Using Business Management Flight

Simulatiors as a Teaching Tool for

Entrepreneurs
Prof.dr.sc. Mirjana Peji Bach
Department of Informatics
Faculty of Economics & Business
Zagreb

When we make decisions

Unintended
effects

Costs are visible

only after a long
time

One of the answers

Entrepreneurs would benefit from more effective education that would improve the
quality of the decisions making.

Management simulation games

are
A powerful tool that:
enhances learning about company, market

and competitors
portrays the cognitive limitations on the
information gathering and processing power
of human mind
facilitates the practice of considering
opinions
supports building of "What if" scenarios.

Example of management
simulation game

What if customers
do not pay on
time?

What can we do?

Strategy /
Policy
option

Retaining
profit

Borrowing
money
from the
bank

Strategy 1

Strategy 2

Strategy 3

Strategy 4

Chose
Delay
customers paying to
that are
suppliers
better
payers
/Lose the
market!

Lets simulate!

Crystal ball
Turnover Profit
Average
(local
margi aging of
currency
n
accounts
in
receivable
millions)
(months)
Scenario 1

4.53

Scenario 2

Average
aging of
debt to
suppliers
(months)

Negative
cash
position
(local
currency in
millions)
No

2.08

3.00

4.53

16.7
%
9.0%

13.60

3.00

Scenario 3

4.53

3.8%

13.60

3.00

Scenario 4

3.88

5.86

3.00

Scenario 5

3.88

15.5
%
15.5
%

Yes (39.19)
Yes (10.60)
Yes (-0.84)

5.86

5.94

No

Graph for Cash

2M

1
45

1 23 4 51 2 3 4 5 1

45

45

4 51

451

45 1

3
2

-8.5 M

-19 M

2
2

-29.5 M

2
2

-40 M
1

51

101
Time (Month)

150

200

Cash : Scenario 1 - Ideal case

1
1
1
1
1
Cash : Scenario 2 2
2
2
2
2
2
2
Cash : Scenario 3
3
3
3
3
3
3
3
Cash : Scenario 4
4
4
4
4
4
4
Cash : Scenario 5
5
5
5
5
5
5

Local currency
Local currency
Local currency
Local currency
Local currency

Graph for debt to suppliers

4M

3M
2M

51

1M
0

5
12
12 34 5

34

51

512 3

12 3

12 3

12 3
4

12 3
4

1
4

4
4

101
Time
(Month)
1

Debt to suppliers : Scenario 1 - Ideal case

2
Debt to suppliers : Scenario 2
3
Debt to suppliers : Scenario 3 3
4
Debt to suppliers : Scenario 4 4
5
5
Debt to suppliers : Scenario 5

150
1

1
2

2
3

4
5

1
2

3
4

1
2

3
4

200

4
5

DEM
DEM
3 DEM
DEM
DEM

Behind the scene

Cash

amount repay ed

taxes

Cash
acc rec collected

interest pay ed

inf low

outf low

amoutn borrowed
pay ment in adv ance
prof it pay out

total pay ment to suppliers

pre tax return collected

import costs pay ed
currency ratio

pay ing
admin and sell costs

decrease in debt
to suppl
Debt to suppliers
buy ing price in
f oreign currency
increase in debt
to suppl

products receiv ed

decrease in debt
to suppl

time to pay suppliers

Lessons learned from the

model
The worst solution would be to do nothing
Credit from the bank would not be sufficient
Because of a restrictive accounts receivable
policy the firm would eventually lose its market
share
The only way out use informal sources of
credit and to delay payments to suppliers,
which is the most likely reaction.

Because of the inefficiency of the legal system, most firms

decide to pay debts late simply because the cost
associated with late payment is smaller than the cost of
alternative sources of finance.
Underpaid suppliers usually do not terminate further
shipments for fear of losing their clients, and, as a result,
mutual arrears become a universal practice.

Final effect
Symptomatic
"solutions" (delaying
payments)

Problem symptom
(nonliquidity)

Fundamental solution
(increase efficiency of
legal system)

Side effect (financial

indiscipline)

How to do it?
Philosoph
y

Methodol
ogy

Tools

System
Approach

Simulation
Modelling
System
Dynamics

Software

The Fifth
Discipline: The
Art & Practice
of the Learning
Organization

Business
Dynamics:
Systems
Thinking and
Modeling for a
Complex World

Vensim, Stella,
iThink

Models are to be used, not

believed.
Henri Theil