A DYNAMIC SIMULATION MODEL FOR BUDGETING AND FUNDS
MANAGEMENT FOR SMALL SCALE FIRMS IN TURKEY
Niiket Yetis, Fevzi Tas¢1, Erol inelmen
1, INTRODUCTION:
Modern financial management is a complicated subject even for the experts. The entrepreneurs of
small-scale firms in Turkey, having limited men-power and due to lack of budgeting or financial
planning knowledge, have to rely on ad-hoc advice on their financial affairs from part-time
financial advisers, or junior bankers and their life is full of unpleasant surprises. Consequently a
simple budgeting and financial planning tool is a great contribution to their basic needs in
strategical and operational management. A simple and demonstrative simulation model on
budgeting and financial planning will be a highly desirable tool for the training of managers of
small-scale firms. If such a tool had been available for them then they would practice with it to
gain confidence to implement the methods set forth in the model in real life for better
achievements. This is the idea behind the “Dynamic Simulation Model of Funds Management for
Small Scale Firms” in Turkey presented in this paper.
The sections that follow will cover budgeting and funds management, application of system
dynamic simulation models to budgeting, previous work in financial simulation, proposal for a
simulation technique, findings and conclusions.
2, BUDGETING AND FUNDS MANAGEMENT
Anybody with some experience and knowledge on financial planning and model building realizes
that each activity in the firm has an effect on the cost or benefit of the firm, which will be
consequently reflected on the financial statements of the company. Each activity is result of action
between’ several possible alternatives, which are in turn determined by several exogenous or
indigenous factors. The multiplicity of alternatives and factors involved imply the complicated
nature of the model. for example, in production planning process, we know that production
capacity, type and composition of products, production technology, qualifications and number of
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workers, capital requirements for fixed assets, working capital and inventory, sales forecast and
marketing, short and long term credit arrangements and costs, are interrelated factors and
activities of a firm i.e. each is influenced by others: This is not an exhaustive list; there are several
other factors or activities interrelated in the manufacturing industry that are subject of continuous
research.
A simulation model should reflect but simplify this multiplicity of factors for different people
with different priorities and judgments. Ideally the model should be flexible enough to produce
the financial statements for any point of time on the time scale and for any span of time. These
aspects of the simulation model necessitate some simplifying assumptions and restrict it for the
small-scale firms. It is therefore characterized as a quasi-realistic simulation model.
3. SYSTEM DYNAMICS SIMULATION
The aim of System Dynamics and Simulation models is to identify the important relations among
several factors without living through an expensive experience to discover the results of decision
making. Some managers failing to realize pitfalls of interrelated factors may insist on wrong
concepts and malpractices, which drag them to vicious circles and endanger the future of their
companies. If they practice and contemplate on the impartially drawn Influence Diagrams of their
activities, they may have a chance to discover the positive loops in their system. Ideally, managers
would like to discover an overall performance indicator of the firm, which could be calculated
and displayed immediately on the demand. Since such an indicator does not exist in practice the
managers can discover some of the important performance indicators through simulation models
using the method of system dynamics.
Therefore, to device a practical and quasi-realistic simulation model for funds management
requires that it should be:
Te Simple and based on commonly available PC programs,
2. Restricted to requirements of small scale firms,
a. A budgetary tool and financial planning instrument,
oneness
4. Simple enough to be revised frequently by user to reflect changes in external
conditions,
5. Have relatively small number of input parameters,
6. Flexible to cover short and long term periods,
cA Flexible for changing internal and external assumptions,
8.
Produce reports in conventional financial statements.
4, PREVIOUS WORK IN FINANCIAL SIMULATION MODELS:
Several “financial simulation models” for computers have been developed by academia and
software industry. A realistic and comprehensive simulation model for a relatively large-scale
company requires quite a complicated, large and expensive program. Besides, such a program is
to be revised frequently by specialists as and when the conditions or the priorities or the policies
of the management change, making it impractical for applications in small-scale firms. Each case
has its own particulars, which are to be incorporated in the model without discouraging the
already shy user. In other words, customizing the model for each user is an important feature of
the model. Generalized models tend to be complicated. Too simplified models produce
unsatisfactory results. Therefore an optimum sophistication is targeted.
Jay W. Forrester introduced techniques for system dynamics in 1977 (2) that have been applied
on several areas including financial planning. Yetis, in 1982 applied system dynamics and
Simulation Models for a Cost-Volume-Profit analysis using DYNAMO Compiler. inelmen (3)
applied the same techniques in 1992 to problem of balancing cash flow of a company. R. C.
