Topic 4 - Building a Profit Plan Flashcards
A principal tool that managers use to (1) evaluate different courses of action, (2) set goals, and (3) evaluate business performance.
Profit plan
The resource plan of an organizational unit generating or consuming resources.
Budget
summarizes the expected revenue inflows and expense outflows for a specified future accounting period. Typically, one year.
Profit wheel
Current Assets - Current Liabilities = ?
Working capital
Tangible assets, like buildings, machinery and equipment.
Long-term depreciable assets
a tool used to forecast whether the company has enough cash to operate the profit plan.
Cash wheel
An accounting method that records revenues and expenses when they are earned or incurred, regardless of when the actual cash is received or paid. This method matches the revenues recognized in that period with the expenses that has incurred.
Accrual accounting
A method for forecasting cash flow using the actual cash inflows and cash outflows.
Operating cash needed during a period =
Cash received from customers - Cash paid to suppliers and operating expenses
The direct method
Method for forecasting cash flows. This method starts with net income and adjust for non-cash expenses like depreciation and changes in the working capital.
The indirect method
Net income + interests + tax + depreciations + A = ?
EBITDA
accounts payable, short-term debt, and other obligations that are due within a year. Current Assets include cash, accounts receivable, inventory, and other assets expected to be converted into cash within a year
Current liabilities
Formula for working capital
Working capital = Current Assets - Current Liabilities
Formula for net working capital
Net working capital = Current Assets (minus cash) - Current liabilities (minus debt)
Formula for Operating working capital
Operating working capital = Current Assets - Non-operating Current Assets
includes cash and marketable securities that are not directly tied to daily operations.
Non-operating current assets
Formula for ROI
Return on Investment (ROI)=(Net Income)/(Total Investment)
Formula for ROA
Return on Asset (ROA)=(Net Income)/Assets
Formula for ROE
Return on Equity (ROA)=(Net Income)/Shareholder’s Equity
Formula for ROCE
Return on Capital Employed (ROCE)=(Net Income)/(Capital Employed)%
3 formulas for Capital employed
Capital employed = Non-current Liabilities + Equity = Total Assets - Current Liabilities = Working Capital + Non-current Assets
Formula for ROE calculated with three elements
= (Net Income/Sales) * (Sales / Assets) * (Assets / Shareholder’s Equity) = Profitability ratio * Assets turnover ratio * Financial Leverage ratio
Formula for Fixed Assets Turnover
Fixed Assets Turnover = Sales / PPE (Property,Plant & Equipment)
This ratio evaluates how efficiently a company is using its fixed assets (e.g., machinery, buildings, and equipment) to generate sales.
Fixed Assets Turnover
This ratio shows how often a company sells and replaces its inventory over a specific period.
Inventory turnover
Formula Inventory turnover
Inventory Turnover=(Cost of Goods Sold (COGS))/Average Inventory
This ratio shows how efficiently a company collects money owed by its customers from credit sales.
Accounts Receivable Turnover
Formula for Accounts Receivable Turnover
Accounts Receivable Turnover=(Net Sales on Credit)/(Average Net Receivables)
formula for Working Capital Turnover
Working Capital Turnover=Sales/(Current Assets-Current Liabilities)
This ratio shows how effectively a company is using its working capital (the difference between current assets and current liabilities) to generate sales.
Working Capital Turnover
