How To Win a Business Simulation
Using one of our business simulations in your class? Want some tips on how to do well?
KEYS TO SUCCESS IN MANAGING YOUR BUSINESS
As with a "live" business, the keys to long-term success are to:
Know your customer.
This is important so that you know what marketing media are most cost effective at reaching them with your product's message and so that you can more accurately forecast their purchase behavior. Accurately forecasting sales allows you to better control the costs of running your business.
Manage the costs of your business.
Learn which costs have the most significant impact on your company's profitability. Then determine the components of those costs and which of those components you can control. For example, you may believe that the tax rate imposed on your business is too high, but can you do anything to lower it? If not, focus on those costs where your efforts can have an effect.
Take care of your employees.
You may be able to neglect your employees and "save" money, but what are the long-term consequences? For example, worker turnover is expensive, so employee policies that cut costs today, but result in increased turnover tomorrow are unlikely to be cost effective.
If you are losing money
To get insights into why you have a negative income showing on the bottom of your Income Statement, you need to start at the top of that report.
Are your sales revenues sufficient to cover the expenses you incurred to generate these revenues?
To help answer this question, look at your sales forecast versus your actual sales on the marketing decisions panel.
If your actual sales were considerably short of what was forecasted, your sales revenues will be far less than planned. This needs to be corrected before you are likely to be profitable. Do you know why this occurred? Do you know if you have a competitive position in terms of price or quality that will yield the sales that you desire?
If you can't answer these questions, you need to conduct some marketing research so that you can position your products in the market to yield the sales you need.
You also need to consider whether you're spending too little in your marketing efforts to attract customers and convince them to buy your products. You may have an attractive product, but few people know about it due to weak promotional efforts. And check for cost increases that reduce earnings.
Manage the costs of your business. Assess your Manufacturing Cost of Goods Sold.
They are the largest cost for your business. Even small inefficiencies in your production process can add up to large costs. To check for that, look at the Cost of Goods Sold Report. Look at your per unit cost of goods sold. If they are they increasing, you need to determine the cause of these cost increases. Look at the various components of this cost (typically labor, materials, and depreciation expenses for plant facilities). Look for inefficiencies in each.
What are your marketing costs?
Besides the manufacturing costs, you need to look at the costs associated with getting customers to buy your products (we're back to knowing your customers). For your business, if your marketing costs are a large percent of your sales revenues, then being profitable is likely to be a challenge.
Are you directing your advertising expenditures to a medium that is missing your intended customers? Are you promoting your products beyond the point of diminishing returns or not spending enough to attract customers? Or spending money on quality, but not getting that message out to your customers so that you can price accordingly?
Are you getting payback for the money you spent? Are you using the information you purchased to make better decisions in the future that then will then translate into higher profit? Are you buying information and then not analyzing it?
Next, on your income statement is the cost of carrying Finished Goods inventory. A low number here may indicate you are having stockouts and losing sales revenues if you had sufficient units in stock. A large number would indicate excess inventory levels. You need to balance these two costs with any bulk purchasing discounts that may be available.
The last expense item on the income statement is interest expense. Borrowing money is part of any business. The Cash Flow shows how well you have managed this. Are you borrowing so much money that associated interest charges are stripping away your profits? Are you incurring emergency loans at high interest rates that needlessly increase your interest expense?
If you conduct a diligent analysis of possible inefficiencies in your costs, you are well on your way to "winning" in your simulations exercise.