Inventory, break-even, ARR, Payback Flashcards
(20 cards)
How do you compare a business’s inventory turnover with industry standards?
Inventory Turnover Days = 365 / Inventory Turnover
A higher figure than the industry average may suggest overstocking or inefficient stock management.
Example: If Inventory Turnover = 10, then 365 ÷ 10 = 36.5 days.
If the industry average is 5 days, the firm is 31.5 days slower, indicating potential inefficiency
What is the formula for Receivables Days and what does it indicate?
Receivables Days = (Receivables ÷ Revenue) × 365
Measures the average number of days it takes customers to pay.
Receivables = money owed by customers who bought on credit.
A higher number signals delayed payments and potential cash flow issues.
What is the formula for Payables Days and what does it show?
Payables Days = (Payables ÷ Cost of Sales) × 365
Indicates the average number of days a firm takes to pay suppliers.
Cost of Sales = direct costs/variable costs of goods sold.
A higher figure may improve liquidity but risks damaging supplier relationships.
What is break-even output and how is it calculated?
Break-Even Output = Fixed Costs ÷ Contribution per Unit
Contribution per Unit = Selling Price − Variable Cost per Unit
Tells you the number of units that must be sold to cover fixed costs, beyond which the firm makes profit.
How do you calculate margin of safety and use it to find profit?
Margin of Safety = Actual Output − Break-Even Output
Profit = Margin of Safety × Contribution per Unit
Shows how much output exceeds break-even and the profit generated from that excess.
How do you find the break-even point and margin of safety from a graph?
Break-Even Point = where the Total Revenue line intersects the Total Cost line.
Margin of Safety = Actual Output − Break-Even Output (read from the graph).
Visualises how close or far the business is from profitability.
What happens to break-even and profit if the price rises but demand falls?
New Price = Original Price × (1 + % Increase)
New Contribution per Unit = New Price − Variable Cost
New Break-Even Output = Fixed Costs ÷ New Contribution
Adjusted Output = Original Output × (1 − % Fall in Demand)
New Profit = (Adjusted Output × New Contribution) − Fixed Costs
If price increases improve contribution more than demand falls, profit may still rise.
Key insight: Consider both price elasticity and fixed cost coverage.
What is the formula for Inventory Turnover and what does it measure?
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory (value of stock held)
Shows how many times the business sells and replaces its stock in a year.
High turnover = efficient stock control; low turnover = slow sales or overstocking.
To express in days:
Inventory Turnover Days = 365 ÷ Inventory Turnover
How do you calculate market share and interpret it?
Market Share (%) = (Firm’s Sales / Total Market Size) × 100
Shows how much of the market is controlled by a business. A larger share can indicate competitive advantage.
How do you calculate market size if you know market share?
Market Size = (Firm’s Sales / Market Share) × 100
Use when sales and market share (%) are known. Helps identify scale of opportunity.
How do you calculate forecasted sales growth?
Sales Growth (%) = ((Forecasted Sales - Current Sales) / Current Sales) × 100
Shows how much sales are expected to increase over a period.
How do you calculate future market size using annual growth rate?
Future Market Size = Current Market Size × (1 + Growth Rate)^Years
Used to forecast how an entire market will expand over time. Important for long-term planning.
How do you calculate a company’s future revenue from market share?
Calculate future market size using compound growth.
Multiply future market size by firm’s market share (%).Projected Sales = Future Market Size × Market Share (%)
How do you calculate historical growth in sales revenue?
Sales Growth (%) = ((Recent Revenue - Past Revenue) / Past Revenue) × 100
Shows how much a firm has grown over a specified past period.
What is the payback period and how is it calculated
Payback Period = Time it takes to recover initial investment from net cash inflows.
Use cumulative cash flow and divide remaining investment by next year’s net inflow.
Useful for quick risk assessment but ignores long-term returns.
How do you calculate ARR and what does it measure?
ARR (%) = (Average Annual Profit / Initial Investment) × 100
Average Annual Profit = (Total Net Return - Initial Investment) / Number of Years
Used to assess average profitability of an investment. Allows easy comparison across projects.
How do you calculate payback with partial years and changing cash inflows?
Add net cash flows year by year until close to covering investment.
For partial year: Remaining Investment ÷ Next Year’s Net Inflow = Fraction of Year
Add years + fraction for full payback period.E.g., £30,000 left / £60,000 inflow = 0.5 → Payback = 2.5 years
How do you adjust for outflows when they are a % of inflows in payback?
Net Cash Flow = Inflow - (Inflow × % Outflow)
Use adjusted net cash flows in cumulative calculation.
Apply standard payback method (as in Flashcard 31).Used in cases like: Net = £60,000 – (0.4 × £60,000) = £36,000
How do you calculate ARR when inflows and outflows vary each year?
Calculate Net Cash Flow = Inflow – Outflow (each year)
Total Net Cash Flow – Initial Investment = Total Return
Divide by years = Average Annual Return
ARR = (Average Return / Initial Investment) × 100
How do you calculate ARR with the same annual net inflows?
Multiply Net Inflow × Number of Years = Total Net Return
Subtract Initial Investment
Divide by number of years = Average Annual Return
ARR = (Average Return / Initial Investment) × 100
