Finance Flashcards
Profit Margin:
((Revenue - cost) / Revenue) x100 = %PM
*PM can never exceed 100%.
Not the same as markup which represents how the price of an offer compares to its total cost.
Markup:
((Price - cost/ cost) x100 = %M
Higher the price and lower the cost, higher the markup
Value Capture
Is the process of retaining some percentage of the value provided in every transaction.
i.e. I consult for a company which makes them an additional 100,000. whatever I charge them is a percentage of the value created which = value captured.
The more value you capture, the less attractive your offer is [to your prospective buyer]
2 Dominant philosophies: Maximization & Minimization
- MAX: capture as much value as possible→ Tends to erode customer perception
- MIN: capture as little value as possible while the company remains sufficient.→ When something is viewed as a “good deal” that usually drives the spread of business to other customers.
Sufficiency
Enough to make it worth it past breakeven for the business. Sufficiency is subjective.
Valuation
An estimate of the total worth of a company.
Business revenue
Profit margins
Bank balance
Future outlooks
→ These all contribute to the business overall valuation.
Cash Flow Statement:
A look at a company’s bank account (cash in & cash out) and is always looking at a specific time period.
Cash tends to move in 3 areas:
Operations: selling offers and buying inputs
Investing: collecting dividends and paying for capital expenditures (cap ex)
Capital: Borrowing money and paying it back
“Free cash flow”:
- Amount of cash a business collects from operations — (cash spent on capital equipment + assets necessary to keep the company operating).
- The higher the better; a company doesn’t have to keep spending on cap ex in order to bring in revenue.
- More cash = Higher resilience.
Income Statement:
Also called a P&L (profit and loss), Operating or Earnings Statement. It contains an estimate of the business’s Profit over a certain period of time, once revenue is matched with related expenses.
Income Statement Formula:
General format: Revenue - COGS - Expenses - Taxes = Net Profit
Income statements include many estimates and assumptions. Large expenses have to be amortized, and so do large cash-flows.
The incomes statement can be easily manipulated and introduce biases in expense matching.
Balance Sheet:
A snapshot of what the business owns and what the business owes at a moment in time. They always cite a specific date.
formula: Assets - Liabilities = Stockholder Equity
Balance Sheet (2)
Balancing comes from a rearrangement of the formula:
Assets = Liabilities + Stockholder Equity. The balance sheet always balance.
By examining the BS - you can determine if a company is solvent.
There are also biases that can be introduced to the BS like the value of current inventory, stock price, or % of A/R that will be paid.
Financial Ratios: Profitability ratios:
How good the company is at realizing profit
Return on Assets: NP / TA (Total Assets)
Leverage ratios:
Tell you how the company uses debt
Debt to Equity: TL (Total Liabilities) / SE
Liquidity ratios:
the ability of a business to pay its debt
- Current ratio: CA / CL
- Quick ratio: CA - Inventory / CL
Efficiency ratios:
How well a business is managing assets and liabilities. Commonly uses in inventory management.
- Avg number of days in inventory
- Days sales outstanding
4 Methods to Increase Revenue:
- Increase the number of customers you serve
- Increase the average size of each transaction by selling more.
- Increase the frequency of transactions per customer
- Raise prices
4 Methods to Increase Revenue (2):
Your ideal customer is someone who buys early, buys often, spends the most, spreads the word, and are willing to pay a premium for the value you provide.
If you can double your prices and lose less than half of your customers, it’s probably a good move.
Pricing Power:
Refers to the ability to raise prices over time. Related to price elasticity.
Lifetime Value:
Total value of a customer’s business over the lifetime of their relationship with your business.
By understanding the LTV of a prospect, you can calculate the max amount of time that you should be willing to spend to acquire a new prospect (AAC).
Allowable Acquisition Cost:
How much you’re reasonably allowed to spend to try to acquire a new customer based on their LTV.
First sales can be “loss leaders” - low introductory prices to establish a relationship with a buyer.
Allowable Acquisition Cost Formula
Average customer LTV - Value Stream Costs - (OH / Total Customer Base) x (1 - desired PM)
- Value Stream Costs (what it takes to create and deliver the value promised to that customer over your entire relationship with them)
- OH / Total Customer Base represents fixed costs needed to pay to stay in business over that period of time
- OH represents minimum ongoing resources for a business to continue operations
Costs:
- Fixed: incurred no matter how much value you create. Reductions in fixed costs accumulate.
- Variable: directly related to how much value you create. Reductions in VCosts are amplified.
