CAT Business Acumen

What is Business Acumen?
Business Acumen is the ability of an employee to:
• Understand business operations
• Apply financial data to decision making
• Confidently use business terminology … to achieve the company’s business goals.
1) Understand Caterpillar’s annual report and its three basic financial statements
• Results of Operations
• Statement of Financial Position
• Statement of Cash Flows
2) Explore how the need for profit and cash drive business decisions
3) Make sense out of the business decisions that affect your job, focus on quality, and
help manage costs (reduce waste) in areas where we are not efficient
4) Understand the critical connection between your work and the long-term success of
Caterpillar
Looking at the Results of Operations Statement what can we see?
First we see that our sales went up from 56 million last year to 60 million this year.
That is good news.
However we see that our costs went up as well. Not good news.
One measure we use to see how efficiently we are running our business is called Return
on Sales (ROS) percentage. ROS is a ratio used to evaluate a company's operational
efficiency. This measure is helpful to management, providing insight into how much
profit is being produced per dollar of sales.
This year our return on sales is 6.7%- down .4% from last year. This means we earn
less profit off of every dollar of sales. At a lower ROS we need even greater sales to
sustain our profit.
We can't stop here though. We need to look at our new Statement of Financial Position
to see what we have to work with next year. It also helps us see how efficiently we are
using our assets.
Do the Books-1
The chart below is a simplified financial statement. We use the numbers you have recorded on the left to fill in
the Results of Operations statement. You now see that the numbers on the financial statements are simply a
collection of the transactions made by Fast Track throughout the year. Looks good -sales are up!
You have a voice-mail from Fast Track's Vice President of Sales. What Happened?We
worked hard this year. We built and sold more product and our profit stayed flat?
Our efficiency went down! Despite solid sales growth, return on sales percentage went
down. Our costs are out of control!
Returns are up, Costs of Goods sold is up, Scrap is up, and SG&A is up. What are
YOU going to do about this?
Do the Books-3
Looking at the Results of Operations Statement what can we see?
First we see that our sales went up from 56 million last year to 60 million this year. That is
good news.
However we see that our costs went up as well. Not good news.
One measure we use to see how efficiently we are running our business is called Return
on Sales (ROS) percentage. ROS is a ratio used to evaluate a company's operational
efficiency. This measure is helpful to management, providing insight into how much
profit is being produced per dollar of sales.
This year our return on sales is 6.7%- down .4% from last year. This means we earn
less profit off of every dollar of sales. At a lower ROS we need even greater sales to
sustain our profit.
We can't stop here though. We need to look at our new Statement of Financial Position
to see what we have to work with next year. It also helps us see how efficiently we are
using our assets.
Do the Books-4
Fast Track made many transactions this year. Those transactions are represented in the
graphic above. See below the Statement of Financial Position that also incorporate
the Profit from the Results of Operation statement.
*Note* Period 0 displays the Statement of Financial Position at the start of the year.
Do the Books-5
The third financial statement we must review is the Statement Of Cash Flow.
The Statement of Cash Flow allows us to see where the cash is flowing both in and out
of our business. Cash flows out to pay bills, buy machines and invest. Cash flows in from
borrowing, sale of stock, or sales. Fast Track's cash flow has been impacted by the
slow turn of their receivables. To increase cash flow they must ensure receivables are
paid.
This statement also highlights that the flow of cash in from profit (net income) did not
increase from last year. If profit (Net Income) stays flat, Fast Track must bring in cash
in other ways, such as borroiwing or selling stock, all of which have a cost to the
business.
Intro to Dupont
From the financial statements we can see Fast Track's Sales, Profit (Net income), Total
Assets and Liabilities among other details for the current year. Now that we have
recorded the transactions and filled in the financial statements we need to look a little
deeper at the numbers. By using the Du Pont Model, we can use the numbers to help us
make decisions.
The DuPont Model is a technique that can be used to analyze the profitability of a

company using traditional financial performance management tools. To do this, the
DuPont model integrates elements of the Results of Operations Statement (Profit) with
elements of the Statement of Financial Position (Total Assets.) Using these numbers, we
will be able to calculate Fast Track's Return on Assets. (ROA) or Profit/Total Assets.)
Dupont-1
Return on Assets (ROA), calculated by dividing Profit (Net Income) by Total Assets, we can see
how profitable a company is relative to its total assets. ROA gives an idea as to how
efficient management is at using its assets to generate earnings. The higher the ROA
number, the better, because the company is earning more money on less investment.
Profit (Net Income
Total Assets
Last year Fast Track had total assets of $ 63 million and a Profit (Net Income) of $ 4
million.
By dividing 4/63 we get an ROA of 6.3%
This year Fast Track increased Total Assets to $70 million yet Profit (Net Income) stayed
at $4 million
This resulted in a decreased ROA of 5.7% (4/70)
So what does this mean? It means Fast Track is less efficient this year in the use of their
assets in generating income.
The assets that were added brought in no additional revenue. Adding assets should
produce additional income. In this case no additional income was generated.
Dupont-2
This downward trend in both Return on Sales and Return on Assets is very concerning to the

Fast Track CEO. He knows it will take input from all of the various departments that are
responsible for each model Fast Track produces to craft a balanced approach to reverse
the trend. To ensure a timely yet balanced approach, the CEO directs the product
manager for each motorcycle line prodReturn on Sales
Return on Assets
The CEO understands that when working towards Fast Track's financial goals it is
important to understand that there are many groups that contribute to a product's
success. Achieving business goals will require close collaboration between these groups.
Without teamwork, trust, and a common understanding, it will be very difficult to reach
the desired goals.
Dupont-3
Although the product manager has the ultimate decision making authority and
accountability for the success of each product in his or her product line, they will make
the best decisions because they have detailed input from everyone involved in the
success of the product.
Fast Track is going to bring this group together to create a Business Table. A Business
Table is defined as accountable, cross-functional business leaders operating as a team,
coming together under the leadership of a business entrepreneur making decisions on
behalf of the business. At Fast Track the business entrepreneur is the product manager
for each product line.
Dupont-4
Conclusion
Remember, each decision that is made, whether to buy parts, produce an additional unit
of product or pay off debt, eventually gets to the financial statements.
With a high level of Business Acumen, the employees of Fast Track can collaboratively
make appropriate decisions to help satisfy Fast Track's customers, shareholders and
employees.
With dropping Return on Assets and Return on Sales, Fast Track must consider many
options to turn this situation around. They need to look to the financial statements to
help identify areas that need improvement.
As we saw, scrap went up, SG&A went up, Warranties went up, Cost of Goods sold went
up, the competition is taking sales, and our customers are demanding new technologies,
all as our Profit (Net Income) has stayed flat!
These areas must be evaluated to see what can be done to reverse the negatative
trends. Every employee will need to use good Business Acumen to make the right
decisions to position Fast Track for long term success.

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What is Business Acumen?

Business Acumen is the ability of an employee to:

• Understand business operations

• Apply financial data to decision making

• Confidently use business terminology … to achieve the company’s business goals.

• Statement of Financial Position

• Statement of Cash Flows

Looking at the Results of Operations Statement what can we see?

Looking at the Results of Operations Statement what can we see?

The third financial statement we must review is the Statement Of Cash Flow.

The DuPont Model is a technique that can be used to analyze the profitability of a

Profit (Net Income

By dividing 4/63 we get an ROA of 6.3%

This resulted in a decreased ROA of 5.7% (4/70)

This downward trend in both Return on Sales and Return on Assets is very concerning to the

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