1. Operations Management
Unit 6

2. Management Functions
Once you open your business and have people working for you, you become a manager
The person responsible for planning, organizing , staffing, implementing, and controlling the operations of a business
These are functions ALL managers must perform, no matter the size or type of the business
Management is the process of achieving goals by establishing operating procedures that make effective use of people and other resources
All functions of management work together and are continuous

3. Planning
There are three types of planning that should take place in any organization
Strategic Planning: setting broad, long-range objectives to achieve the long-term goals
You should think 3-5 years ahead
Intermediate-Range Planning: preparing detailed plans and strategies for achieving goals within a 1-year period
Should include target dates for the completion of tasks
Short-Term Planning: planning for the day-to-day operations to achieve the goals/objectives set in intermediate-range planning
Rules, policies, procedures, and budgets
Planning involves analyzing information, setting goals, and making decisions about what needs to be done to move the business forward
“Time is money” Planning activities must be done in a timely manner
Envision where you want your business to be at that time and what it will take to get you there
Planning is an ongoing process. Plans can be revised as needs change

4. Organizing Assignment of tasks Grouping of tasks into departments
Determine how many employees you will need and what their duties will be
Grouping of tasks into departments
You will have to decide which tasks are closely related and group them accordingly.
Accounting, marketing, human resources, etc..
Organizational structure
A plan that shows how the various jobs in a company relate to one another
Often represented in a chart and indicates the working relationships within the business
Allocation of resources across the organization
A plan for distributing and using the available resources efficiently
Creating budgets based on requests from the departments
Organizing is identifying and arranging the work and resources needed to achieve the goals that have been set for your business

5. Staffing
Includes all of the activities involved in obtaining, training, and compensating the employees of a business
A company is only as good as the people who work for it

6. Implementing
Directing and leading people to accomplish the goals of the organization
This is accomplished by communicating assignments and instructions to your employees
Managers must develop a management style that will motivate employees to perform at a high level
Management style is the way a manager behaves toward and works with employees
Managers will use different styles based on the characteristics of the employees, the type of work assignment, and the importance of the work being performed
An experienced and effective manager can change the style as needed

7. Management Styles
Authoritative Management: manager is directive and controlling
Manager makes the major decisions and closely monitors the work of the employees to be sure the work is done correctly
Often used in crisis situations when there is not enough time to let the group participate in the decision-making process
Also appropriate when working with a new group of employees who do not have previous experience in the type of work being performed

8. Management Styles
Democratic Management: employees are involved in decision making and the manager provides less direction
A manager of a group of experienced employees who work well together does not have to be directive and controlling
Employees like to be involved in the planning and decision making
Mixed Management: combining authoritative and democratic
Different employees feel that if they are not involved in the decision-making process, then the manger does not trust them
Others prefer to be told what to do and want someone else to do the day-to-day decision making

9. Controlling
The process of setting standards for the operation of a business and ensuring that those standards are met
Compare actual revenues and expenses with what was projected
Observe business operations and determine if they are running effectively
Inspect products and services to ensure they are meeting performance and quality standards
Changes may include hiring new employees, upgrading to higher-quality production materials, or increasing the budget for a specific area
You may also decide to change operating procedures
Work processes and work flow

10. Operations Manual
Contains all of the rules, policies, and procedures that a business should follow to function effectively
Having this info. in writing makes it easy to reference and easy to apply consistently
Your operations manual should include:
Rules: outline the appropriate behavior and actions of those that work for you
Policies: guidelines for daily operations
Established to make the business run efficiently; applied to both employees and customers
Procedures: series of steps and actions that employees must follow to complete an activity
Instructions on how to perform a task correctly
As a business owner, it is important to remember that sometimes you have to make exception to rules, policies, and procedures because not all situations are the same

11. Different Policies Operating Policies Customer Service Policies
Set daily operating hours that are convenient for your customers
Customer Service Policies
A policy for replacements, refunds, or repairs will help maintain goodwill
Payment options regarding cash, checks, and credit cards
Delivery Policies
Determine whether you will offer delivery services, if you will charge a delivery fee, and whether you will guarantee delivery within a certain time frame
Hiring Policies
Policy may specify that all job applicants complete an employment application and submit a resume and letters of reference
Testing may be required for some positions, background check, credit report check; who makes the final hiring decision
Safety Policies
Instruction in safety procedures should be part of employee training
Employees should know how to operate equipment safely and be required to wear the necessary protective gear

