Finance Chapter 7

Question 1

Mission fulfillment

Answer 1

the extent to which an organization realizes its mission and moves
closer to its vision.

Is systematic,, cyclical, dynamic and broad-based approach

Question 2

Mission fulfillment parts:

Answer 2

• formulation
• operationalizing
• monitoring
• execution

Question 3

strategy

Answer 3

the process of carefully
devising and executing plans to achieve particular goals

Question 4

Governing board

Answer 4

frequently the board of directors, managers, or trustees which delegates strategy responsibilities to the executive leadership.

Question 5

Vision statement is a

Answer 5

forward-looking pronouncement that describes what a firm aspires to be and achieve. It is its ultimate purpose, its “why.” forward looking, inspirational and motivational, measurable and actionable

Question 6

Mission statement

Answer 6

a mission is encompasses the company’s “what,” its broad purpose. A firm expresses its mission in a succinct, precise declaration through a mission statement.
Present oriented, stable and long lasting, could evolve over time

Question 7

Values

Answer 7

Organizational values provide a facet within the “how” frameworks that allows all
within a firm to evaluate their decisions and actions, take pride in their institution’s work, and make commitments.
Often include explanations of the individual value components, which can be used as personal forethought and retro- spection tools as well as permission-to-play evaluations.

Question 8

Strategic initiatives plan

Answer 8

• Encapsulates a handful of high-level strategic initiatives (SI) at a time,
  including substrategies
• Considers the potential operational and financial impacts of each SI
• Evaluates SI alignment with the mission, vision, and values
• Sets measurable, well-defined targets for tactical planning and execution,
  with specific metrics, data-gathering methods, and evaluation techniques
  described within the substrategies

Question 9

Institutional research

Answer 9

An organizational function responsible for collecting, aggre-
gating, and interpreting internal and external data.

Question 10

Strategic Initiatives: Broad, High level statements

Answer 10

• Set multiyear targets for and describe how a firm progresses from the state
  of its present mission fulfillment to the state of its desired vision
• Address long-term security, viability, scale, and sustainability issues
• Inform annual tactical planning and budgeting
• Fluid over time

Question 11

SWOT Analysis

Answer 11

• EVALUATES ORGANIZATIONAL STRENGTHS, WEAKNESSES,
  OPPORTUNITIES, AND THREATS
• BASED ON ENVIRONMENTAL EVALUATIONS
• Data from various sources of operational, financial, and market
  information
• ANALYZES STRATEGIC CAPABILITIES AND COMPETITIVE POSITIONING
• Basis for strategic initiatives
• STRENGTHS AND WEAKNESSES: TRENDS IN THE INTERNAL
  ENVIRONMENT
• OPPORTUNITIES AND THREATS: EXTERNAL FORCES AND FACTORS

Question 12

Human capital

Answer 12

The economic value of an employee’s skill set; recognizes that all
employees are not equal.

Question 13

Organizational alignment refers to

Answer 13

the degree employees subscribe to, accept, and model their employer’s mission, vision, and values.

Question 14

Organizational alignment and outcomes

Answer 14

• Determined through self-reflection, dialoguing, psychometric
  benchmarking, and surveys
• Include turnover rates, productivity levels, and strength of the internal
  employment referrals

Question 15

Role Alignment and Outcomes

Answer 15

• Personal job match: balancing of role outcomes with technical expertise,
  natural behavioral drives, and enthusiasm toward performance of duties
• Evaluate job satisfaction, engagement, and effectiveness
• Safe environment for continual personal and professional development

Question 16

DEVELOPMENTAL ALIGNMENT AND OUTCOMES

Answer 16

• Four categories: health and wellness, company environment,
  relationships, and achievement and recognition
• Measure deliberate development progress
• Leads to higher levels of employee engagement and satisfaction, stable
  workforces, better business outcomes, greater profitability, better error
  detection, reduction in cost structures, and political maneuvering

Question 17

Passion skills

Answer 17

Convergence of technical expertise and enthusiasm for performing specific duties.

Question 18

deliberately developmental organizations (DDOs) is a company

Answer 18

organized around the idea that “organizations will best prosper when they are more
deeply aligned with people’s strongest motive, which is to grow”

Question 19

people outcomes

Answer 19

Subset of broader organizational strategic outcomes focused on
organizational, role, and developmental alignment of employees.