Coyle (4) published a new book in 1996 covering the subject comprehensively. In that book he
discusses the theoretical background, giving several samples in several areas including Financial
Planning and discussing the new developments and available Computer Package Programs such
as DYSMAP, COSMIC and COSMOS, VENSYM, STELLA, POWERSIM, etc. which are
developed after DYNAMO. His emphasis is also on specialized package programs designed for
simulation and system dynamics. In the book he used COSMIC which is DYNAMO related
program. He mentions that he has seen programs written in FORTRAN but does not comment on
spread sheet applications.
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5. PROPOSAL FOR A NEW SIMULATION TECHNIQUE
Spread sheet programs today are equipped with number of built in functions, goal seek and
scenario solvers including linear programming, etc. These packages are widely available. The
users of PC are becoming familiar with spread sheet programs and PC packages of the spread
sheet programs are relatively cheap. The programs are equipped with graphic modules which
produce varieties of graphics suitable for many cases. The spread sheet programs are also
equipped with development languages, such as Visual Basic which can be used to develop
DYNAMO type applications and Macros to facilitate development of user defined functions and
customising facilities. We are not in a position to comment on their assistance features for
developing influence diagrams, though a simple and easy-to-use manual drawing facilities exist
which can be used as an alternative to hand drawing of influence diagrams in a much elegant way.
A sample output of a sub model for recruitment and training of workers of the firm is attached
herewith as Annex 1. Influence Diagram for Recruitment and Training of Workers is given as
Annex: 2 (a) and Cost-Volume-Profit Model of Yetis as Annex: 2 (b).- All features of system
dynamics is easily applied and demonstrated that simple models are easy to develop and apply
with the help of spreadsheet program. Graphic facilities and what-if scenarios are easily applied.
Linear Programming and Goal Seek facilities are not utilized in the sample but could be used in
optimization of production and cost of capital. Expansion of the model for various levels of
management is easy. The results are obtained in few seconds and can be printed. Graphics
immediately reflect changes in the model as soon as any variable or assumption is recorded on the
spreadsheet.
Computer presentation of the results is attractive since displaying the results of revisions on the
screen instantly without boring the audience is possible. The facility called Auditing in recent
versions of some of the spread sheet programs which display interrelated cells in the spreadsheet
can be used to draw influence diagrams. Elaboration of this aspect is left to computer wizards.
seems
The proposed model is a prototype of dynamic simulation model of funds management for small
scale firms in Turkey. This is a narrowed version of the “Simultaneous Cost-Volume-Profit
Planning and Control” thesis of Yetis (1).
Yetis’s thesis was very comprehensive covering several modules and sub-modules Annex :2 (b)
and designed and run on mainframe computers with Dynamo Compiler. In this paper a much
simpler simulation model is prepared for a spreadsheet package program and applied to a simple
case just to demonstrate advantages and disadvantages of spreadsheet method vis a vis
DYNAMO and other simulation packages.
6. CONCLUSIONS
The purpose of this study is to demonstrate the scope of application of spreadsheet programs to
Dynamic Simulation Models on Financial Budgeting and Funds Management of a small-
scale manufacturing firm. Advantages and disadvantages of spreadsheet analyses against
Simulation Packages available in the market are discussed briefly in the paper. On the basis of the
foregoing discussions it can be concluded that relatively simple system dynamic problems can be
analysed using spread sheet applications. The computer wizards can develop user oriented
programs and develop techniques for easy drawing of influence diagrams and improve and extend
the model to cover more cases and make it easily applicable to the needs of a small scale
industrialist.
REFERENCES :
1. FORRESTER, J.W. (1961) Industrial Dynamics, MIT Press.
2. YETIS, N. (1982) Simultaneous Cost-Volume-Profit Planning and Control, ITU.
3, INELMEN, E. (1992) Integrating Data Data Bases with Model Bases for Decision Support
Systems, BU.
