Final Finance Quiz 2

What are the main reasons for business growth?

Meet demand, Improve efficiency, Stay competitive, Respond to industry changes

What are the two requirements for growth?

Cash and Organizational capacity

What does growth look like operationally?

Hiring staff, Buying inventory, Buying equipment

What limits business growth?

Cash availability and Owner's willingness to take on debt

What is slow growth?

Growth funded mainly by internal cash

What is fast growth?

Growth requiring borrowing or external funding

What are fixed costs?

Costs that do not change with output

What are variable costs?

Costs that change with production/sales

What does CM represent?

Profit contribution per unit

What is break-even point?

Where profit = 0

If fixed costs increase, what happens to break-even?

It increases

If variable costs increase, what happens?

CM decreases → break-even increases

If price increases, what happens?

CM increases → break-even decreases

What is cost-benefit analysis?

Comparing total benefits vs total costs

When should a decision be accepted?

When benefits > are greater then costs

What is a key limitation of cost-benefit analysis?

Ignores qualitative factors (risk, uncertainty)

What is cash flow?

Actual movement of cash in/out of business

What is the difference between profit and cash flow?

Profit = money you earn (on paper)

Cash flow = money actually moving in and out of your bank

Why can profitable firms fail?

They run out of cash

What are cash inflows?

Sales, loans, investments

What are cash outflows?

Wages, rent, inventory, expenses

What is a cash flow forecast?

Projection of future cash inflows/outflows

Why is forecasting critical?

To predict cash shortages

What must every forecast number come from?

Historical data OR An assumption

What is the purpose of an assumptions table?

Connect logic → numbers

How many assumptions should there be?

8-12 key drivers

How can revenue be forecasted?

Growth %, Price × volume, Customers/transactions

What MUST happen if revenue increases?

At least one must increase: Working capital, Staffing, Capacity

What is working capital?

Money tied up in operations

What are the components of working capital?

Accounts receivable, Inventory, Accounts payable

What happens when revenue grows?

Working capital increases → needs more cash

Why is increased working capital dangerous?

Profit may increase but cash decreases

What are step costs?

Costs that jump at certain levels

What are examples of step costs?

Hiring new staff, New facility, Software upgrade

What is the order of income statement forecast?

Revenue, COGS, Gross profit, Expenses, Operating income, Interest, Net income

What is internal consistency?

Numbers must make operational sense

What is an example of inconsistency?

Revenue increases but costs stay the same

What is CAPEX?

Investment in long-term assets

What does ROI measure?

Profitability

What is payback period?

Time to recover investment

Why is payback important?

Measures risk

What is a limitation of ROI?

• Ignores scale

• Ignores time value of money

• Ignores timing of cash flows

• Can be misleading

What is a limitation of payback?

• Ignores future profits

• Ignores cash flows after payback

• Ignores time value of money

What are sources of funding?

Owners, Debt, Investors, Crowdfunding

What are the 3 C's of credit?

Character, Capacity, Collateral

What do investors care about?

High growth and high returns

What do lenders care about?

Ability to repay (low risk, steady cash flow)

What is the most important concept overall?

Cash flow > profit

What are the two scarce resources for a business owner?

Time and money

What are key elements of a business plan?

• Business idea

• Market analysis

• Financial projections

• Funding needs

1 cause of business failure?

Running out of cash

1 forecasting mistake?

Not linking numbers to assumptions

1 growth mistake?

Ignoring working capital

What is the purpose of financial ratios?

To evaluate performance and financial health

What do liquidity ratios tell you?

Can the business pay its short-term bills?

Why do lenders care about liquidity?

They want to know if they'll get repaid

What do efficiency ratios measure?

How well the business uses its resources

What does asset turnover tell you?

How efficiently assets generate revenue

What do leverage ratios measure?

How much debt the business is using

What does debt-to-equity tell you?

How much debt vs owner investment

What is an operational-centric strategy?

Focus on efficiency and cost control

What metric matters most for operational strategy?

Margins

What is a customer-centric strategy?

Focus on customer experience and value

What metric matters most for customer-centric strategy?

Revenue and customer satisfaction

What is a volume (growth) strategy?

Focus on increasing total sales

What trade-off happens in a volume strategy?

Margins may decrease

What are the 3 things you must evaluate in growth?

Profit, Margins, Returns

Why is profit alone misleading?

Because it doesn't show efficiency

If profit increases but margins decrease, what does it mean?

Growth is less efficient

If ROE (Return on Equity) decreases after growth, what does it mean?

Owners are getting worse returns

When analyzing a business decision, what is step 1?

Identify what metric matters (profit, cash, margins, etc.)

If a question gives you profit, what should you question?

Whether margins and returns also improved

If a question gives you cash flow, what should you focus on?

Survival and financing needs

If a business expands, what typically increases?

Assets, Liabilities, Costs

Does growth automatically mean success?

No

What must growth improve to be considered good?

Efficiency and returns