12. Activity Take the management style quiz
what-kind-of-manager-you-are-quiz
Write a paragraph about your style and if you believe your results apply to you.
Find your management style in the article “6 management styles and when best to use them”
In a second paragraph, describe when your style is effective and when is it not
Provide an example of a situation where your management style is effective and one where it would not be effective

13. Inventory Control

14. Meet Inventory Needs
Direct costs of inventory include storage, insurance, and taxes
In addition to the purchase price of the inventory
Some concerns managers must address:
Maintaining a wide assortment of stock but keeping adequate quantities of fast-moving items
Increasing inventory turnover but maintaining a high level of service
Keeping stock levels as low as possible without sacrificing service or performance as a result of stockouts
Obtaining lower prices by making bulk purchases but not ending up with slow-moving inventory
Having adequate inventory on hand but not ending up with out-of-date items

15. Purchasing Plan
Inventory control includes planning to determine inventory needs, placing purchase orders for the items in advance, and scheduling deliveries to arrive when needed
Inventory control also involves determining when you need the most inventory in stock
Establishing reorder points
Also determining when you should discontinue an item

16. Calculating Inventory
The amount of inventory you need to purchase can be calculated from the sales forecast
Look at how many units you need to add to the inventory you already have in stock to reach your sales objective
Beginning Inventory + Purchases – Sales = Ending Inventory

17. Calculating Inventory
Alan has a beginning inventory worth $40,000 in his automobile parts store and expects to sell $80,000 over a period of 6 months.
He wants to have $25,000 of inventory at the end of the 6-month period
Alan must purchase $65,000 in inventory during the 6-month period
Beginning Inventory +
Purchases -
Sales =
Ending Inventory
Probably shouldn’t purchase the entire inventory and have it delivered at the same time because he does not have the cash to pay for it all at once, nor does he have the storage space
$40,000 + ? -
$80,000 =
$25,000

18. Detailed Purchase Plan

19. Track Inventory Two ways: periodic and perpetual
Periodic Inventory Method
Involves taking a physical count of merchandise at regular intervals
weekly or monthly
You can then compare your inventory counts to your established reorder points
Commonly used by small businesses with limited inventory
Record the date on which you are taking the inventory, the stock number of each item, a description of each item, and the actual number of units in stock.
At least two people should be involved in taking a physical count. One person should count the items on the shelves while the other records the information

20. Tracking Inventory Perpetual Inventory Method
Keeps track of inventory levels on a daily basis
More efficient and ensures you don’t run out of stock
Uses stock cards or a computer to track inventory
Retail businesses can use bar code scanners to scan inventory items at the point of sale
Cash registers with a POS software system update inventory records as each sale happens
A POS system allows you to always have an up-to-date inventory balance
POS system also will get detailed information on sales that will assist you in the decision-making process for inventory control.
You can analyze the sales data, determine how well each item you have in stock is selling, and adjust your purchasing accordingly

21. Perpetual Inventory Method
You should record the following information:
A description of the item
A stock number for identification purposes
Any receipt of inventory, the number of units received, and the date of the transaction
Any sale of inventory, the number of units sold, and the date of the transaction
The amount of inventory you currently have
The minimum amount you want to keep in inventory (reorder point)
The maximum amount you want in inventory at any time
Even with the perpetual inventory method, you will need to take a physical count of your inventory at least once or twice a year.
Your actual inventory may differ from that listed in your perpetual inventory system. The difference can be cause by many things: failure to record sales, theft, or damage to merchandise

23. Manage Your Inventory
The level of inventory you keep in stock depends on three factors:
The costs of carrying inventory
The costs of lost sales due to being out of stock
Your stock turnover rate

