F4 Economy

What is economic sustainability?

A business is economically sustainable when it survives and remains financially viable over time — consistently generating enough profit to continue operating.

What is the core formula driving economic sustainability? A: Profit = Revenue − Costs

A business is only sustainable if it generates positive profit over the long run.

In the Priority Model of Sustainability (Vorrangmodell), what is the hierarchy between Planet, People, and Profit?

The three dimensions are NOT equal. Profit (economy) depends on People (society), which in turn depends on the Planet (biosphere). There are no profits without caring for people and maintaining functional ecosystems. Economy is embedded in society, which depends on the biosphere.

What is Doughnut Economics and why is it relevant to economic sustainability?

Doughnut Economics (Kate Raworth) aims for a "safe and just space for humanity" — operating above a social foundation (meeting basic human needs) while staying below an ecological ceiling (planetary boundaries). The goal is a regenerative and distributive economy.

What is the break-even point (BEP)?

The BEP is the quantity of units sold at which revenue exactly equals total costs, meaning profit = 0. A product is only profitable if actual sales volume exceeds the BEP.

What is the formula for the break-even point? Define all variables. A: BEP = Q = F / (p − v)

• F = Fixed costs (e.g. rent, salaries — costs that exist regardless of output)

• p = Price per unit

• v = Variable cost per unit (e.g. ingredients — costs that depend on output)

• (p − v) = contribution margin per unit

What is the general profit formula using fixed and variable costs?

rofit(Q) = (p − v) × Q − F Where Q = number of units sold. If result is negative → loss; positive → profit.

Vegan Gelateria: Fixed costs = CHF 3,800/week; price = CHF 3.50; variable cost = CHF 1.25. What is the BEP?

BEP = F / (p − v) = 3,800 / (3.50 − 1.25) = 3,800 / 2.25 = 1,689 units/week

Same gelateria, expected demand = 1,500 units/week. Is it profitable?

Profit(1,500) = (3.50 − 1.25) × 1,500 − 3,800 = 2.25 × 1,500 − 3,800 = 3,375 − 3,800 = −CHF 425 → loss. Do NOT open.

If a product is unprofitable, what are the three levers to lower the BEP?

1) Decrease fixed costs,

(2) Increase the price per unit,

(3) Decrease the variable cost per unit. All three reduce BEP = F / (p − v).

What is the difference between fixed costs and variable costs? Give examples.

Fixed costs exist regardless of output (e.g. rent, salaries). Variable costs depend on the quantity produced (e.g. ingredients, energy per unit). Total Expenses = Fixed costs + Variable costs.

What are the three key financial reports a company must produce, and what does each show?

• Balance sheet → snapshot of what the company owns (assets) and owes (liabilities + equity) at a given date

• Income statement (P&L) → flows of revenue and expenses over a period; shows net profit

• Measures of profitability → EBITDA, EBIT, net profit, operating margin, net profit margin

What is the fundamental equation of the balance sheet?

Assets = Liabilities + Shareholder Equity Assets = what the company owns (cash, inventory, equipment, property). Liabilities + equity = how the company was financed (debts + owners' investment). It must always balance.

What is the fundamental equation of the income statement?

Revenue = Expenses + Profit (it always balances). Or equivalently: Profit = Revenue − Expenses

What is EBITDA? What does it measure?

EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization. Since depreciation and amortization are not cash outflows, EBITDA is a rough measure of the cash the company earns through its core business.

What is EBIT? How does it differ from EBITDA?

EBIT = Earnings Before Interest & Taxes (= operating profit). It is calculated from EBITDA by subtracting depreciation and amortization. It shows how much a company has earned from its operations, excluding debt costs and taxes.

What is Net Profit and how is it calculated from EBIT?

Net Profit = EBIT − Interest − Income Tax. It represents how much profit the company made overall after all costs including financing and taxes.

Using the example income statement: Revenue = 250,000 | COGS = 50,000 | Marketing = 20,000 | Admin = 80,000 | Depreciation = 5,000 | Interest = 5,000 | Tax = 15,000. Calculate EBITDA, EBIT, and Net Profit.

• EBITDA = 250,000 − 50,000 − 20,000 − 80,000 = 100,000

• EBIT = 100,000 − 5,000 (depreciation) = 95,000

• EBT = 95,000 − 5,000 (interest) = 90,000

• Net Profit = 90,000 − 15,000 (tax) = CHF 75,000

What is the Operating Margin formula and what does it indicate?

Operating Margin = EBIT / Revenue Expressed as a %. Allows comparison of profitability across companies regardless of size.

What is the Net Profit Margin formula?

Net Profit Margin = Net Profit / Revenue Shows the percentage of revenue that becomes actual profit after all costs.

Revenue = 250,000 | EBIT = 95,000 | Net Profit = 75,000. Calculate both margins.

• Operating Margin = 95,000 / 250,000 = 38%

• Net Profit Margin = 75,000 / 250,000 = 30%

What is a business model? (Definition)

A business model describes the rationale of how an organization creates, delivers, and captures value (Osterwalder & Pigneur, 2010).

What are the 9 building blocks of the Business Model Canvas?

Key Partners, Key Activities, Key Resources, Value Proposition, Customer Relationships, Customer Segments, Channels, Cost Structure (fixed + variable costs), Revenue Streams.

What spectrum of company types exists from purely commercial to purely social?

Profit-maximizing companies → Companies with CSR → Companies with social enterprise business model → Social Business → Social Enterprise → Non-Profit Organisation. Commercial enterprises prioritize financial goals; social enterprises prioritize social & environmental goals.

Why must the whole supply chain be economically sustainable, not just the focal firm?

Every actor in the chain (suppliers, manufacturers, distributors) must be able to generate a sustainable profit (positive NPV) for the system to function long-term. If suppliers cannot survive financially, the focal firm's supply chain collapses.

What are the two main levers to optimize a supply chain economically?

(1) Decrease costs (e.g. more efficient logistics, better sourcing) and

(2) Increase revenues (e.g. better marketing, new products). Making the supply chain circular can help both economically and environmentally.

What is NPV and why is it mentioned in the supply chain context?

NPV = Net Present Value — a measure of whether a project or business generates more value than it costs over time. A positive NPV means the investment is profitable. Every actor in the supply chain needs a positive NPV to be sustainable.

What is the Triple Bottom Line?

The idea that sustainable business performance means simultaneously improving financial (Profit), social (People), and environmental (Planet) performance. It's a balancing act between these three dimensions.

What is Corporate Social Responsibility (CSR)?

CSR is when companies voluntarily go beyond legal requirements to achieve social and environmental objectives in their daily operations and stakeholder interactions (European Commission, 2001/2017).

What are the three areas of CSR?

• Corporate Governance — value statements, anti-corruption, compliance

• Triple Bottom Line — balancing profit, people, planet

• Corporate Citizenship — foundations, donations, cultural promotion

How did Milton Friedman (1970) view the social responsibility of business, and what is the counterargument?

Friedman argued the sole social responsibility of business is to increase profits for shareholders. The counter-view (Drucker): businesses exist to fulfill a social purpose AND meet specific needs of society — and they must legitimize themselves to all external stakeholders, not just shareholders.