4. COYLE, R.C. (1996) System Dynamics Modelling, CHAPMAN & HALL
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Recruitment and Training of Workers
Base for Variable Demand]_10 JRondom Numbers (Demand Forest) 20M 6 oo 9 8 7
Bass for fixed Demand) 10 reiod] i] as] st loaf ol ul
Aucriment of fixed Demand| -0.3 CNT +z copies Random Numbers to the line "Demand available for the
[Results jann|
Parameters| mm] Work Load, beginning period 6 0 6 6 0 1 27 2% 30 30 33 28
Fra NooFiobs available | 323] Demand avilable forthe fmm Ro 9 9 we 8 ws 7
Potential work oa 2 1 9 TW a 40 38 40 a8 35
Number of Workerstobl 4 |work Force Needed for Ptenil Work Load 48 40 36 44 BF 112 176 160 152 160 192 140
[rot Not obs Undenaten | 7721 Jobs Undertaken (Dropped) oo 0 0 9 8 7 Ss 8 ww 7
ob Duration Peiods|_ 4 |Wrk Los end of period 0 0 0 1 1 2 39 oe 4 4 35
Frou Not Finished Jobs | 257] Jobs Finished, atthe end of period oo 0m 9 BT ek
‘Wark Loa, end of period 0 0 0 1 19 27 2% 9% 9% 33 28 27
Work Force Needed for Work Lond 0 0 0 40 76 108 136 156 152 160 172 M0
“Trnned (new) Workers Joined o 0 0 9 0 0 0 7 0 0 Oo
Total WorkForce, afer tines fined 0 0 0 79 76 108 136 193 152 160 172 218
‘Tranes ting nine, begining prod 09 6 & 6 1 4 4 0 87 87 87
[aver Noof NewReenits | 367] Now Recents 4% 0 0 0H 0 0 0 & 0 oO Oo
Duration of raining Povids|_4 |Tranes being tained end period ee
rap Out Rat, Ratio} 0.1 |Trainees Dropped Ot oo 04 0004 0 0 0 9
Tranes Joined the Work Force 0 0 0% 0 0 0 7 0 0 Oo
Naber of trainees os hand, end period 68 8 0 4 at 4 0 87 a a 0
[ Weortiaeestrinea]_10 Jraine Workers Needed $4446 6 4 4 6 9 9 9 8
“otal Workers Needed (Tisiners+ Workers) $4 4 4) 8 12 140 160 161 169 81 49
Total Work Fore, begining period 5 4 4 4 3 7 35 3 OS OD
Workers Quiting Rate, Ratio] 0.1 Workers quited, end period 10 004 4 437655
[aver. No.of Workers Avail [72.5] Tal Work Force, end period 44 4 43 39 35 ar 6S 58 52 7 10
Workers Available for work face 0 0 0 3% 3 Ho 6 wy oe
Work Losd that can be handed by Work Force oo 6 9 8 7 1 oO Wo 2
‘Work Load, beginning Period 0 0 0 1 19 27 24 30 30 33 28 27
{ob Disrepency (Ex obs, (7 Less Jobs 0 9 0 0-0 «9 17 «IS 8 a2 8 1
[average Workers Discrepancy [4.92] Workers Disrepany () Needed (+) Extn Wo, 45 44439 9 9 0
288
SETS:
Recruitment and Training of Workers
What-if Scenarios on Recruitment and Training of Workers:
Number of Workersatihestat 5 5 10 15 20 25 30 35 40 45 50 55
|. Total Nocof Finished Jobs 257 287 258 263 265 269 270 272 273 273 276 280
2. Average No, of Workers available X 2 MMS 145 146 148 149 152 152 152 154 152 155 157
3. Average Job Diseripancy X 20 90 90 89 -90 92 -93 92 96 92 97 94 96
4. Average Workers Discripancy X 5 246 246 242 25-235 261 21 236 24.1 22.7 23.1 231
fect of Naber of Workers t Star
go 510.35 20.25 30.35 40 45 60 $6 60 6S 70.75 90 85 9095 100 105 110 115 120 125 130 136 140145 160 155 160 65.170 76 466—
No of Workers at start
revo a] of a a] sl of of sl of ool ul
1. Jobs on hand (Work Load) x4 0 0 0 40 7% 108 136 156 152 160 172 140
2, Total Number of Workers (Work Force) 404 4 4 39 35 31 65 58 52 47 120
Nomber of Workers and Jobe
50
Workers debe
200
10 ~
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a = %.
1 = v =z a
= fF c= — a ~
bees
223-4567 8 9 DID 4 1S 16 17 W819 20 11 22-25 D4 25 26 77-28-29 50H 5215 D4 35 36 TT
Periods
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Annex: 2
a) Influence Diagram for Recruitment and
Training of workers
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5) Cost-Volume-Profit Model after Yetis (1982)
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