chapter 7 Flashcards
Payback period
Estimated time required to earn sufficient net cash flow to cover start up investment
Variable costs
Expenses that very directly with changes in production or sales volume
two types of variable costs
Cost of goods/services sold and other variable cost
fixed cost
Expenses that must be paid regardless of whether or not sales are being generated
if a business does not have enough sales to cover it’s fixed cost it will lose money
calculating critical costs
Total gross profit
economics of one unit
inventory cost
total gross profit (contribution margin)
Gross profit per unit the selling price minus total variable cost plus other variable costs
EOU when multiple products sold
A business selling a variety of products have to create a separate EOU for each item to determine whether each is profitable
Inventory costs
Expenses associated with materials and direct labor for production until the product is sold
average contribution margin
A business selling a variety of products can use average COGs to determine an average contribution margin
Seven common fixed operating costs USAIID
utilities salaries advertising interest insurance rent deprecreciation
Fixed operating cost
Expenses that do not vary with changes in the volume of production or sales
depreciation
The percentage of value an asset subtracted periodically to reflect the declining value
accounting
The systematic recording reporting and analysis of the financial transactions of a business records of and flowing out loud
receipt
document with date and amount of purchase
invoice
A bill or statement that shows the product or service sold and the amount the customer is to pay
cash flow basics
Cash is the energy that keeps your business flowing
the success of the business will depend upon cash from start up through existence
cash is essential for initial investment on going operations and growth
cash flow statement
Financial document that tracks the money coming into you and going out of an organization
working capital
The value of current assets minus current liabilities
Tells how much cash the company would have if it paid it short term debt with the cash it had on hand
cash flow cycles
Cash flow cycles of care for every business in our important to understand because they make a difference between success and failure
cash flow seasonal
cash flow can be seasonal for many business amount of cash flowing into a business may depend on where the business is in its fiscal year
Cash flow statement
inflows and outflows of cash are divided into three categories operations investment and financing
cash flow equation
Cash flow = cash on hand + cash receipts -cash disbursements
Healthy cash one
Keeping sufficient cash on hand and available to pay your bills any timely fashion and in general to have financial resources available to you when you need them
burn rate
The pace at which a company spends capital before generating positive cash flow
Capital budgeting
(cash available + revenue) / negative cash outflow per month = #of months before cash runs out
Future value
the amount an asset will gain overtime
Compound interest
The interest or rate of return accumulating on the interest or other returns in addition to earnings on the principal
present value
The worth of a future asset or other investment discounted back to the present example inflation risk opportunity
Discount rate
The interest rate you need to earn on a given amount of money today to end up with a given amount of money in the future
financing
The act of providing or raising funds for a purpose
Three ways for a business to raise the capital to grab
Finance with earnings
finance with equity
finance with debt
Risk tolerance
The amount of risk or threat of loss that an individual is willing to sustain
Debt financing forms
Commercial loans
personal loans
leases
bonds
Debt financing pros
Loan payments are predictable
lenders do not share business profits
lender has no say in operation of business
Debt financing cons
If loan payments are not made lender can force business into bankruptcy
if business is not incorporated and defaults lender can take house and other possesions of owner
loan payments increase fixed cost lower profit
Promissory note
A loan document that is written promise to pay a specific sum of money on or before a particular date
Principal
The amount of a loan before interest and fees are added
leveraged
Financed by debt as opposite to equity
default
The result of a borrower failing to meet the repayment agreement on a day
The five C’s of credit/borrowing
Collateral character capacity capital conditions
Three categories of financial investment/risk
Stocks-shares of company
bonds-loans
cash-liquidation
how stocks work
Shares of stock represent a percent ownership in a corporation public corporation sell stock to general public to raise capital prices of starred reflect investors opinion about business performance and value traded on the stock exchanges
Share
A single unit of a corporate stock
How bonds work
interest-bearing certificates that corporations and government issues to raise capital lower risk and return expected then with Stocks a form of debt financing with a guaranteed rate of return to investors securities maturity face value par premium discount
Five legal business structures
Sole proprietorship partnership C corporation professional corporation (PC) limited liability company (LLC)
contract
In agreement between two or more parties enforceable by law
For A’s of successful contract
Avoid misunderstanding
assure work
assure payment
avoid liability
Breach of contract
the failure of a signatory to perform as agreed
Basis of bankruptcy
The legal process in which an individual or business declares the inability or impaired ability to pay debts as they come due
trademark
Any words of Sandor or design that identifies and distinguishes the source of the goods of one party from those of others
Patents
And exclusive right granted by the government to produce use and sell an invention or process
Basics of selling maintaining growing clothing
Sell to others and merge
maintain
grow- generate internally -acquire others -license your brand -franchise business close- cease operations -bankrupt
Licensing
Renting your brand or other intellectual property to increase sales
Replication strategy (franchising)
A way to obtain money from a business by letting others copy it for a fee
harvesting
The act of selling taking public offering or merging a company to yield proceeds for the owners
exiting
Leaving the business through closure liquidator or bankruptcy
Harvesting options
Increase free cash flow management buyout (MBO)
employee stock ownership plan (ESOP)
merging or being acquired
initial public offering (IPO)
Exiting strategies
Aquisition
earn out
debt equity exchange
merger
