2. recognize what awaits you when
your course is complete. This course will enable you to apply
your talent in the marketplace by
utilizing the principles of marketing, proposals, and business
operations to make executive
decisions.
To link creative skills with business understanding in order to
be successful, the case study
presented in this course explores various types of financial and
accounting principles that are
used in business. These principles will provide you with tools to
examine and assess executive
managerial decisions.
You will be presented with the case study of Blue Valentine
Digital, LLC (BlueVal), a private
digital media company, which has its headquarters in the West
Village in New York City. This
case study will provide you with the foundations to evaluate the
company’s different projects,
analyze their investment feasibilities, as well as make executive
and managerial decisions. The
objective of this case study is to understand accounting and
finance decisions from the
perspective of the owners and senior executives of the company.
The Market Need for BlueVal
With increasing global competition, digital media companies are
now required to create a
competitive advantage that goes beyond developing just a
normal Web site with a header graphic
and a three-column layout. Digital media companies are now
required to specialize in interactive
Web site design. A key aspect of establishing competitive
5. Prior to founding Blue Valentine in 2000, Jason’s career in
digital development began in 1990
even before anyone outside the academic community had heard
of the World Wide Web. He
designed some of the earliest corporate Web sites and Web-
based software applications and has
won dozens of industry awards throughout his career, which
spans over twenty years. Under
Jason’s mastery, Blue Valentine has grown from a computer-
laden office in a garage in Hoboken,
New Jersey to a prominent New York City operation.
In 2004, Blue Valentine was in need of a media department, and
so, Reese Miller was taken on to
head the company’s media operations. Reese has had plenty of
experience delivering
exceptional media. In Blue Valentine, he challenged his media
skills at delivering goods to some
top brands. Within a short time he created a remarkable
presence with a media machine.
At Blue Valentine, Reese uses his research and creative talent to
develop dynamic media plans
that put the client’s message out to the right audience for
maximum impact. His vast, digital-
media experience plays a significant role in launching brands,
expanding databases, and
strategic planning.
Lisa Angelica is Blue Valentine’s vice president and general
manager. Lisa directs all aspects of
interactive marketing production at Blue Valentine, consults
with clients, and mentors a growing
staff of the industry’s best project managers. As a champion of
the user experience, her main
goal is to provide digital solutions that offer constituent users a
7. Valentine should issue an initial public
offering to raise capital or court private equity firms to ensure
that these initiatives are
sustainable.
Lisa suggests that BlueVal draft an executive summary, which
will serve as the beginning of a
prospectus and introduce the company to prospective investors.
Executive Summary
A. The Company
Blue Valentine is an interactive media agency specializing in
sales and marketing solutions
primarily to healthcare clients. It has won numerous awards,
including some of the medical
marketing industry’s top honors. The awards include patient-
oriented Web sites on Crohn’s
disease, physician information Web sites on asthma, and a
campaign supporting a drug for
rosacea. Blue Valentine performs the following services:
Provides computer-related and Web site design services. It
offers creative design,
media buying, and planning search-marketing companies.
reach, search engine
visibility, accessibility, and readability.
language blog processing,
clickstream tracing, and intercept surveys to monitor the
audience’s habits.
8. viral marketing services.
advertisement campaign
services.
B. Company’s Mission
Blue Valentine creates unforgettable brand knowledge for the
significantly increasing digital
world. A privately held, full-service agency, Blue Valentine is
committed to technology-enabled
research, strategic planning, creative design, messaging, and
analytics. Equipped with the most
sophisticated research tools developed from the world’s
foremost professionals in the digital and
social media landscape, Blue Valentine retrieves and assesses
competitive audience insights
from the complexity of the digital landscape.
Today, social and digital media is changing the relationship
between designers and clients,
allowing the opportunity to collaborate and to place designers
as facilitators of complex design
processes. Designers are becoming experts at the process of
designing and not necessarily
perceived as the experts who have all the answers to design
questions. The complexities of the
market make it a land of nonexperts.
Blue Valentine Digital, LLC
Page 5 of 25
10. healthcare marketing mechanisms—such as print media,
television, and radio—are simply too
expensive for the services healthcare organizations provide.
