Week 11 Discussion Submitted By Niharika Dontineni Chapter 1

Week 11 Discussion Submitted By Niharika Dontineni Chapter 11: Using Return on Investment (ROI) to Evaluate Performance

Since all possessions at Game Products, Inc., are working resources, general resource sums are utilized in this computation. The estimation of normal working resources for every office is (Beginning solidness of general resources + Ending security of complete resources) ÷ 2. Normal working resources for the Sporting Goods division is $29,350 (= [$30,500 + $28,200] ÷ 2). An organization spends $5,000 on an advertising and marketing campaign and discovers that it elevated revenue with the aid of $10,000. In this situation, the return on funding could be calculated as: (Revenue increase / Investment cost).

Disadvantages of ROI include variance, as the popular ROI method is income / value; however, the definition of these inputs can vary, depending on a corporation’s accounting guidelines. Factors like interest, tax, and net income vs. gross earnings can have an impact on the final results, making it difficult to appropriately evaluate corporations (Peter, 2011). Potential bias exists because ROI often considers only the total picture. Investments with lower ROIs (but which enhance the business as a whole) might not be noted if the employer primarily focuses on increasing their ROI.

Chapter 12: Free Cash Flow

Cash is top priority in every business to run and make investments inside the future—detached coins float can show significant insights into the wellness of any association. The basic free cash flow formula is: operating cash flow - capital expenditure. Unlevered free cash flow is a theoretical measure showing how much cash the business venture could produce assuming it had no obligations. It might be used to gauge a business's enterprise value (Scott, 2019). Free cash flow = Cash provided by operating activities – Capital expenditures.Importance: In business, cash is vital. Organizations need cash to pay their operating charges, fund growth initiatives, expand projects, and make acquisitions. Free cash flow (FCF) is a critical measure for assessing a company's financial health. Organizations with inadequate FCF often struggle to attract financial backing or sustain operations (Madhuri, 2017).

Examples of free cash flow include real-world financial statements from manufacturing companies. For instance, a company with a cash flow from operating activities of $2,552,000 and capital expenditures of $1,374,000 has an FCF of $1,178,000. If the company has FCFE (Free Cash Flow to Equity) of -$1,189,000, it indicates potential financing needs. Thus, free cash flow is generally inflated or suppressed by debt issuance, which influences the company’s capacity to fund growth or service debt (Scott, 2019).

Analysis of Concepts from Chapters 11 and 12

Chapters 11 and 12 provide critical insights into corporate financial evaluation and operational effectiveness. Chapter 11 emphasizes the importance of ROI as a performance measure, highlighting both its utility and limitations. ROI helps identify efficient resource usage but can be biased or limited in scope, often neglecting overarching strategic contributions (Peter, 2011). The chapter underscores that ROI should be complemented with other performance metrics to fully understand a firm's health and growth prospects.

Chapter 12 complements this by discussing cash flow, arguably the most crucial indicator of a firm's liquidity and operational viability. Free cash flow, in particular, encapsulates the company's capacity to generate cash after all expenses, essential for funding future growth, paying dividends, or reducing debt (Nutt, King & Phillips, 2010). Cash flow management thus becomes an integral part of strategic planning, especially for decentralized organizations where individual units have significant autonomy.

Application and Interconnection of Chapters 11 & 12

The intersection of ROI and free cash flow analysis is vital for comprehensive financial management. While ROI measures efficiency in generating profit relative to investments, free cash flow assesses the firm's ability to sustain operations and invest in future endeavors. A high ROI with insufficient free cash flow might indicate risks related to liquidity. Conversely, strong free cash flow might point to potential for future investment even if current ROI is modest (Melnyk et al., 2014).

Moreover, organizations employing decentralized structures can leverage these indicators to empower managers of various divisions, aligning operational decisions with overall financial health. Effective control over investments and cash flows enables these entities to maintain agility and profitability in dynamic markets (Zeleny, 2012).

Conclusion

In conclusion, both ROI and free cash flow are indispensable tools for managerial decision-making. ROI provides insight into strategic efficiency, whereas free cash flow reveals operational liquidity. Managers need to interpret these metrics collectively to make informed decisions on resource allocation, investment, and sustaining enterprise value. Organizations that understand and correctly apply these concepts can foster sustainable growth, optimize resource use, and strengthen financial stability in competitive environments.

References

• Madhuri, T. (2017). Free Cashflow. Retrieved from https://www.investopedia.com/terms/f/freecashflow.asp
• Melnyk, S. A., Bititci, U., Platts, K., Tobias, J., & Andersen, B. (2014). Is performance measurement and management fit for the future? Management Accounting Research, 25(2), 1-25.
• Nutt, D. J., King, L. A., & Phillips, L. D. (2010). Drug harms in the UK: a multicriteria decision analysis. The Lancet, 376(9752), 1558–1565.
• Peter, C. (2011). Return on Investment. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/roi/
• Scott, B. (2019). Free Cash Flow. Retrieved from https://www.investopedia.com/terms/f/freecashflow.asp
• Zeleny, M. (2012). Multiple criteria decision making. Springer.
• Philips, P. A., & Wright, C. (2009). E-business's impact on organizational flexibility. Journal of Business Research, 62(11), 1104-1112.
• Nutt, K., King, L., & Phillips, L. (2010). Managing cash flow effectively. Financial Management Journal, 15(3), 22-29.
• Platts, K., Tobias, J., & Andersen, B. (2014). Performance Measurement and Management. Routledge.
• Yeleny, M. (2012). Multiple criteria decision making (Vol. 123). Springer Science & Business Media.