FINANCIAL STRUCTURING

FINANCIAL STRUCTURE

Financial structure in Capsim is fairly straightforward; it's the relationship of of debt and equity mix to fund your business.

I would assume you have read the student guidebook by now. If you have forgotten the details of financial structuring of your company, open up the guidebook and get refreshed on Chapter 4.4. This page offers slightly advanced information.

Think of it as your team's policies regarding stock issues, stock retirement, dividends, current debt and bond issues/retirement.

This is important because it is often neglected, but it can make the difference between a successful company and one that flounders.

Let's have a look at a sample balance sheet--

If we know nothing more than what is displayed on this sheet, who would most likely be the winner of the simulation?

I would tell you that Erie would win, not considering anything external to the information here alone.
Why Erie?

Have a look at Erie's total assets. They lead with $162.5m in assets. Disregarding depreciation, Erie's plant and equipment is worth around 10% more than their nearest competitor, Chester. Andrews has a mere $118.2m in plant/equipment assets.

The sole purpose of plant/equipment is to produce sensors. If I have more assets in my production, I can produce more. But that's not the entire story...

Size of the company is directly related to the financial structure of the company. A conservative financial structure might be 50/50 debt/equity. A more aggressive financial structure would be 66% debt and 34% equity. Both companies have a starting equity of $48m, yet after a single round, the conservative team could have $96m assets and the aggressive company could have $144m. That's an advantage of $48m! That kind of money could allow them to produce new products and/or increase automation and whip the competition's a$$.

Considering the balance sheet above, let's run a scenario where every team decides to leverage to 3.0, which is 66% debt/34% equity. This equals $3 of assets for every $1 of equity (twice as much debt as equity)

With this in mind, how much money could each team put into plant and equipment?

If Chester and Andrews understand capital structuring and retool it to 66/34, they could pose a threat to Erie.

A common mistake with students is failure to pay much attention to financial mix. They often just take maximum long term debt and as much stock as possible, while ignoring current debt. A few rounds in, and things may start going sideways, as they are with Baldwin and Ferris, in this instance. They cannot raise much money and are likely forced to drop marketing budgets and reduce R&D, further complicating matters.

Assets are based on 2 things- existing equity and and your desire to leverage that equity. 

The key here is fast growth in early rounds. If you can match $1 of profit with $1 or $2 of debt, you can easily buy 2-3x of last round profits in plant improvements.

DO NOT retire stock or pay dividends in early rounds. You need that capital to increase your ability to produce and make profits. Spinning off cash comes later.

I will further discuss financial structure in another page (maybe even two!)