Based on many conversations with
doctors and administrators at leading healthcare institutions, he
suggests that consensus grows
among providers that these strategies are just too expensive to
provide information that can be
evasive.
Moreover, these types of channels do not forge bonds between
the clients and their constituents.
With the arrival of social and digital media, marketing
strategists are now able to connect clients
with their constituents. Jason still believes that healthcare
information is still daunting;
nevertheless, social and digital media mechanisms have
provided ways to deliver specific
information and improve relationships between medical service
providers and their patients.
The white paper also suggests that entities embracing digital
and social media can provide
training opportunities for current staff to share information and
best practices. Additionally, these
organizations can use these platforms to recruit new employees.
Considering the increasing cost
of healthcare and the growing number of healthcare institutions,
Web site design services,
analysis, and social media tools will help hospitals and
healthcare organizations stay up-to-date
with their patients as well as stay connected to the healthcare
community as a whole.
Generally, large-scale healthcare institutions typically have the
technical infrastructure and capital
12. Search engine optimization (SEO) is the process of refining a
Web site’s place in search results.
This is performed by increasing the information on the Web site
to include keywords or phrases
commonly used by individuals when looking for a particular
Web site. Site structure, navigation,
coding, and naming conventions are also important to consider
when optimizing a Web site to
improve its placement in search results. Results found through
SEO are often called organic,
natural, or algorithmic search results.
2) Revenue from Open Platforms—Facebook, Twitter, and
YouTube
Social networks provide a meeting place for consumers to share
experiences. Consumers,
especially medical consumers, are willing to share information
with one another. BlueVal
understands that these platforms allow healthcare providers
access to real-time feedback so that
they can adjust their processes and train staff accordingly.
3) Revenue from Web 3.0 Applications
Web 3.0 succinctly introduces a person behind the Web. As
such, the Internet can provide the
capacity to track, gather, and synthesize information about the
user’s history, favorites, likes, and
dislikes and then provide helpful suggestions.
Team BlueVal has developed a software to provide these
capabilities, but it is still in the testing
stages, hampered by a lack of investment as well as the political
will of senior management.
However, newer team members firmly believe that by providing
13. this modality, end users can
simply enter two or three part questions and the search
capabilities of the solution will be able to
synthesize the information quickly and astutely.
4) Revenue from Branding
Creating strategic content network solutions.
Revenue Streams from Future Innovations
Blue Valentine is committed not only to developing applications
for healthcare providers,
permitting digital and social media, but it also explores ways to
help clients differentiate
themselves from their fellow providers by developing their own
communities as well as offer
groundbreaking features and applications that will greatly
benefit all healthcare community
members.
As difficult as it is for Blue Valentine team members to gather
data to estimate costs and
revenues, the opportunity for growth in digital and social media
is extremely evident. In the 1990s,
the US market for interactive healthcare digital and social
media solutions was growing rapidly,
paralleling the growth of the Internet capabilities (Hawn, 2009).
Blue Valentine Digital, LLC
Page 7 of 25
Assessment and Analysis for Managers in Design and Media
Arts
15. protocols are in place, healthcare providers may consider
uploading, to a social media
Web site, new patient or other informational forms that can be
downloaded and printed in
order to make a patient’s check-in smoother on arrival at the
healthcare provider’s office.
require personality tests to
match compatible users in order to form a successful
relationship, social networks or
networks within institutional Web sites could be devised the
same way to match patients
to the right doctor.
Jason researched criteria provided by the American Medical
Association. Based on this
information, he developed surveys that will be sent to regional
healthcare providers and
healthcare consumers. Once information is gathered and
analyzed, he hopes to develop
algorithms to match patients with doctors.
pharmaceutical companies to connect
with doctors and consumers, finding new ways to evaluate
combinations of treatments
that will take into account specific characteristics of patients,
such as weight, blood
pressure, etc.
Blogging—A Potential Project
BlueVal professionals are encouraging the utilization of
blogging for its healthcare organizations
to reach out to their community as well as new audiences to
17. Blue Valentine’s senior management knows that the
approximate costs associated with
development and implementation of these new protocols may
not be that easy to gather.
