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Finance in Enterprise > Collected Concepts > Flashcards

Collected Concepts Flashcards

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1
Q

Accounting

A

Collecting, analysing and communicating of economic information to make business decisions

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2
Q

Fixed Costs

A
  • A cost that doesn’t vary depending on production or sales levels
  • Total fixed costs stays the same with increased production
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3
Q

Variable costs

A
  • Costs that increase proportionally with volume of stock produced
  • At certain levels of production may become stepped
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4
Q

Stepped Costs

A

Cost that changed to a different value

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5
Q

Factors influencing Fixed costs

A
  • Location
  • Size of premises
  • Type of business
  • Number of employees
  • Type of manufacturing
  • Qualifications of employees
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6
Q

Combination Costs

A
  • A combination of fixed and variable costs
  • A certain minimum level will be incurred regardless of sales levels, but the costs rise as volume increases
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7
Q

Direct materials

A

Materials which can be identified with the product (Wood for making furniture, etc.)

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8
Q

Direct Labour

A

Wages paid to those who make the product

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9
Q

Direct expensies

A

The expenses that can be attributes to the product

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10
Q

Indirect labour

A

Wages and salaries paid to those who are not directly involved in producing the product

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11
Q

Indirect expensies

A

Running expenses related to the business

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12
Q

Overhead

A

Indirect labour + Indirect expenses

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13
Q

Total revenue/Turnover

A

Price x Quantity Sold

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14
Q

Total costs

A

Total variable costs + fixed costs

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15
Q

Profit

A

Total revenue - Total Costs

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16
Q

Break even

A

Total costs = Total Revenue

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17
Q

Cash flow

A
  • A flow of cash through a business
  • Positive cash flow is essential in short and long term
  • Shows main uses of cash
  • Can locate problem areas or times of the year
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18
Q

Cash

A

Any cash the business can get hold of at 24 hours notice without incurring penalty

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19
Q

Net total

A

Change in cash within the business over certain period of time

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20
Q

Net cash flow

A

Cash from sales - Cash used to buy stock, pay wages, etc.

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21
Q

Financial needs to be considered

A
  • Net cash flow
  • Return on investments
  • Taxation
  • Equity dividends
  • Management of liquid resources
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22
Q

Planning Process 1

A
  • List all assumptions
  • Test and review assumptions
  • Obtain agreement on assumptions
  • Involve all stakeholders
  • Agree on ‘informal’ contract with each stakeholder
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23
Q

Planning Process 2

A
  • Develop a methodical spreadsheet
  • Aim for a realistic amount of detail
  • Use pessimistic realism
  • Time horizon
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24
Q

Modeling issues

A
  • Time increments
  • Planning horizon
  • Inflation
  • Interest rates
  • Exchange rates
  • Cost behaviour
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25
Q

Model testing

A
  • Does it make sense?
  • Can model be flexed to test ideas?
  • Is it manageable?
  • Does it answer the question business have?
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26
Q

Analysing Cash Flow

A
  • Net Cash Flow positive or negative ?
  • Determine main causes of problem
  • Identify main cash flow factors
  • Use the Pareto (80:20) Rule
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27
Q

Pareto Rule/80:20 Rule

A

For many events, roughly 80% of the effects come from 20% of the causes

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28
Q

Ways to Improve Cash Flow

A
  • Cut Costs
  • Chase slow paying customers
  • Negotiate credit terms with suppliers
  • Check customers credit history before offering credit
  • Get customers to pay in advance
  • Reduce stock
  • Borrow money for property or equipment
  • Lease equipment
  • Avoid surplus staff (temps, part-time)
  • Avoid opulent premises and under-employed receptionists
  • Watch for theft, fraud, etc.
  • Make use of bank manager (Overdraft, lines of credit)
  • Capital v Revenue
  • In-house v Bought Out
  • Control Debtor period
  • Move fixed costs into variable costs
  • Sales strcuture
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29
Q

