Chapter 3 Flashcards
Over trading
Growing your business to quickly to the detriment of net working capital
- this happens when a business buys more and more inventory on credit to increase sales but has difficulty selling merchandise or collecting money on time
If bank balance is positive then business is not guilty of over trading
Calculate gross profit percentage
Gross profit / sales
Working capital
CURRENT ASSETS :
SAVINGS ACCOUNT
ACCUED INCOME
PREPAID EXPENSES
FIXED DEPOSIT
CURRENT LIABILITIES :
BANK OVERDRAFT
CREDIT CARD
ACCRUED EXPENSES
INCOME RECEIVED IN ADV
OUTPUT VAT
Net working capital
Current assets - current liabilities
Prime overdraft rate
3-3.5 % above repo rate
NOMINAL INTEREST RATE
Interest that is not compounded annually
- covert to effective
EAR = (1 + nr/period) period - 1
SUNK COSTS
Costs which have already been incurred and which cannot be changed now or in the future
E.g. Long term loan
Variable costs
Expenses that vary due to change in volume of production…
Unit cost stays the same in variable costs
Fixed costs
Expenses which are not affected by change in volume of production
More produced the lower the unit cost for fixed costs
Semi variable cost
Expenses which remain fixed until a certain production volume
E.g. Wages X1,5 after 40 hours worked
Semi fixed costs
Expenses that contain variable and fixed costs
E.g. A salaried salesperson
Break even analysis
Indicates how many units of a product need to be sold before a company starts making a profit
Break even point in units
TOTAL FIXED COSTS / MARGINAL INCOME PER UNIT
Break even point in rands
TOTAL FIXED COSTS / MARGINAL INCOME RATIO
OR
SELLING PROCE PER UNIT X BREAKEVEN POINT IN UNITS
MARGINAL INCOME
VAT EXCLUSIVE SELLING PRICE - VARIABLE COSTS
MARGINAL INCOME RATIO
SALES - VC / SALES X 100
= X%
