and the BSG is keeping lots of business students warm by the heat of their computers while making hundreds of strategic decisions. There is some shock and sadness when teams find themselves in last place or headed that direction. So I thought I’d give a few tips that can benefit most teams right away.
When you start the game in year 11, the company already has two loans. One loan is a 5 year term and the other is a 10 year loan that’s several years into the payments. If you simply pay off those two loans with the proceeds from a new loan, you will increase your cash flow and credit rating. Why? Because a loan with a 5 year term has higher payments to principal than a 10 year term. So you spread the principal over more years and significantly lowering the payment. That frees up cash. That free cash is part of your companies credit worthiness. Now you might ask: won’t we pay more in interest by paying the loan over 10 years instead of 5? Yes, if you actually keep paying the loan to its final payment at the end of the term. But you probably shouldn’t or won’t do that. You should be paying off the existing loans as you generate cash from profits, and then replacing the loan with a new one that’s smaller.
Then think about how loans are affected by the years of the game. You are probably playing from year 11 to 20. That’s 10 years of decisions. If you are in year 14 and you open a new 10 year loan for 50,000, you don’t even have to ever pay back about half of that principle because the game ends after year 20, only 5-6 years into the loan. All you have t worry about is the interest and principal payment for the years left in the game. This is like getting money today that you’ll never have to pay in the future. If you invest the proceeds of the loans into improvements that have high returns, then the profits can greatly exceed the cost of the loan. The trick is to end up with A+ credit in the last year of the game while holding a significant amount of long-term debt.