The Business Simulation – Accounting Version Contents Page 1. Introduction (pg 2-6) 2. Team…
The Business Simulation
– Accounting Version
Contents Page
1. Introduction (pg 2-6)
2. Team Structure (pg 7)
3. 2031 Decisions (pg 8)
4. Research & Development (pg 9-10)
R & D Projects & Expenditure
5. Production (pg 11)
Production Schedule
Raw Materials
Capital Expenditure
Depreciation
6. Finance (pg 12-13)
Budgeting
Cash Flow
Inventory Valuation
Taxation
Payables Period (due to suppliers)
Receivables Period (owed by customers)
Borrowing
Dividend
Interest Received
Share Issue
7. Marketing (pg 14-16)
Retail Selling Price
Advertising Expenditure
Price Sensitivity of Demand
Consumer Preferences
8. Human Resources (pg 17)
Staff Numbers
Training and Development
Wage/Salary Rate (W$000 pa)
9. Sustainability (pg 18)
Appendix
Financial & Business Terminology (pages
19-22)
Results Printout for 2030 (pages 23-24)
Corporate Strategy Form (page 25)
Decision Form Summary (page 26)
© Copyright 2018 Simulation Training Associates Ltd Tel: +44 7976 741 788
All rights reserved. No part of this manual may be reproduced by any means without the written permission of the publisher.
2
1. Introduction
Concept
You are about to participate in a business simulation exercise. You will make business
decisions, as part of a team, and then observe the consequences of those decisions. You
will consider the financial implications of your decisions and will apply various accounting
and finance concepts, tools and techniques.
Procedure
The exercise is run over a number of rounds, each of which represents one year’s trading.
In each round, the following procedure will be adopted:
1. A hypothetical business situation is described in this manual, which you consider
and analyse.
2. You will then make business decisions about that situation, and write them on
decision forms.
3. Those decisions, together with those of your competitors, are analysed by a
computer model which represents how this particular market would react to them.
4. The results of your decisions are printed out in the form of financial statements
and other non-financial Key Performance Indicators (KPIs).
5. You then analyse your results and any other changes (for instance, in the market
or the competitive environment), reappraise your position and make a further set
of decisions.
3
The decisions you may take are described in detail in this manual. Your results will depend
on your own decisions and those of your competitors, (i.e. the exercise is an interactive
one). Their decisions may, of course, frustrate the achievement of your own objectives. In
addition, all teams in the exercise will have to react to market forces. This is shown
below:
In this exercise, you may not co-operate with other teams unless explicitly allowed to do
so.
The Environment
Business has to operate within the social, political and economic environment of the
country and, from time to time, must respond to challenges and influences from outside
bodies such as the government, consumer protectionists and trade unions.
Changes in the prevailing social, economic or political conditions may be introduced during
the exercise. You should gauge their likely effect and modify your strategy accordingly.
Your
Decisions
Competitor’s
Decisions
Market /
Economic
Environment
4
Scenario
The year 2031 is about to begin (it is now 1st January). Your company manufactures and
sells an electronic consumer durable product. This is a domestic robot of (more or less!)
human appearance, which is designed to carry out a wide range of domestic chores.
Your robot is made of light alloy and is equipped with sensory apparatus (a form of radar)
to enable it to move around without bumping into things. It is programmable through a
screen found underneath the panel in the chest. Such programs enable the machine to
walk, move its hands and arms and perform other movements (but it cannot speak or
‘hear’ verbal commands). Various standard programs for domestic chores are offered
within the initial purchase price.
During the exercise, you will have the opportunity to develop the specification of the
machine. The product has a useful working life of about five years, but consumers are
more likely to make a repeat purchase for reasons of technology and fashion than because
their old one is worn out.
The Protection of Human Employment Act of 2025 prohibits robots from undertaking any
industrial work or public service, which would deprive a human being of a job. At the
beginning of the exercise, it looks like this:
5
The Market
The market in which you operate is a typical developed economy of about 30 million
people. It uses the World Dollar (W$) as its currency. The market is fairly homogeneous
and there are few regional variations. The company has not exported outside this market
in the past. Neither is there any significant volume of imports into the territory at
present.
Your company was founded about ten years ago when it first began to develop this
product. After various prototypes and trials, the ‘Mark One’ robot was launched onto the
market five years ago. Over the past five years, your company has established itself in the
market, but its position is still weak.