Nevertheless, they need to put together a demand analysis for
their products and services to
develop accurate forecasts.
Lisa is aware that BlueVal requires a significant accounting
platform to keep track of various
market factors that could affect profitability. Typically, the
factors include the following:
lar digital and social media
protocols
implement the same
technology
start-up costs for newer
firms
Demand Analysis
Sudden shifts in demand for their technology solutions could
contribute to Blue Valentine’s risk.
20. convenient.
lution would
continue to improve the
client’s ROI.
The creative executives and solution engineers in the company
would continue to identify and
implement new product ideas. Senior management understands
that certain conditions must be
met and certain organizational resources need to be acquired to
help the teams develop optimum
solutions. In order to start the process, Angelo Rico understands
that the following concepts
should be executed:
t must be given by senior management and
colleagues
—the match between what senior
management states and what
it does
—maintaining an
open market place for ideas
in which the potential strengths of new ideas are always
identified before their potential
weaknesses.
In keeping with the recruitment needs and with the help of
Angelo Rico, three project managers
were recruited to travel the country marketing the healthcare
digital and social technological
22. For most managers, financial criteria are the prescribed method
to evaluate projects. Such
methods are appropriate when there is a high level of assurance
associated with estimates of
future cash flows. Lisa and Angelo are considering two
financial models: the Payback Model and
the Net Present Value Model.
The payback model determines the amount of time it takes to
recover the initial project
investment. Shorter time periods to obtain the additional
investment are more desirable than
longer payback periods. The payback model is the most widely
used model because it is the
simplest to calculate. It focuses on cash flows, which is a
significant criterion in business
investment. Accordingly, some managers use the payback
method to primarily reject the more
risky projects.
The net present value (NPV) model uses management’s least
desired rate-of-return on
investments to measure the present value of all net cash inflows.
This entails using a discount
rate to adjust for today’s dollars. If the result is positive, that
is, the project meets the minimum
desired rate of return—cash inflows exceed cash outflows—the
project is considered for
adoption. However, if outflows exceed inflows, then the project
is rejected.
Lisa understands that qualitative criteria must also be evaluated.
Firms must endeavor to reject
lucrative initiatives that are outside the scope of their strategic
plan and mission statement.
23. Understandably, BlueVal cannot support projects that do not
have high profit margins but support
strategic reasons including:
generation products
vernment intervention and regulation
Generally, most of the company’s business decisions are long
term. Nevertheless, the objective
always remains the same—to protect the corporate image and
enhance brand recognition. In
making sound, managerial decisions, the team understands that
thorough portfolio management
requires multi-criteria models.
While Jason, Angelo, and Lisa believe that it is important for
the company to be profitable, they
also believe that the organization should develop a relationship
with the community. They feel
socially responsible to the community to do no harm. Together,
they have written a vision
statement for the organization:
Blue Valentine Digital, LLC
Page 12 of 25
25. Whether online or offline, the healthcare industry is heavily
regulated. Therefore, team Blue
Valentine has to be familiar with industry standards and develop
digital media guidelines to
adhere to these industry standards and regulatory agencies
monitoring the healthcare
environment. BlueVal has to develop good policies as well as
training to pursue the benefits and
mitigate the risks.
For example, contractors who develop solutions may not grasp
the ability to publish comments.
One incorrect or flippant remark can become indelible, reaching
audiences who lack the ability to
see the body language or read the facial expressions connected
to the remark. Therefore, Angelo
suggests that the company perform a risk assessment.
Blue Valentine needs to educate its employees on privacy
practices to encourage responsibility
during solution development. They must also diligently monitor
implementation and testing to
ensure that information posted does not violate privacy
regulations and other laws.
Some of the guidelines that should be developed focus on the
following:
s should only be accessed by designated
staff to protect individuals’
privacy and confidentiality.
proprietary information.
26. existing company policy
stating a violation can and may lead to discipline, up to and
including termination.
use.
they are not speaking on
behalf of the organization when they are uploading and
implementing solutions.
Given that technology is outrunning regulations, continually
updating and educating the team is
critical. Blue Valentine management will have to consistently
update its policies and procedures
and engage in discussions with regulators from the US Food and
Drug Administration, Health and
Human Services, the National Institute of Health, as well as the
American Medical Association to
ensure that the company is complying with current regulations
and mandates.
