With lots and lots of business topics open for discussion, this series will focus on Engineering Economics. It will help answer questions you've heard your boss ask, such as: How much will it cost? What will our savings be? Can you show me the cost/benefit analysis? What is the budget for that project?
Have you ever noticed that your boss uses a lot of phrases like the following?
* How much will it cost?
* What will our savings be?
* Show me the cost/benefit analysis.
* What is the budget for that project?
Yes, I know that your project has some really awesome technology and that you’ve got armloads of data sliced, diced, and statistically analyzed to the nth degree. You’ve sketched PFDs (Process Flow Diagrams) and created both kinetic AND thermodynamic models. But, there he sits across the desk, daring to ask seemingly trivial MONEY questions!
In the last few posts, we’ve talked about various Financial Statements that companies are required by law to prepare and share with stockholders and government agencies. Your bo$$, of course, shows sensitivity to operating and production costs because he or she wants these Financial Statements to be favorable. In particular, in the last blog, we discussed Income Statements at length.
Do you think if a company shows a positive Net Income that they are free of all financial trouble?
A Cash Flow Statement, like the Income Statement, shows changes in money flow during a specific period of time: a month, quarter, or year, for example. (You’ll recall from an earlier post that the Balance Sheet is a snapshot in time, showing a “material balance” of Assets against Liabilities.) Cash Flow is easy to calculate.
The cornerstone of a public company’s financial success is the annual report. Wall Street investors, stockholders, executives, and employees are all interested in periodic reports that present a snapshot view of the financial health of the organization, as well as trends of growth or improvement over time. Since these periodic reports tend to drive stock prices up or down, and since your boss’ bonus is based on the value of the company’s stock, he or she is of course interested in how your project will contribute to the bottom line!
If you're a chemical engineer and want to discuss operating costs intelligently with your boss, you'll need to understand a number of financial concepts, including gross margin, cost of goods, depreciation, allocation, and capital investment.
Why does your bo$$ talk about things like inventory control when he asks you about operating costs? Inventory is the aggregate of items that are either held for sale in the ordinary course of business, in the process of production for sale, or currently consumed in the production of goods or services to be available for sale in the future.
Income Statements are often presented in many different formats. Two popular methods are the Traditional Income Statement, which is required by U.S. law for reporting to governments and stockholders, and the Contribution Margin Income Statement, which is used internally to help guide management decisions. Also, you will want to analyze the Income Statement both horizontally and vertically.