24. Costs of Carrying Inventory
Carrying costs can become too high if you have too much inventory.
Costs can increase for many reasons:
Obsolescence
Becoming old and outdated if held too long
Deterioration
Example: plants will need to be sold within a few weeks or they will begin to die
Interest fees
If you cannot pay your vendors until you sell your inventory, you may incur an extra expense
Insurance
Carry insurance against theft, fire, and other disasters
Insurance premiums increase as the value of the inventory insured increases
Storage
Space may be leased on s square-foot basis
Known as carrying costs

25. Costs of Being Out of Stock
If you are out of the items your customers want…
You will lose sales
If customers repeatedly fail to find what they are seeking at your business…
You could also lose customer loyalty
Establish reorder points to avoid this

26. Stock Turnover Rate
The rate at which the inventory of a product is sold and replaced with new inventory
Varys from industry to industry
Restaurants and grocery stores will have a high stock turnover rate
Car dealerships and furniture stores will have a low stock turnover rate

27. Calculating Turnover Rate
If a frame shop maintains an inventory of 20 for a particular frame and sells 100 of those frames in a year
Sales ÷
Inventory =
Stock Turnover Rate
100 ÷ 20 = 5
Months in Year ÷
Stock Turnover Rate =
Months of Inventory to stock 12 ÷ 6 = 2

28. Financial Management

29. Manage Your Cash Flow Create a cash budget
Should show the projections of your cash coming in and going out
Should be based on actual past revenues and operating expenses
This information can help you budget your financial resources
Similar to a cash flow statement
Three columns to show the estimated cash flow, the actual cash flow, and the difference
Many companies use spreadsheets to prepare their cash budgets
If your cash budget shows you will be short of cash in six months, you can begin arranging financing or generating capital now
If your cash budget shows you will have a surplus of cash two years from now, you might use that information in planning how to expand your business

30. Mark Matson owns a snow removal business that he runs from his home
Mark Matson owns a snow removal business that he runs from his home. He uses a spreadsheet to create a budget for the first three months of the coming year

31. Improve Your Cash Flow Increase Cash Receipts
Decrease your accounts receivable by getting customers who owe you money to pay more quickly
To encourage faster payment, you can do the following:
Offer discounts on bills paid right away
Establish tighter credit policies (decrease the amount of time your customers have to pay their bills)
Establish a follow-up system for collecting unpaid accounts receivable
Hold shipments to customers with large unpaid bills or insist that such orders be paid in advance
Businesses can have cash flow problems if they start off with too little capital
Obtain more capital by securing a loan, investing more of your own money, or finding investors who will provide you with capital in return for a share of profits

32. Improve Cash Flow Decrease Cash Disbursements
Gaining better control over your inventory
Inventory is a large business expense
Payroll
Reducing the size of your workforce
Reducing the number of hours that employees work
Reducing expenses
Reducing variable expenses (advertising)
Slowing the rate at which you pay your bills
Depending on your cash flow needs, you may need to take advantage of credit terms, or pay with a credit card

33. Prepare and Analyze Financial Stmts
Cash Flow Statement
Shows the cash inflows (receipts) and outflows (disbursements)
Shows the ACTUAL cash that a business receives and how that cash is used
Income Statement
Reports revenues, expenses, and the net income or loss over a specific period of time
Balance Sheet
The value of assets, liabilities, and owner’s equity
Once your business is up and running, you will prepare financial statements that show ACTUAL financial performance
These financial statements will contain more detailed financial information than the pro forma statements

34. Analyze Sales Your sales records show sales trends and patterns
You can use these records to forecast future sales and make good business decisions
Analyze Sales by Product
Helps you make decisions about the kind of inventory to stock
Can help you increase sales and profits
Emily Lee owns a garden and patio store. Her store has four departments. Emily’s sales figures show that almost 57% of her annual sales come from the outdoor furniture department. The plants department accounts for a little over 12% of sales.
Based on these data, Emily decides to reduce the size of the plants department and increase her inventory of outdoor furniture

35. Analyze Net Profit on Sales
The rate of profit that a business earns is shown as the ratio of its net profit to its sales
Net Income After Taxes ÷ Net Sales = Net Profit on Sales
In order to calculate net profit on sales, a business must first perform calculations to determine net sales and net income after taxes
All of these calculations are found on the income statement

36. Gross Sales – Returns = Net Sales
Calculate Net Sales
Gross Sales: the dollar amount of all sales
Net Sales: the dollar amount of all sales with any returns subtracted
Gross Sales – Returns = Net Sales
$235,000 - $3,200 = $231,800
Jack Hendrick owns a retail store that sells automotive supplies.
Jack sold $235,000 worth of merchandise and had $3,200 worth of merchandise returned.