Company Improvements
Senior management at BlueVal realizes that selecting the
appropriate product is critical and
requires comprehensive knowledge of systems, processes, and
priorities of the business. Lisa
suggests that the company implement the six-sigma quality
process.
Six-sigma is a database approach that relies heavily on the
voice of the client as a focus for
29. across committed projects would
magnify as the number of projects rises.
In addition, resource sharing also leads to multitasking. People
working on several tasks
concurrently are far less proficient, particularly where
conceptual or physical shutdowns suggest
a problem. Nevertheless, multitasking leads to setbacks and
delays. Rearranging priorities
magnify multitasking problems. In the same way, multitasking
becomes more evident in
organizations that have too many projects for the current
resources they utilize.
The amount of minor and major assignments in a portfolio
almost always exceeds existing
resources. The surplus amount more than likely leads to
confusion and ineffective utilization of
resources. In addition, the existence of power politics as well as
multitasking augments the
problem of which projects are allotted resources first. Employee
optimism and buoyancy suffer
because it is difficult to make sense of a vague system.
Therefore, a multi-project organization
environment encounters significant problems if it does not have
a system that is clearly linked to
financial and nonfinancial criteria.
At this point in BlueVal’s trajectory, the company would have
to develop a system to ensure
consistency and governance. Lisa understands the significance
of establishing a set of integrative
criteria and a system for examining and assessing projects that
support senior management
strategies and objectives. Consequently, she proposes that the
organization adopt a project-
31. There are four major applications of break-even analysis:
1) New product decisions
2) Pricing decisions
3) Systems solutions conversion and upgrades
4) Expansion decisions
Having identified the healthcare industry as a viable market,
Lisa decides to look more accurately
at the projected numbers. She examines the company from the
lens of a prospective investor and
thinks about the information an investor would want before
making a decision to seed the
business.
Before making any decision about any project, BlueVal has to
perform some type of break-even
analysis. Moreover, they need to understand how all the projects
would be linked through the
organization. Therefore, it would be better to simply develop a
break-even analysis for each
project separately.
What is clear is that senior management, along with the
company’s project management, will
need to approach every project as an investment decision, and
consequently, they will require
separate break-even analyses. This strategy will certainly be
beneficial for the company
concerning joint ventures with other digital media management
companies, which will require
more costs and a higher level of funding. Accordingly, the team
sees joint ventures as a way to
32. hedge against risk.
Cost Accounting
Costing projects can incorrectly lead to lower gross profits
reported on the income statement.
Companies can also face scrutiny from auditors who question
how the company allocates its
costs. Cost accounting is a traditional managerial accounting
process and its purpose is to
allocate costs to all its product solutions. BlueVal’s project
managers can contribute to the
company’s improvement by finding the best allocation method
possible and remove unnecessary
activities from the process.
Cosmetic Surgery
Solution
s
BlueVal has bid on a project that will provide digital consulting
between Central Pennsylvania’s
plastic surgery community (patients and vendors) and regional
plastic surgeons. The Central
Pennsylvania Society of Plastic Surgeons is underwriting this
project.
Many people ask, "How can you 'market' digital consultation?"
34. compassionate healthcare. This is
what digital interactive consulting is supposed to do.
The First Digital Consultation Project—Central Pennsylvania
Plastic Surgery
Total revenue from interactive site 145,000
Direct costs for digital designers 80,000
Direct overhead 20,000
General and administrative overhead (20 percent of total
direct costs)
16,000
Total costs 116,000
Profit (20 percent) 29,000
Total bid ?
36. strategy.
Moreover, Lisa suggests that because BlueVal’s future relies on
continuously developing new
generations of its media solutions, it is likely that the company
will have to expand its capacity to
generate new clients to support the company’s investment.
Accordingly, the company will have to
move out of its West Village headquarters and hire additional
media designers. Lisa has informed
Jason and Angelo that they need to carefully consider the risks
and difficulties of expansion. She
has persuaded them to hire an outside accounting firm to
provide audited financials of the
company’s activities to demonstrate the efficacy of BlueVal’s
business model to prospective
investors.
