Financial Model and Working Capital Management

TheRBT
Junior Line Worker
Junior Line Worker
Posts: 2
Joined: Wed Sep 13, 2017 11:51 am

Financial Model and Working Capital Management

Postby TheRBT » Wed Sep 13, 2017 2:07 pm

Let me start off by saying that in the few hours that I have spent with this game, it's already become one of my favourite tycoon games! I fully intend to recommend it to friends and even to my alma mater for their op management courses.


Anyway, I have been reading the dev blog and have managed to get many of my questions answered. However, I am still struggling with some questions:

Is "market value" the same as base value mentioned in the blog? "Each feature in a car has a ‘base value’, which is essentially derived from the resources and time/power/research required to make that component, plus a normal profit margin". If so, then how come I am making a loss even though I am selling at a 20% premium to this value (assuming no changes in working capital). Even if I disregard the admin expenses, my 24hr revenue (by selling at 20% premium and no stale inventory) is LESS than the cost of components + working capital alone. So what I am missing in this equation?

Is there a way to see the TOTAL cost of ALL components that go into each model? Essentially, it would help me to price my car appropriately. So for example, if cost of components for a model at current prices is 20K and my admin expenses are 50% of material cost (based on historic data), then I break even by selling the car at 30K. Otherwise, how do I even know if I am selling a car at a profit or loss?

It would also be great to see the total value of your working capital (inventory+WIP). Currently you can see the number of components on the floor but it would be nice to see the total value as well.



Link to referenced blog:
http://positech.co.uk/cliffsblog/2017/0 ... ial-model/
Steve-O
Senior Line Supervisor
Senior Line Supervisor
Posts: 22
Joined: Mon Sep 25, 2017 4:03 pm

Re: Financial Model and Working Capital Management

Postby Steve-O » Mon Sep 25, 2017 4:28 pm

Profit and Cost are very difficult to understand in real time and probably because they are always changing. The actual cost of a part in manufacturing carries with it both the material cost, but also the labor cost associated with each step in the process and also the opportunity costs when one unit is running and another one is not running.

The way that works for me is I start pricing everything with a 50% markup. From that I look at the rates I'm producing cars and the rates I'm producing sales. Typically what I see early on is that I am producing 0-2 cars per hour but only producing 0 sales her hour. Then I'll drop my price 5% and observe the rate the next day. If I am still producing more cars than sales, then I lower them again by 5%. Once I produce cars at the same rate I produce sales I know I am profitable. Demand appears to also be variable. So if you are making a bunch of cars at a price point nobody wants that is inefficient and will cut into your profitability.

Another thing that adds to cost is called "WOCT", or work order cycle time. The longer you have "WIP" or work in progress in the factory and not in "FG" finished goods, i.e. your shop floor the farther each unit is away from making it to the shop floor. It would be helpful to know the rate of production in cars/hour that is actually being achieved for the day at the queried step, rather than just the theoretical rate based on current cycle conditions.

Another thing to consider as your get more efficient is that there is the law of diminishing returns and basically in the game it means, you can keep producing cars past a certain point, becoming more and more efficient but there will be a point at which you can't make a profit because there is no more demand to take the supply you can create. If you start seeing your showroom, expanding beyond 100 cars, and you have lowered the price but can't seem to generate enough sales to meet your car production well then you have essentially reached equilibrium or even gone past it and over produced past the equilibrium point of profit. Selling cars for less than you can make them is of course not profitable and carries with it the huge opportunity cost of making another model which has a demand you may not be supplying.

For example you may have a very efficient line capable of producing 20 cars per hour. But the customer demand at any profitable level is only 10 Sedans, do you produce 20 Sedans or do you produce 10 Sedans and 10 other cars? Obviously if you want to be in business in a few weeks you produce the 10 sedans and the 10 other cars. If you over produce Sedans, you are still incurring all of the material, energy, labor, basically all of the capital costs to produce something that you can sell as fast as you can produce it.

You don't always need to produce at the same level you can sell. In fact in many cases, you want to under produce, so you can keep your prices higher. Higher prices carry with them more profit as well as the ability to lower them should you balance sheet looking weak. Remember right now when you hit $0 you die/fired/lose. Cheesy as it may be it is much easier to pull the lever of dropping 10% profit margin on all models, and slicing your stock from 50-75 cars to 25-45 because you just raised a few $100k. I also like the flexibility of being able to do this and clearing out excess inventory rather than securing another load which will carry with it a substantial interest repay time and drain on your financial engine.

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