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Business Unit 3
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Payback method equation
Payback =
days/weeks/month
Total cash received x100
Average rate of return
ARR =
average annual return/profit
initial cost of investment x100
Payback method pros and cons
Important for businesses that have cash flow problems or if equipment may become out of date quickly
Fails to take into account any cash inflows after payback - ignoring overall profitability of project
It assumes within a year cash flow is consistent
NPV pros and cons
Take into account the fact money value changes with time
Value of money is affected by interest rates and inflation rates
If positive NPV predicted it should be considered - if negative it will be rejected
Average rate of return pros and cons
ARR allows for easy comparison with alternative terms of investment
It can be compared to current or target ROCE
Doesnt take into account the timing of the cash inflow. This may be particularly worrying if firm is concerned about its short term survival
Risks of each project
The sum and source of money invested - huge investment
The length of time the company must commit to project
Impact of investment in other areas of the business
What future strategic decision
Current ratio
Examines whether the business has enough short term assets to pay its short term debts if immediate repayment was required
Advantage to keep it high in short term however in the long term it can be a drawback as they could have invested money into more fixed assest
Inhibit the long term profitability
Gross profit
Total revenue - variable cost
Gross profit margin =
Gross profit
Revenue x100
The higher the better
Enables firm to asses impact of sales and how much it costs to generate sales
Operating profit
Total revenue - total costs
OP margin =
operating profit
Revenue x100
Keeps control over fixed costs
ROCE
Measures how well management is using its assets to generate profits
The sucess of the business is demostrated by profit levels - ROCE does this by comparing profit as percentage
operating profit seemed to be best measurement before tax
Good for comparing the scale of company operations
Assets Turnover
Dependant on type of business
Looks at how well a company uses its assets to produce sales
Non-current assets enable a firm to generate sales revenue by producing the goods to sell
High figure shows that a business is using its assets efficiently to achieve sales - low figure shows opposite
Low inventory turnover could mean poor customer satisfaction if people are not buying the goods
Gearing
Relies on the businesses non-current liabilites
High gearing 50% +
Low gearing 25% -
High may mean more reliant on the economic climate
Low gearing may mean that they are reliant on own money
More exposed to interest rates flaculants
Having to pay back interest and loans before being able to reinvest earnings
High Gearing
There are few shareholders so existing shareholds have more control
Can be very cheap source of finance when interest rates are low
Allows company to retain much more profit for future
Low gearing
The company are less likely it risks of payables forcing it into liquidation
Avoids paying high interest rates on its borrowed capital when there high
Avoids pressure of having to repay their borrowing
Shareholders ratio
Shareholders want it to be the highest possible
Receivable days and payable days
Vary between industries
- generally have it as low as possible
Better that payment to creditor takes longer than receivables days - more solvent
Payables days - want as high as possible helps cash flow
Liquidity ratio
asses whether able to meet short term liabilities
More vulnerable to cash flow problems
Observers ability to stay solvent
Porters Generic strategies
Cost leadership
- firms sets out to become the lowest cost producers in its industry
Gaining scales of economy
Quality may be lower - reduces price and profits
Competitors must not react
Differentiate
- Need a product different from competitors
increases sales volume
greater scope for charging a higher price
adding a USP
Porters Generic strategies effectiveness
Competitive advantage achieved?
Can it be maintained over a period of time?
Does it appeal to wide range of people?
Ansoff Matrix
Market penetration
Market development
Product development
Diversification
Helpful tool to decide on strategic decision
Doesnt take into account competitor actions
Market penetration
Promoting growth in existing markets with existing products
Increase brand loyalty
Encourage consumers to use products more - more frequent purchases
Encourage mass buying
Market development
Entering different countries
entering new segments
More risky than market penetration because firm is not familiar with the needs and wants of the new market
Product development
Substantial modification
Links to competive advantage
Needs extensive research and developing fundings
More risky than simply trying to increase market share
Diversification
New products - links to market leader
high risk strategy with the possibility of high returns
Increase in market share
Author
toricazaly
ID
276704
Card Set
Business Unit 3
Description
s
Updated
6/12/2014, 10:06:30 PM
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