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The flashcards below were created by user
toricazaly
on FreezingBlue Flashcards.
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Payback method equation
- Payback = days/weeks/month
- Total cash received x100
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Average rate of return
- ARR = average annual return/profit
- initial cost of investment x100
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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- Important for businesses that have cash flow problems or if equipment may become out of date quickly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
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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
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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
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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
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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
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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
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Operating profit
- Total revenue - total costs
- OP margin = operating profit
- Revenue x100
- Keeps control over fixed costs
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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
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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
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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
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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
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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
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Shareholders ratio
Shareholders want it to be the highest possible
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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
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Liquidity ratio
- asses whether able to meet short term liabilities
- More vulnerable to cash flow problems
- Observers ability to stay solvent
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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
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Porters Generic strategies effectiveness
- Competitive advantage achieved?
- Can it be maintained over a period of time?
- Does it appeal to wide range of people?
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Ansoff Matrix
- Market penetration
- Market development
- Product development
- Diversification
- Helpful tool to decide on strategic decision
- Doesnt take into account competitor actions
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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
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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
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Product development
- Substantial modification
- Links to competive advantage
- Needs extensive research and developing fundings
- More risky than simply trying to increase market share
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Diversification
- New products - links to market leader
- high risk strategy with the possibility of high returns
- Increase in market share
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