Cash Flow Improvement Processes

A
  • Monitor cash flow against the Plan
  • Cultivate Bank Manager
  • Pay special attention to payment terms for a big order
  • Examine Balance sheet to see where cash is held
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30
Q

Sensitivity Analysis

A
  • Determination and implementation of strategies to overcome identified risks
  • Size of impact of the risk
  • Probability of occurrence
  • Cost and availability of counter measures
  • Identify key outputs
  • Select the inputs that have the greatest impact on the key outputs
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31
Q

Asset

A
  • A resource that a business owns where:
    • A probable future benefit in terms of cash value
    • The business has an exclusive right to benefit
    • Benefit has arisen from a past transaction or event
    • Capable of being measured in cash terms
  • Assets = Capital + Profit/loss + (liabilities)
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32
Q

Assets Examples

A
  • Cash
  • Stock
  • Debtors
  • Shares
  • Property
  • IP / Patent
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33
Q

Types of Assets

A
  • Current assets (working capital)
  • Fixed assets
  • Other assets
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34
Q

Fixed Assets

A
  • Relatively permanent resources intended for the use of the firm, appear over several years of financial statements
  • Value = original value - accumulated depreciation
  • Used to generate wealth and are held for more than one year
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35
Q

Current assets/Working Capital

A
  • Assets that can be converted to cash within the firm’s operating cycle
  • Expected to be converted to cash during normal operations
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36
Q

Other Assets

A
  • Patents
  • Copyrights
  • Goodwill
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37
Q

Balance Sheet [Types of Liabilities]

A
  • Current liabilities
  • Long term liabilities
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38
Q

Current liabilities

A

Liabilities that will be paid off within firm’s operating cycle

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39
Q

Types of Financing

A
  • Debt Capital
  • Short-term (current) Liabilities
  • Long-term Liabilities
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40
Q

Types of Financing [Short-term Liabilities]

A
  • Accounts payable
  • Accured expenses
  • Overdraft
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41
Q

Types of Financing [Long-term Liabilities]

A

Loans and mortgages from banks and other lenders with maturities greater than one year

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42
Q

Types of Financing [Debt Capital]

A

Financing provided by a creditor

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43
Q

Dual Aspect convention

A
  • If a transaction occurs, it has two aspects
  • e.g. if you buy a car fixed assets increase and cash decreases
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44
Q

Prudence convention

A
  • Be cautious, write off expected losses
  • e.g. from clothing line that proved to be unpopular
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45
Q

Stable monetary unit convention

A
  • The balance sheet doesn’t include inflation, but property can change drastically in price
  • Can be re-valued from time to tome to give a more realistic value than historic cost
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46
Q

Objectivity convention

A
  • Try to use fact rather that managers opinion.
  • If stock value falls below historic cost value (e.g. out of date technology products), then list as “net realisable value” which is selling price-cost of sale
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47
Q

Profit and Loss Account [Income]

A
  • Reports wealth generated over a defined time period
  • Need to list Revenue and Expenses
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48
Q

Revenue

A
  • Inflow of assets to the business
  • Subscriptions
  • Fees
  • Interest on investments
  • Dividends from shares
49
Q

Expenses

A
  • Outflow of assets from the business
  • Salaries
  • Rent
  • Utility bills
  • Cost of sales
  • Tax
  • Insurance
50
Q

Gross Profit

A
  • Sales - cost of sales
  • Cost of sales in simply the raw material
51
Q

APR

A

Annual Percentage Rate

52
Q

Monthly payment

A

Principal + Interest

53
Q

Depreciation

A
  • All fixed assets (except land/property) are used up over time and need to be replaced
  • Tries to measure the amount of asset used in creating revenue over time
54
Q

Cost of the asset

A

Anything it needs to make it ready for use

55
Q

Depreciation Methods

A
  • Straight Line
  • Reducing Balance
56
Q

Depreciation Methods [Straight Line]

