the key terminology Flashcards
liquidity ratio
- Current/liquidity/working capital ratio
o ( current assets/current liabilities)
o 1.12:1
o 1.54:1
o $1 in current liabilities…. In current assets
o Short term financial obligations - Importance in liquidity :
o Creditworthiness
o Stability
o Good signal to creditors
solvency ratio
o (total liabilities/total equity)
o 2.41:1
o 2.74:1
o $1 owner’s equity… in total liabilities/borrowed funds
o Long term financial obligations
GROSS profit ratio
o GP/sales x 100
o 38.34
o 37.82
o $1 sales, (100-GP) in COGS, ___ in GP
o High ratio = COGS low
o Obtain stock at lower price
o Raise sales; raise prices on products
o Compensate for lower profit margins
net profit ratio
o NP/sales x 100
o 22.4%
o 21.2%
o $1 sales… ___ in NP
o Reduce expenses
o Increase sales
returnon equity ratio
o NP/owner’s equity x 100
o 55.6c
o 61c
o $1 in equity, returns are ___
o Return on investments
o Effective funds contribution to profit
o Indication to potential shareholders
o Investments^
expense ratio
o lower ratio =more efficient
o expenses/sales x 100
o control of expenses
o for every $1 in sales rev, ___ C was absorbed by expenses
accs receivable turnover
- Sales / Accounts Receivable = times
o 2.365 / turnover times = turnover days
o effectiveness of a business’s credit policy?
o efficiently collect their debts?
o Liquidity of debtors
o Less days= more efficient in collecting debts
o It takes about __ days to collect the accs receivable
cash flow management (general)
- Coming in-out
- Movement of cash
- Basis of sustainable
- Breaking even effect
- Temporary downfall overdue feespotential business failure
- Monitoring n implementing corrective actions
- Eliminating needs for late fees
cash flow statement
- Identifies cash shortages + surpluses
distribution of payments
- Large bills – monthly payment system
- Less dramatic outflows
- Negotiating
- Don’t occur simultaneously
discounts for early payments
- Offering 2 debtors accounts
- Cash flow
factoring
- Sale of accounts receivable
working cpaital management (general)
- Funds available
- Needed for day-day operations
- Vulnerable and insolvent – not liquid
control of current assets (general)
- Optimal amount of current assets
- Costs/benefits w each asset
cash - current asset
o Preparation of cash budget
o Detailed plan
o Cash inflows = customer demands
o Cash outflows= expenses
o Shortage of cash
o Overspending/borrow funds
o Cash lost, theft, fraud, mismanagement
o Appropriate reserve of cash
accounts receivables -current assets
o Maintain adequate cash
o Need funds to meet own commitments
o Credit policy
Extend credit – customers
credit ratings of prospective customers
reasonable repayment period
charging fees 4 late
credit collection policy
inventories - current assets
o stored resources, raw materials
o holds stock = to meet consumer demand
o not enough stock= customer goes another competitor
o JIT system
o Inventory policy – checked against stock
o Rate of inventory turnover – calculate suitable management
current liabilities- accounts payable
o Debts owed to suppliers
o Danger= damaging business credit rating
o incur late fees
o stretching acc payable = paying late, reduce damage for credit rating
o adv of discounts
loans - current liabilities
o hold costs of variable interest rate
o investigating alternative sources of funds
o extremely costly
o comparing lenders
o negotiating lower interest
o reworking loan terms
overdrafts
o overdraw agreed limit
o variable interest
o charge establishment fees & interest
o monitoring
o ensuring cash received promptly deposited
strats (leasing)
o rent, fixed price
o borrowed
o depreciation, tax deductible , renovations are a no
sales n leaseback (strat)
o owned assets to lessors
o fixed payments
o immediate funds
o depreciation, tax deductible
o may affect long term profitability, leasing expenses indefinitely
profitabulity - cost control
o minimise costs, avoid unnecessary spending
fixed costs
dont depend on level of operating activity