The company’s internal financial statements, along with the
independent audited financial
statements will provide important information to potential
investors. Many of these statements
include a verbal statement that is often presented as a letter
from the president. It describes the
firm’s operating results during the past year and discusses new
37. developments that will affect
future operations. The other information presented is
quantitative. It consists of the balance
sheet, the income statement, the statement of cash flows, and
the statement of retained earnings.
Together, these statements give an accounting picture of the
company’s operations and financial
position.
Specifically, BlueVal will need to perform a financial ratio
analysis. Financial ratio analysis is the
use of financial accounting and other information to assess a
company’s financial performance
and financial conditions. Financial ratio analysis particularly
uses comparisons of financial data in
the form of ratios to assess a company’s financial health and
profitability.
There are many ratios that companies perform based on
available financial data. The question to
be considered is which ratios are the most appropriate.
Accordingly, if the purpose of the analysis
is to understand a company’s profitability—the ratios that relate
to returns—profit margins and
asset utilization would be the most significant. If management
38. wants to assess a company’s
effectiveness concerning its credit policies and collections, it
would focus on ratios involving its
accounts receivable. Moreover, when evaluating a company’s
credit worthiness, the task at hand
is to assess the company’s debits and compare them with the
company’s ability to satisfy those
particular obligations.
Ratios are classified into several types based on the company’s
performance and conditions.
They are
effectiveness in putting its asset
investments to good use.
Blue Valentine Digital, LLC
Page 19 of 25
Assessment and Analysis for Managers in Design and Media
Arts
40. Inventories 241,500 Other current
liabilities
117,000
Total current
assets (cash,
receivables, and
inventories)
655,000 Total current
liabilities (accounts
payable, notes
payable, and other
current liabilities)
330,000
Long-term debt 256,500
Net fixed assets 292,500 Common equity
41. 361,000
Total Assets 947,500 Total Liabilities
947,500
Blue Valentine, LLC: Income Statement for Year Ended
December 31, 2011 (In US Dollars)
Sales 1,607,500
Cost of goods sold -1,353,000
Gross profit 254,500
Fixed operating expenses except depreciation -143,000
Earnings before interest, taxes, depreciation, and amortization
111,500
Depreciation -41,500
Earnings before interest and taxes (EBIT) 70,000
44. rather detailed forecast of the solution’s outlay and future
income streams. The final report, which
includes only the forecasted cash flows and explanations for the
forecast, was submitted to Jason
Viola and Angelo Rico. The report does not include the net
present value analysis of the new
solution because another department conducts this analysis.
A few days ago, the investment officer called Lisa to tell her
that he thought that the cash flow
forecasts she submitted were incorrect. Lisa explained that her
forecasts were based on a
significant amount of data that she gathered and verified with
independent sources. She told the
investment officer that her estimations were based on confident
growth rates in revenue streams
in the subsequent ten years. The investment officer said that he
thought the growth figure could
be higher and asked Lisa to provide cash flows using different
estimation figures.
It is clear from this example that the most difficult step in the
analysis of a new project is
estimating its cash flows. This data includes the investment
outlays needed to develop the project
45. solutions and the net cash flows the project is expected to
generate after it is completed. Many
variables are involved in cash flow estimation and many
individuals in BlueVal have participated
in this ritual of gathering and assessing relevant information.
Given that it is inherently difficult to
estimate the costs and revenues connected with large complex
projects, forecasting errors can
be very significant.
As such, the financial staff’s role of forecasting cash flows is
critical and includes the following
steps:
1) Coordinating the efforts of the other departments such as
design management and
marketing.
2) Ensuring that everyone involved with the forecast uses a
consistent set of economic
indicators.
3) Ensuring that no biases are inherent to the forecasts, given
that managers have pet
projects that they push toward implementation.
47. management realizes that they do
not have enough cash on hand to finance a major expansion of
the business. Nonetheless, they
do have a very good balance sheet with a solid debt-to-equity
ratio. After a preliminary analysis of
current cash flows, it shows that BlueVal will need $2 million
for additional property as well as
plant and equipment in addition to more working capital to
finance any type of expansion.