A
  • Divide the cost of the asset by your estimate of its useful life
  • Reduce its value each year to zero
  • (Original value - Remaining value) / Expected life
57
Q

Depreciation Methods [Reducing Balance]

A
  • Reduce the value each year by a fixed %
  • This will mean a high cash value in early years but will be less in later years
  • Factor = 1 - n * sqr(remaining value/original value)
    • n = expected life
58
Q

Depreciation Methods Example

A
59
Q

Ratios

A
  • More meaningful than absolute numbers
  • Alert to potential problems
  • Used for company analysis
60
Q

Profitability ratios

A
  • Important for investors and for share price
  • The level of profit in relation to money invested
  • To be able to consider the return on investment with respect to the risk involved
  • To be able to compare with other companies in the same sector
61
Q

Return on capital Employed (ROCE)

A
  • Profit before tax/Capital Employed
  • Needs to be big enough to:
    • Provide a sufficient return to the shareholders
    • Attract new investors
    • Provide an increase in reserves to match inflation
    • Allow the business to grow
62
Q

Capital Employed

A
  • Fixed assets + Current Assets - Current liabilities
  • Share capital + Loans + Retained profits
63
Q

Return on shareholders capital (ROSC)

A

Profit before tax / Shareholders capital

64
Q

Shareholder’s capital

A

Share capital + Retained profits

65
Q

What investors look for

A
  • Net present value of future profits
  • Net present value of forward order book
  • Companies past and predicted growth
  • The field the company operates
  • The assets held by a company
  • The company management
66
Q

Profit Margin

A
  • Net Profit margin = PBT / Turnover x 100
  • Gross PM = Fross profit / Turnover x 100
  • Whole organisation or individual products
  • Where the main costs in your organisation
  • High turnover not necessarily equal to high profits
67
Q

Activity ratios

A
  • Show how efficient you are compared to similar businesses
68
Q

Credit control

A

Average collection period = (Debtors / Credit sales) x 365

69
Q

Stock control

A
  • Days finished good stock = (Finished good stock / Annual cost of sales) x 365
  • Days raw material stock = (Raw material stock / Annual cost of raw materials) x 365
70
Q

Liquidity ratios

A
  • Ensures you are able to meet short-term obligations from current assets
  • Overdraft, trade creditors, wages, VAT
71
Q

Current ratio

A
  • Current assets / Current liabilities
  • Should be close to 1.1 as the safe operation of a business allows
  • Typically 1.2 to 1.8 is good; Varies with sector
72
Q

Quick ratio (acid test)

A
  • (Cash + deptors) / Current liabilities
  • Typically 0.7 to 1.0 is good
73
Q

Interest Cover

A
  • Shows how much profits can fall before a firm cannot keep up its interest payments
  • Profit before interest & tax / Interest expense
  • 1.5 considered necessary; > 3 reccomended; < 1 is a big proplem
74
Q

Gearing

A
  • Ratios of Loans to Equity (Shareholders capital)
  • Loans(long+short term) / Share capital + Retained profits
  • 1:1 is about right, but wide ranges exist
  • Should be less than 3
  • High hearing increases risks, but cal also increase profits to shareholder
75
Q

Other ratios

A
  • Sales revenue per square metre (Retail)
  • Revenue/profit generated per employee
  • Revenue/profit per fixed asset value (ROA)
  • Revenue/ prefot per working capital
  • Sales per geohraphic area
  • Segmented revenue/profit per product
  • Asset Turnover
76
Q

Earning per share (EPS)

A
  • Earning available to shareholders / Number of shares in issue
77
Q

Dividend yield ratio

A

Dividend per share / Market value per share

78
Q

Dividend payout ratio

A

Dividends announced for the year / Earnings available for dividens

79
Q

Price to Earnings ratio (PE)

A
  • Market value per share / Earnings per share
  • PE averages vary between industries and are often used as a basic form of company valuation
80
Q

