Tag Archives | research and development

SWAG Technique

SWAG Technique

During the Vietnam War era, the military coined the term SWAG – Scientific Wild-Ass Guess.

CBS released “The Uncounted Enemy: a Vietnam Deception” in 1982 which highlighted the US Army and their “manipulation” of facts and figures during the Vietnam conflict. CBS claimed that  General William Westmoreland and other military officers were conspiring to misrepresent information, resulting in America being convinced that we were losing the war.

After the news program was released, General Westmoreland filed a$120 million libel suit.

SWAG: Scientific Wild-Ass Guess

In the heat of battle, the military did not have access to facts, figures, graphs, or wifi connection to research what the actual answers were to questions posed by journalists – i.e. the tactics that the Vietnamese were using, the strength of the Vietnamese, how many Americans were down, or when the next shipment of goods was coming in. Because of this lack of hard information, the military gave estimates based upon what they thought was correct at the time.

CBS did not realize that the information they were given was based upon assumptions and reported it to the American public as fact.  Once they realized their mistake, they apologized to General Westmoreland. The libel suit was eventually dropped in 1985.

The lesson… Sometimes, you gotta use SWAG.  But, you better make sure your audience knows it’s SWAG.

So what does the US Army’s term, SWAG, have to do with being a financial leader?

Often, in business, we’re in the tough spot of needing to make a decision quickly without enough information.

“Tom, I need a flux analysis. Can you have it on my desk by the end of the day?”

“Uh…”

Sound familiar?

SWAG vs WAG

So, what’s the difference between SWAG vs WAG? WAG = Wild-Ass Guess. It has absolutely no thought behind it and can cause a multitude of issues down the line because it was simply something you pulled out of thin air.

“Sure, I can have it to you by the end of the day.”

What’s wrong with that statement?

  1. You didn’t think about the time required for the analysis
  2. You’ve already promised to have X, Y, and Z by to Bob by the end of the day as well

Avoid WAG at all costs!

As seen in the the libel suit, even SWAG can have negative consequences if not communicated that that’s what it is (a guesstimate). SWAG might sound like this:

“It’s possible that I can get you the Flux Analysis by the end of business day tomorrow. However, the likelihood is that it will take 3 days to complete, but no more than 5.”

There is never enough information available to make the right decision, but you can make a smart decision using the information you do have.

Offer a Range

People tend to understand that when a range is given, it is a best guess. There are so many factors that play into any estimate, including impressions, experience, and rough calculations among other things. A SWAG is not the best estimate, but rather the estimate with the most information at a given point in time.

For example, Houston, TX is known for its traffic. If your friend wanted to know how long it would take for you to go to the other side of town, what would your response be? (Notice the differences below.)

WAG: “It’ll take me 30 minutes because that’s a good estimate.”

SWAG: “Since it’s 4:00 and I’ve had experience with Houston traffic at rush hour, it will take me anywhere from 30-50 minutes for me to get to the other side of town. If there are any accidents on the freeway, then it may push me to over 60 minutes.”

Estimate: “According to my GPS, it will take me 41 minutes to get to the other side of town.”

By offering a range, you now have some wiggle room if things don’t go as planned. Figure out the low and high end and provide an explanation with your answer. Explain some assumptions as they could affect the different points in the range.

One area where SWAG is particularly important is with projections.  You will never have perfect information to make spot-on forecasts. Knowing your basic unit economics is one tool that you can use in conjunction with the SWAG technique.

(Do you know your economics in order to make a SWAG? Download the free worksheet here.)

Check Assumptions

Update your SWAG as soon as you get more information that would result in a more clear picture. If you are producing projections for the next 5 years, what assumptions are you making as you create the forecast?

SWAG TechniqueEconomy, customer demand, and international trade are three of the more volatile factors in a projection. Is the economy going to boom or is it going to continue to decline for 6 more months? Look at how that’s going to affect your customers. Keep an eye out for factors that are impacting your customer in a way that might have an effect on your company. Read the news. Embargoes, strikes, and natural disasters could have a massive impact on what your assumptions.

Check them and recheck them as more information comes in. Remember, it is okay to adjust your previous range and assumptions.

Manage Expectations

Think of ways you can validate your assumptions and form a more firm estimate. Not only will this give you more information to impact your company’s financials, but it will allow you to think through all the possibilities in order to give a range under certain assumptions.

Utilizing the SWAG technique has its risks. General Westmoreland didn’t expect that giving a statement to a reporter would eventually result in a libel suit.  But some information is almost always better than no information.  SWAG can be a powerful tool if expectations are managed.