Question 20

Talent optimization and people outcomes must be

Answer 20

• integrated into mission effectiveness and strategic initiatives
  plans
• Position culture as a central business strategy
• Direct relationship between realizing human potential and
  organizational potential

Question 21

Strategy operationalizing

Answer 21

organization must operationalize or translate into executable tasks
This leads to tactical planning and budgeting

Question 22

Tactics are the

Answer 22

planned activities undertaken to accomplish the stated substrategies.
* Carry target completion deadlines
* Assigned an “owner”
* Provide financial expenditures amount and timing

Question 23

Tactical maps present

Answer 23

the tactics to be performed by units, departments, teams, and individual employees within an organization.
* Link day-to-day work functions to the strategic initiative and mission
effectiveness plans
* Translate findings from environmental evaluations, SWOT analyses,
people outcomes, and strategic initiatives into actionable items (tactics)

Question 24

Budgeting

Answer 24

• Annual financial planning process
• Runs concurrent with and supports tactical planning
• Budgets
• Operating
• Capital
• $1,000 or more financial outlay per item (varies from organization to organization)

Question 25

Strategy Execution and Monitoring: Incentives and Accountabilities GAINS, PROFIT, SHARING

Answer 25

* Geared toward accomplishing strategic outcomes * Based on achievement of individual, unit, department, and firm-wide operational, financial, and strategic results * Part of employees’ total compensation * Implemented to attract, retain, and reward employees, promote cohesion and teamwork * Must include safeguards to prevent any cheating or gaming

Question 26

Consultants

Answer 26

Provides expertise and experience in one or more focus areas.

Question 27

Incentive compensation

Answer 27

A variety of approaches for motivating employees; does not need to be monetary to be effective, as long as perceived to carry meaningful value.

Question 28

NON-FINACIAL INCENTIVES

Answer 28

* Must be perceived to carry meaningful value for each affected individual * Organization-wide achievement recognition programs * Satisfy employees’ innate esteem needs and contribute to their elevation to self- actualizing * Could range from daily “values spotlights” to annual award ceremonies

Question 29

DELIBERATELY DEVELOPMENTAL APPROACH

Answer 29

* Ongoing two-way dialogue between the employee and the manger, grounded in self-reflection * Evaluates organizational, role, and developmental alignment * Produces constantly evolving individualized development, or “elevation” plans * Include personal, educational, and professional development components * Promote better alignment

Question 30

SELF-GOVERNANCE MODEL

Answer 30

* Grounded in human motivation theory: promotes employee choices, driven to address deficiency and growth needs * Recognizes that most managers do not have the requisite knowledge and skills to be effective in behavioral modification * Require separation between technical and behavioral management

Question 31

Monitoring and Close-the-loop Tools: PERSONAL DASHBOARD

Answer 31

- widely used tools for intradepartmental communication and alignment monitoring. * Visual snapshot of the status of tactics, projects, key performance indicators, and development goals * Accomplishments * Color-coded status indicators * Known issues with mitigation plans * Developmental opportunities

Question 32

Snapshot Reviews

Answer 32

- an effective approach for keeping the KPI as well as strategic initiatives continually visible throughout the institution and for driving performance to reach goals. * Create visibility into the status of key performance indicators and strategic initiatives * Drive performance and facilitate cross-functional discussions

Question 33

Tactical Reviews and Progress Reports

Answer 33

* Quarterly status update of tactics execution * Offer explanations for any variances to plan

Question 34

internal rate of return (IRR)

Answer 34

* Measures return on investment (ROI) * Expressed in percentages

Question 35

Cash inflow is

Answer 35

positive amount

Question 36

Cash outflow

Answer 36

is a negative amount

Question 37

Present value

Answer 37

Adjusted for the timing and risk, the current monetary worth of a future cash flow or an asset.

Question 38

Net Present Value

Answer 38

Present value of predicted future revenues minus present value of predicted future payments.

Question 39

future value

Answer 39

The worth of a cash flow or an investment at a specified point in the future.

Question 40

opportunity cost of capital,

Answer 40

The magnitude of the best-return investment alternative of the same risk.

Question 41

Capital projects consist of

Answer 41

multiple cash flows: initial and subsequent investment outflows, revenues generated or costs avoided as a result of a project, and expenses associated with operating a new venture created by the project.

Question 42

Sunk costs

Answer 42

The resources previously expended on a project or investment that should be disregarded when evaluating the net present value.

