = -$10,000

Fixed Asset depreciation

Fixed Asset depreciation

Depreciation is a systematic allocation of the cost of a depreciable asset to expense over its useful life. It is a process of charging the cost of fixed asset to profit & loss account.

Fixed Assets are those assets which are:
• Of long life
• To be used in the business to generate revenue
• Not bought with the main purpose of resale.
Fixed assets are also called “Depreciable Assets”

Accumulated Depreciation is the depreciation that has been charged on a particular asset from the time of purchase of the asset to the present time. This is the amount that has been charged to profit and loss account from the year of purchase to the present year.
Depreciation accumulated over the years is called accumulated depreciation.

Useful Life
• Useful Life or Economic Life is the time period for machine is expected to operate efficiently.
• It is the life for which a machine is estimated to provide more benefit than the cost to run it.

Methods of calculating Depreciation

There are several methods for calculating depreciation. However two are important.

• Straight line method
• Reducing balance method or written down method.

Straight line method

It is based on the principle that each accounting period of the asset's life should bear an equal amount of depreciation.
As a result, the depreciation charge for the asset can be calculated using the following formula:

Annual straight-line depreciation charge = (Cost of the asset - Residual value of the asset )/ N

Where N =Useful economic life of the asset (years)

Residual value is the cost of the asset after the expiry of its useful life.

Illustration

A business purchases a new machine for £110,000 on 1 January 2008. It is estimated that the machine will have a residual value of £10,000 and a useful economic life of five years. The business has an accounting year end of 31 December.

Using the straight line depreciation method, the calculation of the annual depreciation charge is as follows:

Annual straight-line depreciation charge = (Cost of the asset - Residual value of the asset )/ N

Annual straight-line depreciation charge = (110,000 - 10,000 )/ 5= £20,000

In the accounts of the business a depreciation charge of £20,000 will be expensed in the profit and loss account for each of the five years of the asset's useful economic life.
In the annual balance sheet, the machine would be shown at its original cost less the total accumulated depreciation for the asset to date.

Reducing balance method or written down method.

The reducing balance method of depreciation provides a high annual depreciation charge in the early years of an asset's life but the annual depreciation charge reduces progressively as the asset ages.

To achieve this pattern of depreciation, a fixed annual depreciation percentage is applied to the written-down value of the asset. Thus, depreciation is calculated as a percentage of the reducing balance.

Illustration

A business purchases a new machine for £110,000 on 1 January 2008. It is estimated that the machine will have a residual value of £10,000 and a useful economic life of five years. The business has an accounting year end of 31 December.The business decides to calculate annual depreciation at the rate of 40% of the written-down value.

Using the reducing balance method, the calculation of the annual depreciation charge is as follows:

For 31 dec 2008

Original machine cost £110,000

Depreciation in 2008 (40% cost) £44,000

Written down value at 31 December 2008 £66,000

For 31 dec 2009

Depreciation in 2009 (40% of WDV of £66,000 31 december 2008) £26,400

Written down value at 31 December 2009 £39,600

and so on...........

In reducing balance method, a formula is used for calculation the depreciation rate i.e.

Rate = 1 –n√ RV / C

Where:
“RV” = Residual Value
“C” = Cost
“n” = Life of Asset

Calculate the rate if:
Cost = 100,000
Residual Value (RV) = 20,000
Life = 3 years

Rate = 1 –3√ 20,000 / 100,000
Rate = 42%

WTO forecasts 9% fall in global trade

WTO forecasts 9% fall in global trade

Collapsing global demand will send the volume of world goods trade plunging by 9 per cent this year, the largest drop since the second world war, the World Trade Organisation predicted on Monday.

This compares with anaemic growth of 2 per cent in 2008, reflecting the sharp downturn in the global economy late in the year, and 6 per cent in 2007.

Pascal Lamy, WTO director-general, urged leaders of the Group of 20 countries who will meet in London next week not to raise trade barriers, saying this would hinder recovery efforts.

Courtsy Financial Times

what is Depression

Depression

Depression is a mood disorder. You feel sad and have no joy in life. You may feel that you have nothing to live for. There are many types of depression, from simple depressed mood to Major Depression - a life-threatening illness.

