IB business (finance)

Liabilities

The money the business owes

Current liabilities

Debts due within 12 bounds (short-term)

Non-current liabilities

Debts due after more than 12 months (long-term)

Bank overdraft

Current

Current year

Non-current

Not this year

Liquidity

How easily a business can pay its current liabilities using current assets

Good liquidity

Assets > Short-term debts (current liabilities)

Poor liquidity

short-term debts (current liabilities) > Assets

Profitability

Makes money

Liquidity (versus profit)

How much money is currently available

Insolvency

When a business cannot pay its debts when they are due

Bank overdraft

a bank allows a business to spend more money than is currently in its account, up to an agreed limit (temporary negative balance)

Bank overdraft advantages (3)

Quick access, flexible, and useful for emergencies

Bank overdraft disadvantages (3)

High interest rate, can be withdrawn by bank, short-term only

Trade credit

Suppliers allow the business to buy now and pay later

Trade credit advantages (2)

Improves cash flow, often interest-free

Trade credit disadvantages (2)

Late payment penalties, can damage supplier relationships

Factoring - Debt factoring

Selling accounted receivable (money customers owe you) to another company for immediate cash.

Factoring - Debt factoring advantages (1)

Immediate cash

Factoring - Debt factoring disadvantages (1)

Lose some revenue

Short-term loan

Borrowed money repaid within a year

Short term loan advantages (1)

Fast funding

Short term loan disadvantages (2)

Interest, repayment pressure

Long-term bank loan

Borrowed money repaid over several years (e.g) loan for a new factory)

Long-term bank loan advantages (2)

Large sums, structures repayment

Long-term bank loan disadvantages (2)

Interest costs, collateral may be required

Collateral

Valuable assets (e.g. homes, cars, factories)

Share capital (equity finance)

Raising money by sellign shared of the business

Share capital (equity finance) advantages (2)

No repayment required, no interest

Share capital (equity finance) disadvantages (2)

Loss of ownership or control, dividends may be expected

Debentures (Bonds)

Long-term borrowing from investors, usually with fixed interest

Debentures (bonds) advantages (1)

Large capital

Ventures (bonds) disadvantages (1)

Interest obligations

Leasing

Renting equipment, assets instead of buying

Leasing advantages (2)

Lower upfront cost, preserves cash

Leading disadvantages (2)

More expensive over time, no ownership T

Retained profit

Profit kept in the business instead of paid to owners or shareholders

Retained outfit advantages (2)

No debt, no interest

Retained profit disadvantages (1)

Limited by profit level

Microfinance

Small loans for small entrepreneurs, often in developing markets.

Insolvency is not loss

A business can be profitable but insolvent if cash flow is poor.

Current asset

Assets expected to be used, sold, or momentous to cash within 12 month a

Current assets examples (4)

Cash, bank balance, inventory or stock, accounts receivable (debtors)

Non-current assets

Long-term assets used for more than one year

Non-current assets examples (5)

Buildings, machinery, vehicles, equipment, land

Cost of Goods Sold (COGS)

Direct production or purchase costs

Gross profit

Revenue - COGS

Net-profit

Final profit after subtracting all expenses

Gross profit margin

Gross profit / Revenue x 100 = %

• For every $1 of sales, how much comes is left after direct production costs

• The business keeps X% of revenue after direct costs

Higher GPM (3)

• Good pricing power

• Effect curve production

• Lower direct costs

Lower GPM (3)

• High production costs

• Real pricing

• Supplier or material problems

Net profit margin

Net profit / Revenue x 100

• For every $100 sold, only $12 is actual final profit

High NPM

Good overall cost control

Low NPM

High expenses, weak profitabilityC

Current ratio

2:1 = The business has $2 of current assets for every $1 of short-term debt.

Return on Capital Employed (ROCE) = 18%

Every $100 invested in the baroness generates $18 profit

High ROCE

Efficient capital use

Low ROCE

Poor investment efficiency

Margins

The percentage of revenue a business keeps after certain costs

Working capital

Money available for daily operations

Working capital equation

Current assets - current liabilities uC

Current ratio

Ability to cover short term debt using its short term assets

Acid tests ratio (quick ratio)

Liquidity without relying on stock sales

Inventory turnover

How quickly a business sells and replaces its stock (inventory) over a period of time

High inventory turnover (4)

Stock sells quickly, good demand, less money tied to stock, lower storage costs

• Supermarket - sells products daily - high turnover

Low inventory turnover (4)

Stock sells slowly, risk of unsold goods, cash tied up in inventory, possible obsolescence

Obsolescence

When a product, asset, or stock becomes outdated and no longer useful or in demand

Stock (inventory)

Goods a business owns and holds to sell

Positive cash flow

More cash coming in than out

Negative cash flow

More cash leaving than entering

Depreciation

Reduction in value of fixed assets overtime

Appreciation

Increase in the value of an asset overtime (e.g. Land)

Break-even

The level of output (or sales) where

• Revenue = Total costs

Therefore no profit, no loss

Margin of Safety

the difference between actual sales and break even sales

BEP

Break-even Point

Below Bep

Loss

At BEP

Zero-profit

Above BEP

Profit

Equity

Owners share or value in a business

Direct costs

Costs that can be directly linked Io producing a specific product or service

• Raw materials

• Packaging for a specific product

• Wages of workers making the product

• Components is used in manufacturing

Indirect costs

Costs that aren’t directly linked to one product, but are needed to run the business

• Rent

• Utilities (electricity, water)

• Management salaries

• Marketing and advertising

• Insurance

• Administrative costs