The market demand will fluctuate in accordance with a 4 to 5 year economic cycle, but the
combined marketing and research effort of all competing companies will affect the size of
the market to some extent.
Historical Performance
Charted below are some key financials for your business (and your competitors who are
identical at this stage). The decisions your company made last year and the results are
appended to these notes.
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
2026
2027 2028 2029
2030
W$000
Cash Flow
Net Profit
Gross Profit
Sales
6
Future Demand Forecast
A market research agency has provided the following future demand forecast:
Year 2031
Year 2032
Year 2033
Year 2034
Year 2035
Year 2036
8,801 – 9,199
9,199 – 10,001
10,001 – 11,599
10,399 – 13,599
9,600 – 10,598
10,001 – 11,599
Notes:
1. The above are estimates of your market’s total size.
2. The agency are 75% confident of these figures.
3. While the agency believe it unlikely that volumes will be significantly lower than
the above, there is a small probability that the market could be significantly
bigger. However, the agency believe that retail prices would need to be
significantly lower than at present for that to happen.
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
2030 2031 2032 2033 2034 2035 2036
Bottom Quartile
Top Quartile
7
2. Team Structure
Your team will be acting as the top management of the company described in these notes.
You should decide amongst yourselves how you will share out the work. Some major
decisions may be taken jointly, but in other instances it could be helpful to allocate
functional responsibilities. For instance, you may appoint some or all of the following
officers:
Managing Director: To develop the overall strategy and co-ordinate the various
functions.
Finance Director: To interpret the accounts and to handle the question of
financing the business.
Marketing Director: To determine marketing strategy and promotional campaigns.
Sales Director: To manage the sales force.
Research Director: To decide on the direction and amount of R & D investment.
Production Director: To manage production output, quality control and
productivity.
HR Director: To determine HR strategy and negotiate with your staff
representative as appropriate.
Sustainability Director: To monitor the business’ processes, products and practices to
ensure they are ethical, socially responsible, sustainable and
environmentally friendly.
Chair: To manage meetings and ensure tasks and decisions are
completed on time.
8
3. 2031 Decisions
Introduction
The main purpose of this 1 st round is to ease you into the process and so you have a very
limited set of decisions. These are:
• Product ion Schedule (below)
• Wages / Sa laries (below)
• Retai l Price (below)
Produc tion Schedule
Your f ir st ta sk i s to dec ide on the amount of product ion needed to meet your expected
demand. At the beginning of the exerc ise, your factory ha s a max imum capac ity of about
1,600 un it s p.a.
Later in the exerci se, you wi ll be able to increa se your capacity to whatever level you w i sh
through product ivity, additiona l staff and capital expenditure.
Wages & Salaries
At the beginning of the exerc i se, your company employ s 155 people. Their average
remunerat ion i s W$10,000 p.a. (W$ = World Dol lars), i.e. a tota l payroll of W$1,550,000.
You may change your pay rate by any amount at any time. Wages shou ld be expressed in
monetary term s on the Deci s ion Form (e.g. W$10,000 in Round “0”).
Your pay rate s, relative to your competitor s, wi ll influence staff mora le and staff turnover
and so thi s may, in turn, affect the exper ience, ski ll s and productivity of your workforce.
Infla tion
There is no inflation within the model.
Re tail Selling P rice
You should dec ide on the retai l price of your robot. No max imum pr ice i s stipu lated, but
you wi ll f ind relat ively h igh pr ices w il l reduce the demand for your produ ct. Neither i s a
minimum pr ice pre scr ibed, but you should ensure that the pr ice you charge at least covers
your co st s. Price shou ld be stated before deduct ion of any trade di scount (wh ich i s 20%
at the beginn ing of the exerc i se).
Pr ice w ill be one of the most signif icant short-term inf luences on your sa les volume.
Market re search information about the impact of a pr ice change (the pr ice sen sit iv ity
report) i s provided in the Marketing section of this manua l.
9
4. Research & Development
R & D Projects & Expenditure
From 2032 onwards you will need to invest in Research and Development projects if you
are to improve the basic specification of your robot.