Question 43

Free cash flow (FCF)

Answer 43

* FCF = net operating margin after tax + depreciation – incremental working capital – capital expenditures * FCF is cash that a firm has available to distribute to its debt and equity holders * Depreciation is a noncash expense

Question 44

WACC (WEIGHTED AVERAGE COST OF CAPITAL)

Answer 44

* Represents opportunity costs for both debt and equity holders and the firm’s target debt–equity ratio

Question 45

In a one period case, PV=

Answer 45

FV /(1+r)

Question 46

Investment Decisions Based on NPV

Answer 46

* INVEST IF NPV > 0; IF MORE THEN ONE CHOICE, PICK THE HIGHEST NPV PROJECT * CONSIDERS TIME VALUE OF MONEY (TVM) * DEPENDS ONLY ON FORECASTED CASH FLOWS AND THE APPROPRIATE DISCOUNT RATE * MEASURED IN TODAY’S $$ * Has an immediate impact on a share price (enterprise value) * ALLOWS TO EASILY SELECT MORE VALUABLE PROJECTS AND COMPARE DIVISIONS * ANY VALUATION METHOD PRODUCING INVESTMENT DECISION RESULTS THAT DIFFER FROM NPV IS WRONG * Use with caution

Question 47

NPV Considerations/ Forecasting:

Answer 47

- disregard sunk costs - cash flow projections and discount rates should be used on the after-tax basis - all organization-wide financial effects of projects should be estimated and taken into account. - only incremental, or additional, cash-based projections should be considered. - existing overhead costs should not be allocated to the new projects. - opportunity cost of the project must be evaluated. In other words, the question of what the company would be giving up by investing its resources in a given project must be answered.

Question 48

3-F Framework for Projects Evaluation: FINANCES /ROI

Answer 48

* Many financial modeling tools exist * Need evidence-based pro-forma financial statements and capital expenditures projections * NPV and IRR calculations determine ROI

Question 49

3-F Framework for Projects Evaluation: FIT

Answer 49

* Every prospective project and investment should be evaluated for fit with the strategic outcomes and broad organizational frameworks * Some positive financial return projects may be rejected due to lack of alignment * Allows companies to focus scarce resources on living the mission and realizing the vision

Question 50

3-F Framework for Projects Evaluation: Feasibility

Answer 50

* Financial and human resources availability * Market viability * Opportunity cost

Question 51

Capital Budgeting Process

Answer 51

* LED BY THE CHIEF FINANCIAL OFFICER (CFO) * BUDGETS DERIVED FROM STRATEGIC INITIATIVES, SUBSTRATEGIES, TACTICS, ENVIRONMENTAL EVALUATIONS, AND SWOT ANALYSES * SHOULD BE SUPPORTED BY ALL 3-F ELEMENTS * SERVES AS THE BASIS FOR SETTING SOME OF THE KEY PERFORMANCE INDICATORS * TIE EXPENDITURES TO THE MISSION EFFECTIVENESS AND STRATEGIC INITIATIVES PLANS AND TACTICAL MAPS * BUDGETS APPROVED BY THE GOVERNING BOARD

Question 52

1. Evaluate your organization’s mission, vision, and values statements and determine how well they match the current state of affairs. How well do they describe what your organization is, does, and aspires to be? How is the organization doing in aligning with its stated pillars? How well is the organization aware of its individual contributors’ organizational alignment to these strategic pillars?

Question 53

2. Based on your organization’s stated mission devise several mission effectiveness outcomes (KPIs), and cascade these through your organization down to the individual contributors’ roles.

Question 54

3. Develop three people outcomes as well as related substrategies and tactics to improve your organization’s focus on alignment. Complete the tactical map template. Prepare an argument in support of your outcomes, substrategies, and tactics to be presented to the strategy committee.

Question 55

4. Using the data in Tables 7.4 and 7.5, calculate the total year-end bonus amount for a nurse manager who earns $100,000 annually, has a 10% bonus target, meets the individual financial contributions, and completes their assigned tactics, but fails to meet some of the individual and unit operational goals, and works in a hospital that has met all of its strategic, operational, and financial goals, achieved 115% of the projected EBITDA, and uses the “all-or-nothing” approach to the incentive compensation criteria. Assume that the maximum aggregate bonus amount is set high enough for all to receive the entire individually calculated bonus amounts.

Question 56

5. Prepare a full 3-F framework for a project of your choosing. Base your assumptions on research and trends, and use Excel for financial modeling. Prepare a presentation for the board of trustees or group of investors. Good luck and have fun!