Symptoms could include:

Irritability
Mood Swings
Nervousness
Loss of Appetite
Night Sweats
Lethargy
Depressed Mood
Memory Impairment
Difficulty Sleeping
Social Withdrawal
Feeling Hopeless
Feeling Empty
Feeling of Anger
Loss of Capacity For Enjoyment
Fear
Suicidal Thoughts
Social Isolation
Poor Self Esteem
Poor Hygiene
Problems at Work
Self Depreciation
Threatening Suicide
Finding of Suicidal Intent

Common Causes

Depression often runs in families. This may due to your genes (inherited), learned behavior, or both. Even if your genes make you more likely to develop depression, a stressful or unhappy life event usually triggers the onset of a depressive episode.

Depression may be brought on by:

Alcohol or drug abuse
Childhood events like abuse or neglect
Death of a friend or relative
Disappointment at home, work, or school
Medical conditions such as hypothyroidism ,cancer, or hepatitis
Nutritional deficiencies
Overly negative thoughts about one's self and life, self blame, and ineffective social problem solving skills
Prolonged pain or having a major illness
Sleeping problems
Social isolation (common in the elderly)

Self care steps are

Get enough sleep.
Follow a healthy, nutritious diet.
Exercise regularly.
Avoid alcohol, marijuana, and other recreational drugs.
Get involved in activities that make you happy, even if you don't feel like it.
Spend time with family and friends.
Try talking to clergy or spiritual advisers who may help give meaning to painful experiences.
Consider prayer, meditation

Conclusion

In today's life , no one can avoid stress as a part of life. However depression can be avoided and stress be minimized by taking life and life events positively. So enjoy life and work hard.

What is free cash flow

What is free cash flow

Free cash flow (FCF) is a cash flow available for distribution among all the security holders of a company. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on.

Free cash flow = (Net Income +Depreciation/Amortization-Changes In Working Capital) cash flow' operations- Capital Expenditure

Explanation

Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. It is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
So it is the cash flow actually available for distribution to all investors (stockholders and debt holders) after the company has made all the investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.

Illustration

ABC ltd has following financial data extracted from income statements, balance sheets , cash flow and notes to accounts.

Net income $ 25,000
Depreciation $ 2,000
Working capital changes +$10,000
Capital expenditure $12,000
Then
Free cash flow = (Net Income +Depreciation/Amortization-Changes In Working Capital) cash flow' operations- Capital Expenditure
Free cash flow = (25,000 + 2,000-10,000) 17,000-12,000
Free cash flow =$5,000

Market Efficiency

Market Efficiency

If prices properly reflect available information , then markets are said to be efficient.

Semi strong form efficient

Markets are said to be semi strong form efficient if the prices are unbiased based on all publicaly information

Strong Form efficient

Markets are said to be strong form efficient if the prices are unbiased based on all information (public and private).

Who cares about market efficiency?

1) Investors

If investors find that prices are predictable, then smart investors can earn extra return at the expense of naive investors.

2) Companies

If markets are efficient aggregators of information, then companies can learn from the stock price reactions.

3) Government and public

They are concerned about market efficiency because of the effect on economic growth and allocation of resources.

Effect of structural economic changes on industries

Effect of structural economic changes on industries


The following factors can have a significant effect on the cash flows and risk prospects of different industries

1) Demographics

The study of demographics includes much more than population growth and age distributions. It also includes the geographical distribution of people, the changing ethnic mix in a society and changes in income distribution.

2) Life style.

Consumer behavior is affected by trends and fads.

3) Technology

Trends in technology can affect numerous industry factors including the product or service and how it is produced and delivered.

4) Politics and regulations

The industry analyst needs to project and assess political changes relevant to the industry under study.

LEARNING ORGANIZATION

LEARNING ORGANIZATION

A learning organization is one in which people at all levels, individually and collectively, are continually increasing their capacity to produce results they really care about.

Leaning Organization is important because of following factors:

The organizations that will truly excel in the future will be the organizations that discover how to tap people’s commitment and capacity to learn at all levels in an organization.

