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Finance in Enterprise > Concepts v2 > Flashcards

Concepts v2 Flashcards

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1
Q

Profitability Ratio

A
  • The level of profit in relation to money invested
  • important for investors
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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
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3
Q

Return on shareholders capital

A

Profit before tax / shareholders capital

Shareholders capital = Share capital + returned profits

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4
Q

New Profit Margin

A

PBT (profit before tax) / Turnover * 100

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5
Q

Gross profit margin

A

Gross profit / Turnover * 100

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6
Q

Activity ratios

A
  • Show how efficient a company is compared to others
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7
Q

Credit control

A

Average collection period = (Debtors / Credit Sales) * 365

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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
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9
Q

Liquidity ratios

A
  • Ensure company is able to meet short-term obligations from current assets (VAT, wages, trade creditors, etc)
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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
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11
Q

Quick Ratio (acid test)

A

Cash + Debtors / Current liabilities

  • Between 0.7 -> 1 is good
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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
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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
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14
Q

Risk managment

A
  • Size of impact
  • Probability of occurrence
  • Cost and availability of counter measures
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15
Q

Prioritising risk

A

Likely outcome = Probability of even * Consequences of event

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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
Q

Value Pricing/Going Rate

A
  • Looks at rival prices and set prices similarly
26
Q

Price Discrimination

A
  • When the same product or service is priced differently to different sections of the market
  • Examples: ticket trains during peak times
27
Q

Price lining

A
  • 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
Q

Factoring

A
  • 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
Q

Bank Loans

A
  • 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
Q

Founder disease

A
  • Reluctant to lose control when company grows
  • Difficult to find a suitable replacement
31
Q

Gross Profit

A

Sales - cost of sales

  • Cost of sales in simply the raw material or how much the goods cost to but from the factory
32
Q

Net Profit

A

Total expenses - Total revenue

33
Q

Gearing Financing

A
  • 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
Q

Functional factory layout

A
  • 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
Q

Celluar factory layout

A
  • 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
Q

Elastic Demand

A

Demand changes with the change in price of the product

37
Q

Inelastic Demand

A

Demand doesn’t change with change in price

Finance in Enterprise (2 decks)

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