Being on good terms with the local bank was a good strategy on
Lisa, Angelo, and Jason’s part.
As a result, they believe that they should not have any trouble
securing and carrying additional
debt. In addition, venture capital investors have also expressed
an interest in purchasing more
stock in BlueVal if the price is right.
More Debt for BlueVal?
In an unstable business environment, banks will not lend unless
they are almost positive that
businesses will be able to repay the loan, and this applies to
BlueVal as well. The amount of
equity capital (stock) in a business acts as a safety cushion for
48. the bank. The stockholders will
lose everything before the bank would lose anything. Generally,
debt is a cheap form of financing
if the company has access to it.
BlueVal’s Debt Cost
Therefore, what will bank financing actually cost BlueVal? The
local bank sets its interest rate by
two components. They add the current risk free lending return
from government bonds to risk
premium based on how risky they judge the company to be.
For example, if government bonds are yielding 2.3 percent and
the loan officer sees BlueVal as a
moderate risk and underscores 3 percent risk, then BlueVal’s
total interest rate will be 5.3
percent.
More Equity for BlueVal
Lisa, Jason, and Anglo meet with their friendly venture
capitalist, Suzie Bucks, who fully supports
BlueVal’s expansion plans. She is willing to buy more stock and
will invest an additional $80,000
50. excess. For a long time, the budgeting
process at BlueVal was rather haphazard with inefficient
predictions pieced together calling it a
cash budget.
With plans for expansion, a well-defined and composed cash
budget will help management plan
investment and borrowing strategies. It will also be used to
provide feedback and control to
improve the efficiency of managing cash assets over time.
Budget
Lisa knows that a cash budget will provide a critical roadmap
for upcoming expenditures. On one
hand, the budget will place some constraints on the company’s
operational activities, but on the
other hand, executives will be less uncertain about costs and
profits. Ideally, the team will want to
devise a budget that identifies the lowest amount of money the
company can use to accomplish
its strategic and tactical goals.
Variance Analysis
51. A close task related to budgets is variance analysis. Lisa wants
to review the company’s cash
budget against actual expenditures. She would like to find out if
there were any major
discrepancies or if there are opportunities to improve business
activities. By comparing the actual
numbers with the budget forecasts, Team BluVal can determine
whether variances are favorable
or unfavorable. That is, whether less or more money is needed
to complete the significant
projects.
In a cash budget, the cash surplus or required shortfall (loans) is
usually provided in the bottom
line. A positive value indicates a cash surplus, whereas a
negative value indicates a loan
requirement. The senior management decides that if cash
surpluses exist, they will pay down
loan balances and then invest in short-term securities.
Blue Valentine Digital, LLC
Page 24 of 25
53. puter-related and Web site design services.
planning search marketing
companies.
engine visibility,
accessibility, and readability.
marketing services.
In addition, in the future they would like to keep with the times
to develop technically adept
solutions that will aid their client organizations. This is because
senior management has realized
that there are plenty of areas that are open for new
technological development.
Finding Additional Partners
Jason Viola understands that every person in a company brings
54. different types of expertise and
experiences: Angelo Rico, the creative vice president, and Lisa
Angelica, the business manager.
Further down the road, this could all change depending on the
company’s growth. If the company
cannot build the healthcare solutions project currently on its
drawing board then additional
partners will need to be added, those who can deliver the
expertise they seek. Nonetheless, a
balance of technical knowledge, business acumen, and creativity
will propel BlueVal forward.
Raising Money
Venture capitalists, bankers, and a public offering may be
needed to raise enough capital to
ensure research, development, and implementation of a
company’s initiatives. Some investors,
especially individuals such as Bill Gates and Warren Buffet,
may be satisfied with informal
meetings and Microsoft PowerPoint presentations. However,
other lesser-known investors may
want a copy of the entity’s business plan if only to remind
themselves of what they invested in.
56. evaluated as if it were an investment, and only when feasible
should the expenditure be
approved. Moreover, the investment should be approved by
more than one individual.
Finally, business is not something you have to be an expert in to
be able to do. The key is to be
creative and develop something your end users will truly
appreciate. Nevertheless, learning from
previous experiences may be the difference between being
successful or not.