It provides competitive advantage.

All organizations exit in more complexes, dynamic and globally competitive environment.

Peter Senge – “The Fifth Discipline”

Learning organizations are where people continually expand their capacity to learn.
Five disciplines are key to achieving an effective learning organization.

Personal Mastery:-enhancing ability to be objective.
Mental Models:-continually scrutinizing our assumptions and picture of the world.
Shared Vision:-creating a new picture for the future.
Team Learning:-creating the capacity to “think together”.
Systems Thinking:-knowledge and tools that allow people to see inter-relationships.

Daniel Tobin’s Five Principles of the Learning Organization

Everyone is a learner.
People learn from each other.
Learning enables change.
Learning is continuous.
Learning is an investment, not an expense

A learning organization tries to do six things

Collect intelligence about the environment.
Learn from the best practices of other organizations.
Learn from its own experiences and past history.
Experiment with new approaches.
Encourage systematic problem solving.Transfer knowledge throughout the organization

Levels of Learning

Managers/leaders need to encourage learning at four levels:

Individual
Group
Organizational
Inter-organizational

The Basis of the Learning Organization Strategy need to be

Transfer Knowledge, not just information.
Knowledge leads to better, safer decisions.
Better-informed.
Knowledgeable and Wiser decisions.

Conclusion

Organizations must learn faster & adapt to the rapid changes in the environment otherwise they will be history. This is the knowledge era and entry is granted only to those who learn, innovate and implement

MOTIVATION

MOTIVATION


Motivation is the inner drive that directs a person’s behavior toward goals. Motivation can be defined as a process which energizes, directs and sustains human behavior. It refers to person’s desire to do the best possible job or to exert the maximum effort to perform assigned tasks. An important feature of motivation is that it is behavior directed towards goal.


Motivational Theories

Motivation theories seek to explain why employees are motivated by and satisfied with one type of work than another. It is essential that mangers have a basic understanding of work motivation because highly motivated employees are more likely to produce a superior quality product or service than employee who lack motivation.

A) Maslow’s Need Hierarchy

Abraham Maslow organized five major types of human needs into a hierarchy .The need hierarchy illustrates Maslow’s conception of people satisfying their needs in a specified order, from bottom to top.

The needs, in ascending order, are:

1. Physiological (food, water, and shelter.)

2. Safety or security (protection against threat and deprivation)

3. Social (friendship, affection, belonging, and love)

4. Ego (independence, achievement, freedom, status, recognition, and self-esteem)

5. Self-actualization (realizing one’s full potential; becoming everything one is capable of being.)

According to Maslow, people are motivated to satisfy the lower needs before they try to satisfy the higher need. Also, once a need is satisfied it is no longer a powerful motivator. Maslow’s hierarchy, however, is a simplistic and not altogether accurate theory of human motivation. For example, not everyone progresses through the five needs in hierarchical order. But Maslow makes three important contributions. First, he identifies important need categories, which can help managers create effective positive rein forcers. Second,it is helpful to think of two general levels of needs, in which lower-level needs must be satisfied before higher-level needs become important. Third, Maslow sensitized managers to the importance of personal growth and self-actualization.

B) Existence Relatedness Growth (ERG) Theory

Alderfer focuses on three needs: existence, relatedness, and growth.

Existence needs are similar to Maslow’s physiological needs, and to the physical components of Maslow’s security needs.

Relatedness needs are those that require interpersonal interaction to satisfy the needs for things like prestige and esteem from others.

Growth needs are similar to Maslow’s needs for self-esteem and self-actualization.

C) McGregor’s Theory-X and Theory-Y

McGregor’s Theory-X represented the traditional management view that employees are lazy, was uninterested in work, and needed to be prodded to perform.

In contrast his theory Y viewed employees as creative, complex, and mature individuals interested in meaningful work.

McGregor believed that under the right circumstances, employees would willingly contribute their ingenuity and their talents for the benefits of the organization. He suggested that the mangers motivate employees by giving them the opportunity to develop their talents more fully and by giving them the freedom to choose the methods they would use to achieve organizational goals. In McGregor’s view the mangers role was not to manipulate employees but to align their needs with needs of the organization so that employees would regulate their own actions and performance. These insights lead researches to investigate the origins and processes of motivation more closely.

