Business Unit 3

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Business Unit 3
2014-06-12 18:06:30
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  1. Payback method equation
    • Payback = days/weeks/month
    •                 Total cash received       x100
  2. Average rate of return
    • ARR = average annual return/profit
    •          initial cost of investment            x100
  3. 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    • Important for businesses that have cash flow problems or if equipment may become out of date quickly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
  4. 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
  5. 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
  6. 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
  7. 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
  8. 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
  9. Operating profit
    • Total revenue - total costs
    • OP margin = operating profit
    •                     Revenue            x100
    • Keeps control over fixed costs
  10. 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
  11. 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
  12. 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
  13. 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
  14. 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
  15. Shareholders ratio
    Shareholders want it to be the highest possible
  16. 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
  17. Liquidity ratio
    • asses whether able to meet short term liabilities
    • More vulnerable to cash flow problems
    • Observers ability to stay solvent
  18. 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
  19. Porters Generic strategies effectiveness
    • Competitive advantage achieved?
    • Can it be maintained over a period of time?
    • Does it appeal to wide range of people?
  20. Ansoff Matrix
    • Market penetration 
    • Market development
    • Product development
    • Diversification
    • Helpful tool to decide on strategic decision
    • Doesnt take into account competitor actions
  21. 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
  22. 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
  23. Product development
    • Substantial modification
    • Links to competive advantage
    • Needs extensive research and developing fundings
    • More risky than simply trying to increase market share
  24. Diversification
    • New products - links to market leader
    • high risk strategy with the possibility of high returns
    • Increase in market share