Two Flashcards
Assessing business management
- History (time in business)
- Industry (life cycle, external influences)
- Products
- Market position
- Competitors
- Suppliers (number, negotiating power)
- Customers (number, negotiating power)
- Significant change in ownership/structure
- Details of existing funding relationships
What to consider for asset value?
- DIMS
- Type and level of asset utilisation
- The extent of maintenance and repair regime
- The rate of obsolescence (due to changing trends, etc)
- Legislative change e.g. Euro 6 emissions standards for commercial vehicles
- Market supply and demand forces
- General state of the economy
What to consider for asset suitability?
- Knowledge of funding these assets
- Their value
- Useful life expectancy of the asset
- Routes to secondary resale market
What are the foreign supplier potential issues?
- Quality and reputation of the supplier more difficult to establish
- Supplier terms and conditions can be different to UK standard
- Legislation in foreign jurisdiction can be difficult if quality issues
- More likely to require progress payments, part payments or final payment all before lender has title
How to solve potential foreign supplier issues?
- Request delivery directly from UK agent of the foreign supplier
- Acquire the asset from the lessee if they need payment (sale and leaseback)
- Funder can make progress payments to the lessee
- Extra margin put in for admin work
Benefits of low gearing?
Less risk of defaulting on debts
Shareholders rather than debt providers call the shots
Business has the capacity to add to the debt if required
Benefits of high gearing?
Less capital required by shareholders to be invested
Debt can be a relatively cheap source of finance compared to dividends
Easy to pay interest if profits and cashflows are strong
What is the gearing calculaton?
total capital employed
50% or higher is high gearing
20% or less is low gearing
But depends on the business
Name ratio categories?
Working capital ratios - Cash pressure in the business
Capital Management ratios - How well they are managing their assets to produce sales
Working capital ratios?
Trade Debtor days - how long the customers take to pay
Trade Creditor days - how long they take to pay suppliers
Stork Turnover days - how long business holds on to stock
Calc - X divided by Turnover x 365
Current ratio - How cash is covered by liabilities in next 12 months
Current liabilities
Capital Management Ratios?
Asset Turnover - How well the assets are being used for sales
(Turnover divided by net assets)
PBIT (Profit before interest and tax) - Measures profit after all expenses
(Turnover - total expenses and interest and tax)
EBITDA - Measure of business operating performances without factoring accounting treatment and accounting decisions
(PBIT - Depreciation and Amortisation)
ROCE - Ratio that is the amount of profit that can be attributed tot he shareholders of the business
Operating profit
———————– x 100
Total Capital & reserves
Result of all working capital ratios if they are high?
Trade Debtor days - More pressure on the business cash flow (if too high bad debt likely)
Trade Creditor days - Less pressure on business cash flows but too high could mean suppliers remove credit lines
Stock turnover days - Means more pressure on cash flows and could mean stock piling of obsolete stock
Current ratio - Means the business is better able to pay back liabilities
Result of all capital management ratios being high?
Asset Turnover - Means assets are being utilised efficiently
PBIT - Means more cash is in the business available to settle creditors useful if low relative depreciation and amortisation
EBITDA - Means more cash in the business but useful if they have relatively high relative depreciation and amortisation
ROCE - Better return for the shareholders