SWAG Technique

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SWAG Technique

Sources:

No Uncertain Terms by William Safire

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Annual Survey – The Average Tenure of a CFO

Ever feel like you’re the only financial professional you know that changes jobs frequently?  Or, maybe it seems like you’re one of the few who has had the same job forever.  No matter who you are, we’d like your help… We’re asking all of our readers to help us out with a little bit of research… In the name of (pseudo) science.  Our goal is to track the trends in the average tenure of a CFO over the years.

Take The Average Tenure of a CFO Survey

Click on the survey link below to let us know how long you’ve held your current position as a CFO, Controller, VP Finance or other type of financial manager.

Take the Survey

We’ll post the results of this survey. Take a look at how the results compare to past surveys in a future post, so stay tuned!

If you are hiring, then determine which candidates are the right fit for your company using our 5 Guiding Principles For Recruiting a Star-Quality Team.

Average Tenure of a CFO

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Average Tenure of a CFO

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Tax Abatement

Tax Abatement Definition

Tax abatement, defined as the decreasing of the tax responsibility of a firm by government, is one of the tools which government uses to motivate behavior in a firm. A tax abatement credit is generally given to a firm when the government wants the saved money to be spent in another way: to increase savings or spending rate, invest in equipment, or others.

Tax Abatement Meaning

Tax abatement means a tax incentive given to business‘ for the purpose of spending it in another way. These motivations are common to in the business world; tax breaks for research and development, depreciation, and more. These perks allow a business to focus on the future rather than trying to survive in the present.

From a governmental standpoint, a tax abatement program is a tool to motivate business to operate a certain way. Similar to the savings and loan crisis of the 1980’s, where government increased regulations, tax abatements have the opposite effect. Rather than preventing certain behavior, a tax abatement agreement can make other behaviors easier and more appealing. This type of approach is favored by many economists.

Tax Abatement Example

Claus is the owner of a technology company. Creating microprocessors, Claus has many expenses to cover along the path of creating a better product. Claus must constantly be thinking forward to what the market will do.

Claus’ company experiences many tax abatements. First, he has a depreciation schedule for many of his capital expenses. Thanks to the tax abatement forms he completes, he can recover the expense of these items rather than having to pay for them. Claus’ company also receives tax abatement for research and development. Here, his company can recover the expenses of r&d. Due to the fact that r&d takes quite a while to create return on investment, Claus can use the cash he saves rather than having it tied up into finding a better way to do business.

Claus is very thankful for the tax abatement he receives. It makes his life, as well as his business operations, much easier. When Claus goes home he must fill out yet another tax abatement letter; the IRS discount for having a family with children.

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tax abatement

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tax abatement

See Also:
Direct Tax
Tax Brackets
Ad Valorem Tax
Tax Efficiency
Federal Unemployment Tax Act (FUTA)

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Research and Development

Research and Development Definition

Research and development (R&D) in business refers to activities geared towards new product development or current product improvement. It typically involves conceptualizing and designing new products and then tailoring them to meet the needs of the target market. R&D is often a line item on a company’s income statement. Technology and pharmaceutical companies often have comparatively high research and development spending because these industries are very research-intensive. Substantive spending on R&D can also be a sign that a company is growing or expanding.

Accounting Research and Development

In accounting, there is some controversy over whether research and development spending should be considered an asset with future benefits for the company or whether it should be expensed in the period when it is incurred. Some claim that because R&D is part of the process of creating new products, it should be considered an asset with future benefits to the firm and expensed when the new products are eventually sold. Others claim that research and development is a regular operating expense, and it should be expensed in the period in which it is incurred.

In the U.S., the Financial Accounting Standards Board (FASB) solved the dilemma by requiring all companies to expense R&D in the period incurred. This is the rule according to GAAP.

When investing in research and development, be the trusted advisor your CEO needs and guide them through this process. Learn how you can be the best wingman with our free How to be a Wingman guide!

Research and Development

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Research and Development

See Also:

How to Estimate Expenses for an Annual Budget
Capital Budgeting Methods

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Product Life Cycle

Product Life Cycle Definition

A product life cycle, defined is the period from when a product goes through its initial specifications and research to the withdrawal of that product from the market. There are five product life cycle stages.

Product Life Cycle Meaning

The product cycle stages are as follows:

Research and Development

This is the phase where market research as well as the design plans for a product are initiated. Patents are established for the product during this phase to protect the product from competition. Production facilities might also be developed during this stage so that mass production can take place. The company might also establish its logistics for raw material suppliers and retailer customers.

Introduction and Growth

Here the company starts its advertising campaign as the product is sent out into the market. The pricing and promotion of this product are essential during this phase to ensure the product’s success.