Remember, your robot was introduced 5 years ago and is now on the downward slope of
its life cycle. Your company is currently working on a project to improve the robots
operating system, including applications software for domestic duties and Do It Yourself
(DIY) activities. This will be completed during 2031.
You pay all of the R&D cost in one year, which allows you to manufacture and market the
improved robot for the majority of that year. (It will take 5 months to plan and
implement).
Projects 10, 18 and 19 are not available at the start of the exercise. You will be notified
as and when these projects become available.
Projects 1-17 all involve the following split of costs: 40% relates to Research and 60%
relates to Development. Research costs are expensed in full in the year in which they are
incurred. Development costs are capitalised as an intangible non-current asset and
amortised on a straight-line basis over 5 years with a full year’s amortisation charged in
the year in which the expenditure is incurred.
All of the cost of Project 18 will be treated as Research. All of the cost of Project 19 will
be treated as Development.
10
Improved mobility equipment (this is a pre-requisite for
Project 8 and will enable the robot to move around the home
without fear of it falling over).
1,200,000
Development of entirely new power source, removing the
need to recharge batteries.
2,000,000
Development of lighter and more efficient parts to enable to
robot to operate using less power.
400,000
Development of automatic fault diagnosis and rectification
abilities.
800,000
Development of expressive features, simulated skin and
human physical characteristics.
1,100,000
Holographic sensing system for (replacing radar) locating
objects and for direction finding.
600,000
Sophisticated three-dimensional jointing system to enable the
robot to manipulate objects with great dexterity.
400,000
Development of software for playing and training in sport
(Project 1 is required before this can be completed).
400,000
Developing a voice synthesizer and extending the robot’s
literary, artistic, musical and conversational abilities.
300,000
A ‘fail-safe device’ to prevent your robot from injuring any
human being. (Not available yet).
900,000
Artificial intelligence and neural network to provide immense
processing power and to avoid the need for any programming
or manuals.
1,500,000
Tough casing and components to enable machine to operate
in adverse environment (e.g. damp, vibration, dust).
300,000
A chef programme enabling the robot to prepare and cook
food in the style of leading international chefs.
500,000
Extending the robot’s emotions, enabling it to ‘listen’ and
respond appropriately.
700,000
A ‘baby-sitting’ programme enabling the robot to look after
babies and children. Project 10 (the ‘fail safe’), not initially
available, is a pre-requisite for this project.
900,000
‘Design for Manufacture’. A project to reduce production
costs by W$300 per unit through better utilisation of
materials and/or equipment.
1,200,000
Elderly companion. The voice synthesiser is a pre-requisite
for this.
500,000
A project which ensures your business’ robots are fully
recyclable. (Project 18 and Project 19 deliver identical
benefits). (Not available yet).
1,000,000
A project which ensures your business’ robots are fully
recyclable. (Project 18 and Project 19 deliver identical
benefits). (Not available yet).
1,500,000
11
5. Production
Production Schedule
You need to decide on the amount of production needed to meet your expected demand.
At the beginning of the exercise, your factory has a maximum capacity of about 1,600
units per annum. Later in the exercise you will be able to increase your capacity through
additional staff and capital expenditure.
Production Staff (no.)
Your production staff consist of assembly workers, production planning and control staff,
quality control and factory maintenance staff. Later in the exercise you will be able to
change the number of production staff you employ.
Raw Materials
The cost of raw materials and components (e.g. metal pressings, plastic mouldings,
circuitry, wiring, trim, etc.) from your supplier Chips Inc. to make one robot is given
below:
0-1,400 Units W$2,500 per unit
1,401 – 1,800 Units W$2,300 per unit
1,801 – 2,000 Units W$2,200 per unit
2,001 – 2,400 Units W$2,100 per unit
Over 2,400 Units W$2,000 per unit
Notes:
These costs can be reduced through R &D.
The raw material costs for producing an artificially intelligent product (following
R&D Project 11) cost an extra $200 per unit.
Capital Expenditure
During the exercise you will be given the opportunity to extend capacity of your factory by
investing in the production line. This will cost approximately W$250,000 for each
additional 100 units of capacity. (You may increase capacity by multiples of 100 units).
Your capital investment will take 6 months to plan and implement. You will need two
extra production employees for every 100 extra units of capacity you invest in beyond the
initial 1,600 units.