D) Expectancy Theory

Expectancy theory states that a person’s motivation to exert a certain level of effort is a function of three things: expectancy (E), instrumentality (I), and valance (V). Motivation = E x I x V.

“E” is the person’s expectancy that his or her effort will lead to performance,

“I” represents the perceived relationship between successful performance and obtaining the reward, and

“V” refers to the perceived value the person attaches to the reward.

E) Reinforcement Theory

In 1911, psychologist Edward Thorndike formulated the law effect: Behavior that is followed by positive consequences probably will be repeated. This powerful law of behavior laid the foundation for country investigations into the effects of the positive consequences, called rein forcers that motivate behavior.Organizational behavior modification attempts to people’s actions.Four key consequences of behavior either encourage or discourage people’s behavior

1. Positive Reinforcement- applying a valued consequence that increases the likelihood that the person will repeat the behavior that led to it. Examples of positive reinforcers include compliments, letters of commendation, favorable performance evaluations, and pay raises. Equally important, jobs can be positively reinforcing. Performing well on interesting, challenging, or enriched jobs is much more reinforcing, and therefore motivating,then performing well on jobs that are routine and monotonous.

2. Negative Reinforcement- removing or withholding an undesirable consequence. For example, a manager takes an employee (or a school takes a student) off probation because of improved performance. Frequent threatening memos admonished people to achieve every one of their many performance goals

3. Punishment- administering an aversive consequence. Examples include criticizing or shouting at an employee, assigning an unappealing task, and sending a worker home without pay. Negative reinforcement can involve the threat of punishment, but not delivering it when employees perform satisfactorily. Punishment is the actual delivery of the aversive consequence.

4. Extinction –withdrawing or failing or failing to provide a reinforcing consequence. When this occurs motivation is reduced and the behavior is extinguished, or eliminated. Examples include not giving a compliment for a job well done, forgetting to say thanks for a favor, or setting impossible performance goals so that the person never experiences success. The first two consequences, positive and negative reinforcement, are positive for the person receiving them:The person either gains something or avoids something negative. Therefore, the person who experiences these consequences will be motivated to behave in the ways that led to the reinforcement. The last two consequences, punishment and extinction, are negative outcomes for the person receiving them: Motivation to repeat the behavior that led to the undesirable results will be reduced.Thus, effective managers give positive reinforcement to their high-performing people and negative reinforcement to low performance. They also punish or extinguish poor performance and other unwanted behavior.

F) Herzberg’s Two-Factor Approach

Herzberg Two-Factor theory divides Maslow’s Hierarchy into a lower-level and a higher-level set of needs,and suggests that the best way to provide motivation for an employee is to offer to satisfy the person’s higher-order needs, ego and self-actualization. Herzberg said that lower-order needs, or hygiene factors, are different from higher-order needs, or motivators. He maintains that adding more hygiene factors to the job is a very bad way to motivate because lower-order needs are quickly satisfied.

G) McClelland (Needs for Affiliation, Power, and Achievement) Theory

McClelland agrees with Herzberg that higher-level needs are most important at work. He believes the needs for affiliation, power, and achievement are most important. He and his associates use the Thematic Apperception Test to identify a person’s needs for achievement, power, and affiliation. People with a high need for achievement strive for success, are highly motivated to accomplish a challenging task or goal,prefer tasks that have a reasonable chance for success, and avoid tasks that are either too easy or too difficult. People with a high need for power enjoy roles requiring persuasion. People with a strong need for affiliations are highly motivated to maintain strong, warm relationships.

H) Adam’s Equity Theory

Adams’s equity theory assumes that people have a need for fairness at work, and therefore, value and seek it. People are motivated to maintain a balance between what they perceive as their inputs or contributions and their rewards as compared to others. This theory seems to work when people feel they are underpaid,but inequity due to overpayment does not seem to have the positive effects on either quantity or quality that Adams’s equity theory would predict.