Maturity

In this product life cycle the company will increase its production and logistics network according to demand. A company will also broaden the audience that it is promoting to as the product becomes more popular during this product cycle.

Decline

As the product loses popularity a company has generally three options. The first choice is for the company to offer the product at a reduced price. The second is for a company to add new features or revamp the style of the product. The decline stage is the last option. Eventually, this stage will move into the elimination of the product or the abandonment stage.

Abandonment

Here the entire product line is discontinued. A company liquidates all of the remaining inventory. If the product contained special facilities, then the company will liquidate those as well. Then, realize the salvage value for all equipment. This stage represents the complete end of that product and everything associated.


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Product Life Cycle

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Product Life Cycle

See Also:
Business Cycle
Cash Cycle
Company Life Cycle
Operating Cycle Analysis
Accounting Cycle

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Intangible Assets

See Also:
Current Assets
Financial Assets
Fixed Assets
Goodwill Accounting Term
Research and Development

Intangible Assets Definition

An intangible asset is a right or non-physical resource of a company. They are usually developed as a result of an acquisition that has been made, or years of research and development to develop a process or idea.

Intangible Assets Meaning

Intangible asset valuation can be quite difficult. If an acquisition is made of another company the goodwill is the amount by which a company pays a premium over the fair value of the net assets. Intangible assets can also be developed over time through research and development, or may simply contain rights over a certain asset to keep competition. Intangible asset examples include the following:

  • Patents
  • Copyrights
  • Trademarks
  • Licenses
  • Leases
  • Franchises
  • Exploration permits

Most of these items are anti-competitive in nature. In that the developer maintains a right to be a sole provider of an idea or asset. Such is the case for patents or trademarks. These items protect the product for the developer so that they can retrieve the costs to develop the product or idea, thus giving an incentive to develop and expand on ideas. Intangible assets like a copyright protect a developer for life. Copyrights are usually for books to protect a writers creative work and protect his/her original thoughts.

Intangible assets measurement on the financial statements can be difficult at times because sometimes it is hard to see the future benefit from holding an intangible asset. Other times it is difficult to measure an intangible assets total life. Amortize most intangible assets over a certain amount of time. If there is a specified period like for a patent then it is easy to measure the amount of amortization, but if it is a franchise is maybe difficult to measure.

Valuation of Intangible Assets

When you perform a business valuation, it can be tricky to accurately value intangible assets. When a valuation becomes complex, it is standard practice to consult with a valuation firm. If you need help finding one, then we will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

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Intangible Assets

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Intangible Assets

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Cost Center

See also:
Cost Driver
Variable vs Fixed Cost
Sunk Costs
Activity Based Costing vs Traditional Costing
Removal Cost
Profit Center
Responsibility Center
Adding Value as a Financial Leader

Cost Center Definition

In accounting, a cost center is a type of responsibility center. A responsibility center is an organizational subunit the manager of which is responsible for certain financial and non-financial performance measures. For accounting purposes, consider a responsibility center – in this case a cost center – a distinct entity within the context of the larger organization.

Furthermore, a cost center is an organizational subunit that incurs cost but does not directly contribute to the company’s profits. In fact, a cost center may not generate any revenues at all. The manager in a cost center has the authority to incur costs related to normal business activities and operations. Furthermore, a cost center manager’s primary goal is to contain and control the subunit’s costs. As a result, the manager of a cost center is evaluated on the basis of cost containment and control.

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Cost Centers and Discretionary Cost Centers

In addition, make a distinction between cost centers and discretionary cost centers. The difference is with the relation between inputs and outputs in the production process.

When there is a well-defined relation between inputs and outputs in the production process, the organizational subunit is a cost center. For example, a manufacturing process is a regular cost center because each unit of output requires a measurable input of raw materials and a measurable amount of direct labor time. Furthermore, in this type of process, it is easy to see the relationship between the cost-incurring inputs and the revenue-generating outputs.

When there is not a well-defined relation between inputs and outputs in a business activity, the organizational subunit is a discretionary cost center. A good example of a discretionary cost center is an administrative department where the work of the administrators is not clearly linked to any tangible or measurable output. It is not easy to see the relationship between the cost-incurring inputs and any type of revenue-generating outputs.

Examples

Cost centers are typical business units that incur costs but only indirectly contribute to revenue generation. For example, consider a company’s legal department, accounting department, research and development, advertising, marketing, and customer service a cost center. The managers in charge of these departments can control and contain costs – and they are evaluated on their ability to control and contain costs. But there is not much they can do to directly impact the company’s revenues. If you want to identify your cost centers and know how they fit within your economics, then download your free guide here.

cost center

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cost center

Sources:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

 

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