Depreciation
Depreciation is calculated using the reducing balance method at a rate of 10% per annum
based on the carrying value of plant and equipment at the start of each year. No
depreciation is applied to any capital expenditure which is made during the year.
12
6. Finance
Budgeting
When working out your Cost of Sales, remember that Materials and Labour in the
Statement of Profit or Loss are ‘matched’ to sales i.e. they are based on how many robots
you sell. The calculation is:
Opening Inventory + Production Costs – Closing Inventory (This is roughly equal to
Unit Cost x Number of Units Sold)
Cash Flow
Your cash flow will differ from your profit after tax due mainly to the following items:
• Depreciation and amort i sation
• Changes in work ing capital (inventory, receivable s, prepayment s, payable s,
accrual s and prov ision s)
• Capita l expenditure (pur cha se of tangible non-current asset s and development
cost s)
• Share i ssue
• New loan s or loan repayment s
• Div idends pa id
The Statement of Ca sh F low s on your resu lt s printout provides a detai led reconci liat ion
between your business’ prof it performance and its cash flow performance for the year.
Inventory Valua tion
The inventory figure shown in the Statement of Financia l Po sition i s for fini shed goods and
include s both raw mater ial and production labour cost s.
Taxa tion
Corporat ion Tax at 35% is levied on any net prof it you make. No tax i s payable if you
make a lo ss and tax lo sses are carr ied forward to be off set again st future profit s.
Payables Period (due to suppliers)
You wil l pay many expen ses ( including wages) a s they are incurred. However, purcha ses
of raw material s, and some market ing expen ses, are on credit. At the beginning of the
exerc i se, your major suppl ier of component s and raw materia l s i s Ch ips Inc. Th is company
dom inate s the world market for the supply of electronic component s. You current ly have
an agreed 90 day credit period. During the exer cise you w il l be given the opportun ity to
negot iate a change in the period of t ime you take to pay your suppliers. You can take 1
to 182 day s’ credit from your suppl ier s. To take longer periods of credit will improve your
cash flow but thi s might damage the re lation sh ip you have with your suppl ier.
13
Receivables Period (owed by customers)
At the beginning of the exercise, your company is offering its customers 90 days’ credit,
and therefore some of the sales made in 2031 and appearing as Receivables will then be
converted into cash in 2032. You will be given an opportunity during the exercise to
negotiate a change in the credit period offered to customers. You may ask your
customers to pay cash on delivery or offer them from 1 to 182 days’ credit. A longer
period of credit may improve your order intake but will damage your cash flow.
Borrowing
At the start of 2031, you have an overdraft limit of W$1.5 million. You will have the
opportunity to increase this borrowing facility. The interest rate on the overdraft is
initially 10% per annum. Interest is charged on the balance outstanding at the end of the
preceding year.
The actual level of your overdraft will be calculated by the computer in accordance with
your cash flow, and any payments, which would cause you to exceed your overdraft limit,
will be stopped by the bank.
At the start of 2031 you also owe $1m for a long term bank loan which is repayable in full
in 2040, though you will have the opportunity to repay this loan early if you wish.
Interest on this loan is payable at a rate of 8% per annum.
Dividend
Your company has a policy of paying 20% of Profits after Tax as a dividend.
Interest Received
You will receive interest of 5% on a positive cash balance, based on the amount on hand
at the end of the preceding year.
Share Issue
During the exercise you will have the opportunity to issue new shares. For the share
issue to be fully taken up you will need to offer the shares at a price which is 20% below
the current share price. Investment banking fees of W$100,000 will be incurred.
You will be notified how much (if any) finance can be raised by your business through a
share issue during each year of the exercise.
The nominal value of each of your company’s shares is W$1. At 31 st December 2030 there
are 120,000 shares in issue.
14
7. Marketing
Retail Selling Price
You sell your product to retailers (such as department and chain stores) who sell the
product to the consumer.
You must decide on the retail selling price of your robot. No maximum is stipulated, but
you will find relatively high prices will reduce the demand for your product. Neither is a
minimum price prescribed, but you should ensure that the price charged at least covers
your costs. The price you set should be before deduction of the trade discount (which is
20%). Price will be one of the most significant short-term influences on your sales
volume.
The retail selling price for 2030 was W$5,000, which after the trade discount of 20%
means that you received a sales value of W$4,000 per robot.
