Certi know Flashcards
Explain the impact of debt ratio increase on liquidity. (task word) COMEBACK
Positive: new assets potentially increase liquidity by generating sales
Negative: higher loan repayments puts pressure on cash for many years and higher interest payment reduce the net profit.
What is debt ratio
Debt ratio determines the percentage of assets that are funded by borrowed funds.
What is profitability
Profitability is the ability for the business to earn profit, measured by comparing its profit against a base such as sales, assets or owners equity.
What are the profitability indicators
Return on owners investment, Net Profit Margin, Return of Assets, Asset Turnover, Gross Profit Margin.
2 way to reduce Accounts Receivable Turnover
- Send invoices promptly
- Conduct extensive credit checks
- Send reminder notices
- Develop a strong relationship with each customer
2 ways to reduce sales returns
Discounts, improve quality of inventory.
What is accounts receivable turnover
Calculates the average number of days it takes for a business to receive cash from its Accounts Receivable
Two non-financial indicators that can determine success of business.
- The firm’s relationship with its customers is important information to help assess sales levels. The number of repeat customers, along with customer complaints and sales returns, not only helps with predicting sales levels, but also inventory suitability and quality. (can use a survey to get this information)
What are the purpose of benchmarks?
Benchmarks are an acceptable standard against which the firms actual performance is assessed. You can see how well your business is doing compared to other things.
benchmarks that can be used to determine performance of business?
- Performance from previous periods: horizontal analysis and identification of trends (improved/worsened)
- Budgeted performance for the current period: whether profitability was satisfactory/unsatisfactory in terms of meeting the firm’s goals and expectations
- Performance of similar firms (industry average): compared against other firms operating under similar conditions
How can a business experience an increase in sales but at the same time a decrease on return on assets?
When assets are purchased the average Total assets will increase and the sales will only increase slightly meaning there will be a smaller proportion of Net profit when compared to average total assets. This means the Return on assets will fall indicating that assets have not been used as profitability.
How can net profit increase while cash flow is negative?
When you purchase Non-current Assets you are borrowing money so the cash flow will negative but the assets will help generate sales.
3 ways to improve GPM?
- Increase selling priceCarries the risk of lowering demand, and thus reducing the volume of sales. This could mean that while GPM increases, Gross Profit in dollar terms may actually decrease. that is, the business may make more Gross Profit per item but make fewer actual sales. If the drop in the number of sales outweighs the increase in profit per item, Gross Profit will actually fall
- Reduce cost priceIf quality of inventory is reduced through a change to a cheaper supplier, this could cause a decrease in sales volume, or an increase in Sales returns or Inventory losses (through damage)
eg. find a cheaper delivery company to reduce cartage in - Improve management of Inventory.
How preparing more income statement budget variance reports can improve profitability of a business? Provide example of increase in profitability.
Can add a benchmark that can so you can see what steps the business needs to take in order to meet the expectations and goals of the firm.
Positive and negative of a high WCR
Positive - the significant amount of cash can be used to pay off loans faster and reduce interest.
Negative - A large amount of inventory could incur additional storage cost, and increase the possibility of inventory loss and write-down (damage, and technical obsolescene)