37. Calculate Net Income After Taxes
Gross Profit is profit before operating expenses are deducted
Net Sales – Cost of Goods Sold = Gross Profit
$231,800 - $150,000 = $81,800
Gross Profit – Operating Expenses = Net Income from Operations
$81,800 - $39,900 = $41,900
Net Income From Operations – Interest Expense = Net Income Before Taxes
$41,900 - $2,400 = $39,500
Net Income Before Taxes – Income Tax Paid = Net Income After Taxes
$39,500 - $12,245 = $27,255
Three calculations: (1) gross profit (2) net income from operations, and (3) net income before taxes

38. Calculate and Analyze Net Profit on Sales
This calculation helps determine how profitable your business is.
Net Income After Taxes ÷ Net Sales = Net Profit on Sales
$27,255 ÷ $231,800 = 11.8%
You can compare the profit ratio this year with ones from previous years
Also compare the profit ratio with average profit ratios in your industry

39. Set and Meet Profit Goals
Jack would like to increase his profit ratio to 15%
He decides to try to increase his sales and reduce his expenses
He begins a frequent-buyer program and offers discounts on bulk purchases
Jack will try to reduce his cost of goods sold by purchasing his inventory in larger quantities to get a discount from suppliers

40. Perform Breakeven Analysis
A useful tool for determining how increases in sales will affect your profits
The breakeven point is the volume of sales the must be made to cover all of the expenses of a business
Below the breakeven point, your expenses will exceed your revenues and you will lose money

41. Analyze Debt and Equity
When analyzing a company's financial health, it is important to look at its mix of debt and equity
There are four key areas an entrepreneur should review using the balance sheet:
Ability to pay debt as it comes due
Returns on assets
Amount of debt the company is using
Using debt increases the risks that a company faces
But it could also increase the expected return on the owner’s equity investment
Rate of return on the owners’ equity investment

42. Current Assets ÷ Current Liabilities = Current Ratio
Ability to Pay Debt
A business that has enough money to pay off any debt owed is described as being liquid
Liquidity depends on the availability of cash
The ratio compares a company’s current assets to its current liabilities
Current Assets ÷ Current Liabilities = Current Ratio
$125,410 ÷ $59,610 = 2.10
This means that it has $2.10 in current assets for each $1.00 in current liabilities

43. Net Income ÷ Total Assets = ROA
Return on Assets (ROA)
The ROA indicates how profitable a company is relative to the total amount of assets invested in the company.
Assets are invested in a company for the purpose of producing net income
Net Income ÷ Total Assets = ROA
$27,255 ÷ $206,770 = 13.18%
This means that the company earned over $0.13 for each $1.00 of assets
The higher the ROA, the better

44. Total Debt ÷ Total Assets = Debt Ratio
The more debt a business has, the more risk it is taking
Because debt is a fixes cost, it has to be repaid no matter how much profit the company earns.
Total Debt ÷ Total Assets = Debt Ratio
$101,610÷ $206,770 =
This means that it has approximately $0.49 in debt for each $1.00 of assets
For good financial health, the ratio should be 1 or less, which indicates the company’s debt does not exceed its assets

45. Net Income ÷ Owner’s Equity = ROE
Return on Equity (ROE)
The ROE is the rate of return the owners are receiving on their equity investment
Reveals how much profit a company earned in comparison to the total amount of OE reported on the balance sheet
Net Income ÷ Owner’s Equity = ROE
$27,255 ÷ $105,160= 25.92%
A high ROE is likely to be more capable of generating cash internally
Compare the ROE to those of other companies in your industry

46. Activity
Using the following data, calculate the current ratio, ROA, debt ratio, and ROE for Hallman Printers
Current Assets
$170,000
Total Assets
450,000
Net Income
50,000
Current Liabilities
$100,000
Total Liabilities
150,000
Owner’s Equity
300,000