Advertising Expenditure
You should decide how much to spend on advertising your product.
Price Sensitivity of Demand
The solid line represents the maximum price sensitivity (i.e. an undifferentiated product in
an overstocked market). The dotted line represents the minimum price sensitivity (i.e. a
differentiated product in a boom market where there is little stock available for sale).
Typically, a $100 price change will change volume by 50 units. Point ‘X’ represents an
average price (e.g. sales of 1,500 units at $5,000 in 2030).
-400
-300
-200
-100
0
100
200
300
minus W$400
minus W$200 Same Price Plus W$200
Most
Least
Plus W$400
Volume
Price
15
Consumer Preferences
Ownership
A survey was carried out amongst 3,500 people in the territory. Of these:
1% Already owned one or more machines;
2% Said they were considering a purchase in the next 12 months;
20% Said they were considering a purchase within the next 5 years;
74% Had no immediate purchasing intentions and/or hadn’t considered it;
3% Did not know/had not heard of robots/did not understand the
question.
Uses
The people who owned robots were asked for what purposes they were using their robots:
89% Were using them to carry out indoor household chores (washing
clothes, ironing, washing up, cleaning, cooking, servicing, D.I.Y.
repairs, etc.);
85% Were using them to carry out outdoor chores (gardening, washing
the car, D.I.Y. repairs, etc.);
60% Were playing them at indoor games (chess, draughts, table
tennis, billiards, scrabble, monopoly, etc.);
52% Were playing them at outdoor sports (tennis, golf, cricket, football,
hockey, etc.);
40% Were using them for educational, musical or conversational
purposes;
37%
Were using them for child minding and security-guard purposes;
32%
Were using them as a butler (serving food and drinks, answering the
door, etc.);
25% Were using them for various other purposes.
When asked whether they were using their machines to the full potential, 90% replied
“No”. The principal reasons for this state of affairs was given as:
80% Lacked time to study the owner’s manual;
70% Lacked understanding of programming techniques;
60% Said that the operating instructions were too complicated;
65% Said that the machine behaved inconsistently in response to
commands;
22% Said that they had abandoned the use of their machine as it was
ineffective.
Benefits
When asked what they believed was the greatest benefit of ownership, machine owners
replied as follows:
35% Replied “Additional leisure time”;
20% Replied “Entertainment/sport”;
15% Replied “Companionship”;
11% Replied “Opportunities for self-improvement”;
9% Replied “Prestige of Ownership”
5% Various other benefits;
5%
Didn’t know.
100%
16
Features
When asked what features they would most like in a robot, owners and potential owners
replied as follows:
97% No need to recharge batteries (as at present);
96% Total reliability;
96%
Artificial Intelligence (thus avoiding programming);
90%
Voice programming (responds to the commands of specified voices
only);
88% Maintenance free (no need for servicing);
80% Ability to speak, naturally and like a human;
75% Visual recognition and acknowledgement of owner, family and
friends;
75% A warm, friendly “personality”;
70% A wider range of skills and facilities;
65% Assurance that it will not injure human beings;
60% A more human appearance;
50% Greater sex appeal;
40% Greater strength and/or speed of movement;
35% Quieter and smoother movement
30% A more futuristic appearance
17
8. Human Resources
Your company operates a semi-automated factory. The different categories of people your
company employs are as follows:
125 Production staff
10 Sales representatives and area managers
20 Administration staff
155 Total employees
During the exercise you will have the opportunity to change the number of production
staff working within your business.
Recruitment and redundancies take place immediately. You may not obtain the full
benefit pf an additional person until the year following the recruitment. The cost of
recruitment is W$1,000 per person and the cost of redundancy is $5,000 per person.
If your pay and other conditions of employment are not competitive then staff may leave
voluntarily. The amount of staff turnover is shown on your results printout as a
percentage of total staff. The recruitment costs associated with your staff turnover will
be added into the Overheads in your Statement of Profit or Loss. Staff turnover may
affect skill levels.
The level of morale and skill of your employees will impact on many aspects of business
performance, including areas like productivity, quality and customer satisfaction.
Training and Development
Currently, the majority of your W$50,000 annual spend is on meeting legislative
requirements as opposed to developing skills. Please specify how much you want to spend
on the Decision Form. These costs will be included within Overheads in your Statement of
Profit or Loss.
