In 2014, James retired from teaching at Georgian Court University, where he taught the Capsim business simulation for four years.
Capsim Simulation: The Finance Module
During the 2013 fall semester at Georgian Court University in Lakewood, NJ we had six teams competing in the Capstone (Capsim) simulation. There were four students on each of the following companies/teams:
The computer has two simulation companies/teams:
The simulation begins with four basic modules:
- Research and Development
We add the Human Resources module in the second round and Total Quality Management module in the fourth round. The competition was seven rounds, beginning Saturday, October 27, 2013 through Saturday, December 8, 2013. On Saturday, December 15, 2013, each company made a power point presentation that included the company mission statement, corporate vision, segment analysis, round analysis and financial statistical analysis compared to the other companies. Segment analysis describes company products in the traditional, low-end, high end, performance and size segments.
This lesson is a brief synopsis of section 4.4 Finance on page 15 of the Capstone team member guide. The finance department manager for each company/team will make decisions according to that company’s business model and strategy.
The finance manager should not make any financial decisions until all other departments (research and development, marketing, production, human resources and total quality management) have entered their decisions.
The finance module simulation begins its online display with plant improvements. Let’s use company/team Andrews as an example.
First the production manager, within the production module, buys capacity and increases automation for product Able. He enters 100 in the buy/sell capacity box. The manager then increases automation from 4.0 to 4.5 in the automation box. The simulation calculates within the investment box $6,000 for Able. $6,000 in the box is a $6 million investment. The production manager repeats this process for product Acre entering 100 in the capacity box and changing 5.0 to 5.5 in the automation box. The investment box for Acre displays $5,600 or $5.6 million. The total investment box displays $11,600 or $11.6 million. Note that the total buy/sell capacity box will show an increase of 200. The student then goes to the finance module. Under plant improvements in the total investment box $11,600 is displayed.
Now, within the production module, the production manager wants to sell capacity. The manager desires to get out of the size segment and sells capacity for product Agape. The production capacity for Agape is 600. The production manager enters -599 (negative 599) in the buy/sell capacity box for Agape. Therefore, the simulation calculates a negative/red in parentheses ($7,008) in the Agape investment box. This changes the total investment box number to $4,592 which is $11,600 - $7,008. The total buy/sell capacity box now displays a decrease in red of 399. We return to the finance module. Under plant improvements, the sales of plant & equipment box displays the red negative cash amount of $7,008.
Common Stock and the Finance Module
In the finance module, the next section is common stock. Shares outstanding in thousands will display 2,000 which are 2 million shares. The price per share box shows $33.99. The simulation adjusts price per share each round. After company Andrews makes plant improvements, the earnings per share box changes from $0.50 earnings per share. The box shows a loss, displayed in red of $0.70 per share. Company Andrews will have to input appropriate changes in the research and development module, the marketing module and the pricing and forecasting sections to increase company net income and earnings per share. The company must check the proforma balance sheet, cash flow and income statements to modify financing.
The common stock section of the finance module displays the max stock issue box which is set at $13,596. The computer simulation adjusts automatically the max stock issue. In the issue stock box, company Andrews can issue more stock if they develop a new product. Let’s say Andrews wants to produce a new low end product called Apple. The finance manager will finance Apple by issuing half the cost in new stock and half the cost in new bonds. Metrics for Apple will be entered by company managers into sections of research and development, marketing pricing, advertising, sales promotion and sales forecasting. Production for Apple would include buying capacity and automation. These changes would make Apple ready for sale in the following year/round of competition.
In the finance module, the max stock retire box is set at $3,399 and changes during the course of the simulation. Company Andrews can retire stock. If Andrews wants to retire 200,000 shares of stock the finance manager enters 200 in the box. Usually, companies retire stock when they want to increase earnings per share. However, if a company has a loss per share of stock, retiring stock will increase the loss per share. If Andrews retires 200,000 shares of stock the loss per share will increase to $0.71. It makes no sense for Andrew's to retire stock when they may issue stock for a new product. Companies can pay a dividend per share of stock by entering an amount in the dividend per share box. Note that Warren Buffet's company, Berkshire Hathaway, never pays dividends.
In the finance module, under the current debt section there are boxes for interest rate, current debt due this year and borrow. The more debt your company has, the higher the interest rate, because your company presents more risk to debt holders. The current debt box displays the current debt due from the previous year. On January 1st of the current round, last year’s debt is paid off automatically. Section 4.4.1 on page 15 of the Capstone team member guide gives an excellent explanation of current debt.
The finance module also includes a cash position section displaying two cash amount boxes. One box is for the end of the preceding year, and the other box is for the end of this year’s round. These boxes will show any negative cash flow in red.
In the long term debt section, a company can retire or issue long-term debt. The Andrew’s finance manager can issue long-term debt in order to finance the new low-end product, Apple. The manager inputs $2000 or $2 million into the long-term debt box.
The last section of the finance module contains outstanding bonds. There are boxes for series number, face amount, current year and bond yearly closing value. Bonds are explained in section 4.4.2 of the Capstone team member guide. There are three other sections under finance in the team member guide:
- 4.4.3 Stocks
- 4.4.4 Emergency Loans From Big Al
- 4.4.5 Credit Policy
© 2012 James Cage
James Cage (author) from Orlando, FL on October 20, 2018:
I am having a problem posting this comment. Do not issue any more debt. Do not sell anymore stock. Try to sell the products that you are doing well in. Study the Capstone Courier. See how the other teams did. You are in the first round. If you have negative cash flow the game automatically gives you a loan which is more debt. If you are losing money cut the products you are losing money in and concentrate on two product or three product lines that you can sell. Most sales are in low end and traditional. You need to read the guide at least five times to understand the course. James
Nan on October 20, 2018:
Hello we just finshed round 1 with zero customer satisfaction and negative 6000 cash flow we two product able that we make sale for HE and LE and acre for LE and we take max long debt and issue max stock is it good or not also what should we do to do better in next round? we think to introduce HE product
James Cage (author) from Orlando, FL on July 18, 2018:
Your company lost money. Therefore you have negative earnings per share. You need to check your company statistics in the Capstone courier. Also keep studying the Capstone Guide.
John on July 17, 2018:
James hi and thanks for responding. I am still in the practice round and still learning how to maneuver in capsim. We started out a few weeks ago, but think we produced too much inventory, along with other novice mistakes. I have a great deal of problems, but the earnings per share of -4.50 has me perplexed. Any quick fixes from the finance perspective?
James Cage (author) from Orlando, FL on July 17, 2018:
John on July 17, 2018:
James, are you still around?
NICKSON KIMETTO from Nakuru, Kenya on August 11, 2017:
Splendid and educative
Marius on May 08, 2015:
Actually the proforma is more confusing our team. It doesn't make any sense; we're in positive we every figure (per proforma) until we upload our decisions when all of our positive figures go to the trash. This doesn't make any sense...
James Cage (author) from Orlando, FL on November 13, 2013:
It is always best to be conservative. Check your pro forma income statement to make sure you have a net profit. When the results for a round are complete, compare the pro forma income statement with the actual income statement. This way you can make adjustments and a better forecast for the next round.
Tung on November 12, 2013:
Should I gamble when the proforma shows a loss in net profit?