Concepts v2 Flashcards
1
Q
Profitability Ratio
A
- The level of profit in relation to money invested
- important for investors
2
Q
Return on capital employed (ROCE)
A
Profit before tax / Capital Employed
- Provide sufficient return to shareholders
- attract new investors
- provide increase in reserves to match inflation
- allow business to grow
3
Q
Return on shareholders capital
A
Profit before tax / shareholders capital
Shareholders capital = Share capital + returned profits
4
Q
New Profit Margin
A
PBT (profit before tax) / Turnover * 100
5
Q
Gross profit margin
A
Gross profit / Turnover * 100
6
Q
Activity ratios
A
- Show how efficient a company is compared to others
7
Q
Credit control
A
Average collection period = (Debtors / Credit Sales) * 365
8
Q
Stock Control
A
- Days finished good stock = (Finished good stock / Annual cost of sales) * 365
- Days raw material stock = (Raw material stock / Annual cost of raw materials) * 365
9
Q
Liquidity ratios
A
- Ensure company is able to meet short-term obligations from current assets (VAT, wages, trade creditors, etc)
10
Q
Current ratio
A
Current assets (cash, debtors & stack) / current liabilities
- Ability of a business to meet its immediate liabilities
- Close to 1.1 is safe
- 1.2 -> 1.8 is good
11
Q
Quick Ratio (acid test)
A
Cash + Debtors / Current liabilities
- Between 0.7 -> 1 is good
12
Q
Interest cover
A
Profit before interest & tax / Interest Expense
- Shows how much profit can decrease before company can’t keep up its interest payments
- < 1 is a problem
- 1.5 necessary
- 3 is recommended
13
Q
Gearing Ratio
A
Loans (long + short terms) / Share capital + retained profits
- Ratio of loans to equity
- 1:1 is about right
- Should be less than 3
- High gearing increases risks, but can increase profits for shareholders
14
Q
Risk managment
A
- Size of impact
- Probability of occurrence
- Cost and availability of counter measures
15
Q
Prioritising risk
A
Likely outcome = Probability of even * Consequences of event
16
Q
Operational Risk
A
- Lack of skills
- Loss of assets
- Loss of earning power
- Suppliers fail to deliver to contract
- Product/service failures
- Production/delivery failure
17
Q
Financial Risk
A
- Control system failure
- Shortage of cash
- Interest rate
- Fraud
18
Q
Strategic Risk
A
- Business environment changes
- Technology changes
- Market Changes
- Lack of Skills
- Poor Market research
- Loss of IP
19
Q
Hazards
A
- Health and safety issues
- Unplanned liabilities (injury)
- Environmental change
- Environmental impacts
20
Q
Process of Risk Managment
A
- Identify Risk
- Evaluate Risk
- Select methods to manage risk
- Implement the decision
- Evaluate and review
21
Q
Penetration Pricing
A
- Low prices selected to introduce a new product into the market or to increase market share
- Suitable for long life cycle mass market products
22
Q
Market Skimming
A
- Firm charges the highest initial price that customers will pay.
- As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.
- Selected for high price low volume products
- Money needs to be made as soon as possible before a patent runs out
23
Q
Predatory Pricing
A
- Products are sold at a low price to force rivals with lower resources to go out of business
24
Q
Loss Leader
A
- Products sold below the cost price to attract people attention
25
Value Pricing/Going Rate
* Looks at rival prices and set prices similarly
26
Price Discrimination
* When the same product or service is priced differently to different sections of the market
* Examples: ticket trains during peak times
27
Price lining
* Products or services within a specific group are set at different price points.
* The higher the price, the higher the perceived quality to the consumer.
28
Factoring
* Another company buys the debt
* Takes of day by day work
* Types
* Recourse - cost of bad debt retained by customer
* Non-recourse - bad debt protection
* Useful for small companies
* up to 80% invoice value in advance
* Good for cash flow
* Allows management to concentrate on the growth
* Costs 0.5 - 3.5% of turnover
29
Bank Loans
* Pros
* Good for expanding
* Cons
* Hard to get for a startup
* Have little interest in the venture, only that you can pay back
* Prefer low risk, the lower the risk the lower interest rate
* Usually given on basis of tangible assets
30
Founder disease
* Reluctant to lose control when company grows
* Difficult to find a suitable replacement
31
Gross Profit
Sales - cost of sales
* Cost of sales in simply the raw material or how much the goods cost to but from the factory
32
Net Profit
Total expenses - Total revenue
33
Gearing Financing
* Bank loans allow founders to retain control without giving away equity
* Venture is at risk if load is not paid back on time
* VCs/Business Angels only paid when the company is profitable
34
Functional factory layout
* Based on commonality of process (but could be working on different products)
* Pros
* Supports wide product range
* Can be flexible
* Good for specialist expertise
* Can cope with minor stoppages
* Cons
* Complex flow path for materials/WIP
* High levels of WIP in the system
* Long/unpredictable throughput times
* Inefficient material handling
* Complex process control
35
Celluar factory layout
* All the people and process needed to make a single product
* Pros
* Good for high volume/low variety products
* All familiar with the working of the cell
* Better control of WIP and quality
* Throughput times predictable
* Cons
* Difficult to change between products
* Inflexible
36
Elastic Demand
Demand changes with the change in price of the product
37
Inelastic Demand
Demand doesn't change with change in price