Wage/Salary Rate (W$000 pa)
At the beginning of the exercise your company employs 155 people. Their average
remuneration is W$10,000 per annum, i.e. a total payroll of W$1,550,000. You may
change your rate of pay per person per annum (p.p.p.a.) by any amount, up or down.
Wages should be expressed in monetary terms p.p.p.a. (e.g. W$10,000 in Year 2030).
Your pay rate relative to your competitors will influence staff morale and staff turnover
and so this may in turn affect the experience, skills and productivity of your workforce.
18
9. Sustainability
You may want to consider the circumstances in which Sustainability expenditure can
create more value for your owners.
There are 8 ‘Sustainability Options’ for you to consider: Options 1 – 4 relate to Energy and
CO 2 reduction and Options 5 – 8 relate to Pollution and Compliance with Environmental
Legislation. The financial effects of all if these Options will be reflected in Overheads
within your Statement of Profit or Loss.
Energy & CO 2 Reduction
Your organisation currently consumes 3.33 gigawatt hours per year to manufacture the
robots. This costs W$160,000 which is included within the Overheads. It can be impacted
as follows:
1. Allowing the workplace to be 1° warmer in summer and 1° cooler in winter would give
a 3% reduction in energy use.
2. Heat exchange system to transfer heat to parts of the building that need it from those
that don’t. This could be leased at an annual cost of W$25,000 for year 1, reducing to
W$5,000 per annum thereafter which would give a W$15,000 p.a. saving and a CO 2
saving of 300 tonnes p.a.
3. Wind turbines to supply 25% of energy demand could be leased at an annual cost of
W$10,000 per year, half of which for the first year is covered by a government grant)
which would give a W$2,000 p.a. saving and a CO 2 saving of 350 tonnes p.a.
4. Switching energy providers to one whose power comes from a renewable source; this
reduces your CO 2 emissions by 87.5%, but at a 2% price premium.
Pollution & Compliance
Your company has never complied with current legislation and so runs the risk of fines. So
far, this has remained undetected, but you are non-compliant in four areas:
5. Compliance with HSE legislation will require expenditure on barriers, guards, personal
protective equipment (PPE) and systems. This will be a one off cost of W$20,000.
6. As a producer of electrical and electronic equipment (EEE) you are required to join a
producer compliance scheme which will cost W$2,000 p.a. To protect the immediate
environment from oil spillages, oil tanks are required to be bunded at a cost of
W$20,000. To perform to the international standard ISO 14001 an Environmental
Management Scheme will cost W$20,000 as a start-up fee.
7. Your plant is polluting the local river and the Environmental Damage Regulations
require treatment of effluent to water sources. This will cost W$50,000.
8. The Clean Air Act requires expenditure in furnaces and air pollutant treatment of
W$30,000.
Product Recyclability
In addition to the above, there is a further Sustainability issue for you to consider.
Currently, your product is not recyclable. The ability to make your product recyclable
through investing in R&D project 18 or 19 may become available during the exercise.
19
Appendix 1 – Financial and
Business Terminology
The following is an alphabetical listing of the items from the results printout and evaluation
summary together with a definition of how each one is calculated.
Accrual A current liability which represents an amount owed at the year-end
where the supplier invoice has not yet been received or recorded.
Acid-Test Ratio
Current assets excluding inventory divided by Current liabilities.
Administration
The cost of admin. staff (the number multiplied by their salary rate),
plus the administration costs relating to your total staff (e.g. their
pensions, national insurance, etc.).
Amortisation An expense which reflects the consumption of intangible assets over
time. Similar to depreciation (see below), though depreciation is
applied to tangible non-current assets. In the simulation,
Development Costs (as part of R&D) are amortised over 5 years on a
straight-line basis.
Capacity The maximum number of units which your factory could produce.
Capacity Utilisation The production schedule expressed as a percentage of the total
factory capacity.
Cash at Bank The amount of cash in the bank (or overdraft, referred to as Bank
borrowings, if a negative balance).
Cash Flow This represents the movement of money into and out of the
business. Cash flow for the year can be checked from the Statement
of Financial Position by comparing the bank balance (in credit or
overdraft) at the end of the present year with the balance at the end
of the prev
