3.1/3.2
What is capital expenditure?
Money spent on assets (last more than one year) ex: buildings and machinery
What is the margin of safety?
The amount by which the output level exceeds the break-even level of output
Define cash flow
Net amount of cash and cash-equivalents being transferred into and out of business
List 1 source of internal finance
Personal funds, retained profits, sale of assets
List 1 use of breakeven analysis
- To make marketing decisions, eg. impact of price increases on sales
- Helps to tell whether a good can be financially worthwhile and the level of profit a business is likely to earn
- An operations management decision, eg. purchasing new equipment
- Choosing between two locations for a new factory
List 1 benefit of cash flow forecast
Forecasting periods of negative cash flow allows companies to prepare
ex) Arranging bank overdraft, preparing to inject more of owner’s capital
If cash flow is too negative, plans can be made to alleviate the situation
ex) Cutting down on purchase materials, reducing sales on credit, etc.
Business proposals will never progress unless investors & bankers are presented with a cash flow forecast
What are semi-variable costs? Explain and provide an example.
Costs that have both a fixed and variable cost element; fixed for a set level of production/consumption and becomes variable after this production/consumption level is exceeded
Eg. sales person’s fixed basic wage plus commission that varies with sales
Name a limitation of breakeven analysis
Assumption that costs and revenues are always represented linearly is unrealistic
Not all cost can be conveniently classified into fixed and direct cost
No consideration for stock levels on break-even chart
Unlikely fixed cost will remain unched
Cost and price data only estimated
The average rate of return (ARR) measures the annual profitability of an investment as a percentage of the initial investment.
List 3 sources of external finance
Debt Factoring, Bank Overdraft, Trade Credit, Leasing, Grants, Sales of Shares, Debentures, Venture Capital, Loan Capital, Business Angel, Subsidies
What is 1 strategy to improve profitability and efficiency ratios?
Increase gross and net profit margin by reducing direct costs – cutting the cost of goods sold, eg. cheaper materials, lower labor costs, cut wages
Increase gross and net profit margin by increasing price, eg. raise the price of products
Increase net profit margin by reducing overhead costs, eg. cheaper location, less promotion, delayering the organization
List 1 qualitative factor to evaluate the profitability or desirability of an investment project?
Impact on the environment/community:
- The project may be damaging to the local community/environment causing a negative image on the business to be formed.
Planning permission:
- Some projects may not receive the permission to go through with the project, if it’s going against the communities interests.
Aims/Objectives of the business:
- If a project threatens the main aim/objective of the business, the manager may not pursue the project.
Risks:
- Managers with different views will be prepared to accept the different degrees of risk.
What are revenue streams? Explain and provide 2 examples.
the income that an organization gets from a particular activity
eg. subscription service, advertisement, transaction fees, sponsorship, franchise, renting a factory to another business, dividends on shares, interest on deposits in bank
What is 1 strategy to improve liquidity ratios?
Sell off fixed assets for cash – could lease these back if still needed by the business, eg. land and property could be sold to leasing company
Sell off inventories for cash – will improve acid test, not current ratio
Increase loans to inject cash into business and increase working capital, eg. long-term loans
What is the payback period?
The payback period is the length of time it takes for net cash inflows to pay back the original capital costs of the investment.