Limitations of ratio analysis

A
  • Dependent on accuracy of financial statements
  • Don’t look at absolute changes which compliment ratio analysis
  • Need to compare with other business but no two businesses are the same
  • Balance sheet ratios are also only a snapshot of the financial position
81
Q

Awards/Grants/Prizes Financing

A
  • Non-repayable cash
  • Good publicity
  • In-kind support
  • Terms and conditions vary
82
Q

Tradeoffs between Debt and Equity

A
  • Potential profitability
    • Firm return on assets > cost of debt = owner return on investment increases as firm uses more debt
  • Financial Risk
    • If firm is not doing well, increased possibility of lower or negative returns
  • Voting control
    • Dept permits owners to retain all stock and ownership
83
Q

Business angels

A
  • Individuals or clubs of individuals of “high net worth”
  • Invest in area of interest to them personally and have own criteria for investing
  • Normally take a board position and a percentage of the company in return
  • Normally invest up to £225K
  • Can be a valuable source of new contacts and advice
84
Q

Venture Capitalists (VC)

A
  • Large companies interested in profitability of the company
  • Strict criteria
  • Take close interest in experience and qualifications of the management team
  • Important to offer an exit strategy
  • Take a percentage of the company and a place on the board
  • Investments from £250K to £2M+
  • Needs an extremely thorough business plan
  • Normally limit to 5 years
  • Accept that many of the businesses they invest in will fail
85
Q

Exit strategies

A
  • Build up a company for a trade sale to a competitor
  • Sell to new equity investors
  • Float on stock exchange
  • Management buy-in or buy-out
  • Failure
86
Q

Stages of VC

A
  1. Initial screening
    • Assess experience
    • Management team
    • Projected growth
    • Market for future sale
  2. Managment support and monitoring
    • Appoint a non-executive director
    • Involvement in strategy, marketing and accounting
  3. Exit
87
Q

Pros of Equity Funding

A
  • Higher risk money
  • Higher growth money
  • Maintenance borrowing ability
  • Flexibility
  • Cash with added value
88
Q

VC Pros

A
  • Resources
  • Network
  • Credibility
  • Funding
89
Q

VC Cons

A
  • Dilution of ownership
  • Loss of ‘freedom’
  • Finance driven
  • Opinionated investor
90
Q

Bank Loans

A
  • Given on basis of tangible assets
  • Most likely to be used by an expanding company rather then startup
  • Little interest in the venture, only that you repay the loan
  • Prefer low-risk companies
91
Q

Factoring

A
  • Asset-based loan
  • Factoring company buys your debts
  • Company takes over day to day work
  • Types:
    • Recourse - cost of bad debt retained by customer
    • Non-recourse - bad debt protection
  • Cost: service fee (1-2%); interest charge
92
Q

Factoring Pros

A
  • Up to 80% of your invoice value in advance
  • Allows management to concentrate on growing the business
    *
93
Q

Factoring Cons

A

Costs 0.5 to 3.5% of turnover

94
Q

Types of Risk

A
  1. Operational (lack of skills, loss of assets, product failures, etc.)
  2. Financial (shortage of cash, interest rates, exchange rates, etc.)
  3. Strategic (market changes, tech changes, loss of IP, etc.)
  4. Hazards (health and safety, environmental damage, etc.)
95
Q

Exit Strategy

A

A plan for leaving a business

96
Q

IPO Advantages

A
  1. Raise money for growth
  2. Raise profile of company
  3. Motivate employees (share options)
  4. Easier to buy other businesses (By offering shares)
  5. Reassure customers of your long term plans
97
Q

IPO Disadvantages

A
  1. The cost
  2. Needs army of accountants and lawyers to prepare prospectus
  3. Regulation is very strict
  4. Loss of control of the company
  5. Need to consider shareholders as priority
  6. Vulnerable to market fluctuations and external uncontrollable events
98
Q

