Toolkit Tactics
What is the Ansoff Matrix used for?
It is a strategic planning tool used to determine growth strategies by assessing new and existing markets and products.
What does "liquidity" mean in a financial context?
Liquidity refers to the ease with which an asset can be converted into cash without affecting its market price.
What is the primary purpose of a profit and loss account?
To summarize revenues and expenses over a specific period, showing the net profit or loss.
What is investment appraisal?
Investment appraisal is the process of evaluating the potential profitability and financial viability of a proposed investment.
What is the formula for calculating the gross profit margin?
Gross Profit Margin = (Gross Profit / Revenue) x 100.
Name the four growth strategies identified in the Ansoff Matrix.
Market penetration, market development, product development, and diversification.
Define "debt financing."
Debt financing is raising capital through borrowing, typically through loans or issuing bonds.
Name two stakeholders who would be interested in a company's final accounts.
Shareholders and creditors.
Name two common methods of investment appraisal.
Net Present Value (NPV) and Internal Rate of Return (IRR).
Name two liquidity ratios used to assess a company's financial health.
Current Ratio and Quick Ratio.
How does a Decision Tree help in business decision-making?
A Decision Tree visually represents the possible outcomes of different decisions, allowing businesses to analyze risks and benefits.
What is "equity financing"?
Equity financing involves raising capital by selling shares of stock in the company, giving investors ownership interest.
What is the difference between gross profit and net profit?
Gross profit is sales revenue minus the cost of goods sold, while net profit is gross profit minus all other expenses.
How does Net Present Value (NPV) help in making investment decisions?
NPV calculates the difference between the present value of cash inflows and outflows, helping to assess whether an investment will generate profit over time.
How is the current ratio interpreted in financial analysis?
The current ratio indicates a company's ability to pay short-term liabilities with its short-term assets; a ratio above 1 suggests good liquidity. 2:1 benchmark
Explain the concept of "diversification" as per the Ansoff Matrix.
Diversification involves entering new markets with new products, which can reduce risk but also comes with higher uncertainty.
Explain the term "return on investment (ROI)."
ROI is a performance measure used to evaluate the efficiency of an investment, calculated as (Net Profit / Cost of Investment) x 100.)
Explain the significance of the balance sheet in assessing a company's financial health.
The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time, helping stakeholders assess its financial stability.
Discuss one limitation of using payback period as a method of investment appraisal..
The payback period method does not consider the time value of money or cash flows that occur after the payback period, potentially leading to suboptimal investment decisions
Explain the significance of the acid-test ratio compared to the current ratio.
The acid-test ratio (or quick ratio) provides a more stringent measure of liquidity by excluding inventory from current assets, thus showing a company’s ability to meet short-term obligations without relying on inventory sales
Analyze how a business could use a Decision Tree to assess the viability of launching a new product.
A Decision Tree can help evaluate potential sales, costs, and probabilities of success or failure, guiding decision-makers in their investment choices.
What is "working capital," and why is it important?
Working capital is the difference between current assets and current liabilities, and it is crucial for day-to-day operations and financial health.)
Discuss how depreciation is recorded in final accounts and its impact on financial statements.
Depreciation is recorded as an expense in the profit and loss account, reducing taxable income, and it is also reflected in the balance sheet as a reduction in the carrying value of fixed assets.
Chislehurst Garden Centre (CGC) is investigating the feasibility of replacing its fleet of delivery vehicles. The new vehicles would cost $560,000. The investment would increase CGC’s annual sales revenue by $150,000 but raise costs by $50,000 a year. The estimated useful life of the new vehicles is 8 years with no scrap (second-hand) value. Calculate the ARR.
Annual net cash flow (or total returns from the project) = $150,000 – $50,000 = $100,000
Total projected profit = ($100,000 × 8 years) – $560,000 = $240,000
Average annual profit = $240,000 / 8 years = $30,000
ARR = $30,000 ÷ $560,000 = 5.36%
Discuss how profitability ratios can indicate a company's operational efficiency.
Profitability ratios, like net profit margin and return on equity (ROE), reflect how effectively a company generates profit relative to its revenues or equity, providing insights into operational efficiency and management effectiveness.