Company Valuation

A
  1. Book Value (Assets - Liabilities)
  2. Market Capitalisation (number of shares X share price)
  3. Sales to price ratio (sales / share price)
  4. Share price to earnings ratio (P/E)
99
Q

Elasticity of demand

A
  1. Degree to which a change in price affects the quantity demanded
  2. Elastic demand changes significantly when there is a change in the price of the product
  3. Inelastic demand does not change significantly when there is a change in the price of the product
100
Q

Penetration Pricing

A
  1. Low prices selected to introduce a new product into the market or increase market share.
  2. Suitable for long life cycle mass market products such as household goods.
101
Q

Market Skimming

A
  1. Selected for high price low volume products where money needs to be made as soon as possible before a patent runs out.
102
Q

Predatory Pricing

A

Products are sold at a low price to force rivals with lower resources out of business.

103
Q

Loss Leader

A

Products sold below the cost price to attract peoples attention

104
Q

Value Pricing

A

Charging a price in line with customer expectations of an exclusive product

105
Q

The Going Rate

A

Looks at rivals prices and sets prices similarly

106
Q

Price Discrimination

A

This is done when the same product or service is priced differently to different sections of the market, such as pricing train tickets higher during peak times

107
Q

Price Lining

A

Setting a range of several distinct merchandise levels

108
Q

Little’s Law

A
  1. The average throughput time for a manufacturing operation is proportional to the inventory held within that operation
  2. Long term average customers in a stable system (L) = Long term average arrival rate (ʎ) x long term average time (W)
109
Q

Factory Layout

A
  • A key method of controlling costs, quality and throughput speed of materials to products
  • Functional
    • Based on a commonality of process (but could be working on different products)
  • Cellular
    • All the people and process needed to make a single product
110
Q

Functional Layout Advantages

A
  1. Supports wide product range
  2. Can be flexible
  3. Good for specialist expertise
  4. Can cope with minor stoppages
111
Q

Functional Layout Disadvantages

A
  1. Complex flow path for materials/WIP
  2. High levels of WIP in the system
  3. Long/unpredictable throughput times
  4. Inefficient materials handling
  5. Complex process control
112
Q

Cellular Layout Advantages

A
  1. Good for high volume /low variety products
  2. All familiar with the working of the cell
  3. Better control of WIP and quality
  4. Throughput times more predictable
113
Q

Cellular Layout Disadvantages

A
  1. Difficult to change between products
  2. Inflexible
114
Q

Kaizen

A
  • The art of continual improvement
  • Encompass whole company
  • Everyone has a say in how to improve
  • Reducing waste to improve quality
  • Flexible workplace practice
  • Punctuality
  • Empowerment of staff to make decisions
115
Q

Competitive Advantage

A

When a firm makes above average profits for that particular industry

116
Q

Sustainable competitive advantage

A

A competitive advantage which cannot be imitated/copied by competitors or eliminated by environmental changes

117
Q

Lower Cost Structure

A
  • Efficient Business model e.g. JIT method
  • Locate cheaper suppliers
  • Outsourcing processes outside of your core skills (e.g. Manufacturing in Asia)
  • Cheaper premises (e.g. not Central London)
  • Optimum number of staff (Contract staff)
  • Not always lower prices for customers – could mean higher margins if there are few competitors!
118
Q

Economy of Scale

A
  • Fixed cost of each unit spread over more units e.g. rates, utility bills, rent of premises etc.
  • Fixed cost of research/development is lower
  • Able to buy raw materials in bulk, lowering variable costs.
  • Lower cost of deliveries per unit.
  • Avoid marginal customers
119
Q

Learning Curve Effect

A
  • As workers practice making units, they become better at it, lowering costs by creating fewer poor quality units and making them faster.
  • Your researchers will improve with experience
  • Experience in a consultancy role – a template for future work (Next time you are quicker and better)

Finance in Enterprise (2 decks)

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