Business Unit 3 - Finance
3.2: Revenue streams
- Advertising revenue - Transaction fees - e.g. pre-assigned seats: revenue stream for airlines - Franchise costs & royalties - franchisee pays royalties based on sales revenue as well as a fee to the franchisor - Sponsorship revenue - Subscription fees - e.g. cable/satellite tv - Merchandise - Dividends from holding shares - Donations - Interest earnings - Subventions - subsidies offered from the govt to certain firms to reduce production costs/to help w/ R&D
3.5: Liquidity ratios
- Assess the ability of a firm to pay its short-term liabilities from its current assets, such as by comparing working capital to short-term debts - Ways of improving ratios: raising level of current assets, lowering current liabilities (e.g. using overdrafts, trade creditors)
3.7: Reasons for cash flow forecast
- Banks and other lenders require a CFF to help them assess the $ health of the biz seeking external finance - Can help managers anticipate & identify periods of potential liquidity problems a. Can plan accordingly - arrange any overdrafts or adjust the timing of the Cash Inflow and Outflow - Aid in business planning - socially responsible & helps better achieve its organizational aims & objectives . Can be compared with actual Cash Flows to improve predictions & planning
3.8: Average rate of return (ARR)
- Calculates the avg. profit on an investment project as a % of the amount invested ARR = (Total profit during project's lifespan ($) ÷ number of years of project) ÷ initial amount invested ($) x 100% - As: allows easy comparison of the estimated returns of diff. investment projects - Ds: ignores the timing of cash inflows and hence is prone to forecasting errors when considering seasonal factors
3.7: How investment, profit and cash flow are linked
- Cash flow is vital for investment opportunities because poor cash flow results in missed opportunities for investment - E.g. When a business sells an investment, it experiences an increase in its cash flow position. The opposite happens when a business buys an investment. - E.g. When a firm obtains finance for investments, the cash inflow improves its liquidity position.
3.4: Method 2 - Reducing balance method
- Depreciates the value of an asset by a predetermined % for the duration of its life Net book value = Historical cost - Accumulated Cost
3.5: Liquidity ratio: Acid test ratio (Quick ratio)
- Ignores stock when measuring the short term liquidity of a firm - Can be more meaningful than current ratio b/c stocks aren't always easily converted into cash - Should be at least 1:1 Acid test ratio = (current assets - stock) ÷ current liabilities
3.6: Firms can improve their debt collection period by:
- Imposing surcharges on late payers - Giving debtors incentives to pay earlier e.g. encourage the use of autopay service (customers don't have to remember to pay), giving discounts to those that pay early - Refusing further business w/ a client until payment is made - Threatening legal action - for customers that repeatedly pay late
3.3: Ways to increase profit
- Increasing sales of product raises total contribution (gross profit) - Reducing variable costs e.g. through negotiating deals w/ suppliers - Reducing fixed costs & overheads e.g. through better financial control
3.4: Assets
- Items of monetary value that are owned by the biz and are purchased - E.g. cash, stocks, buildings • Fixed Asset: asset used for business operations that lasts for more than 12 months - E.g. machinery, building • Current Assets: asset that is likely to be turned into cash within 12 months - E.g. Main Current Assets = Cash, Debtors and Stocks
3.4: Liabilities
- Legal obligation to repay lenders or suppliers @ a later date (amount of $ owed) - Long-term liabilities: debts that are due to be repaid after 12 months - e.g. debentures, mortgages, bank loans - Current liabilities: debts that are settled within one year - e.g. overdrafts, tax, dividends to shareholders, creditors
3.1: Loan capital
- Medium/long term source gotten from lenders/banks - Interest charges - E.g. mortgage, business development loan (customized specifically to a business), debentures: Long-term loans issued by a biz (debenture holders (the ppl that lend) get interest even if the biz faces a loss & before shareholders are paid, they also can't vote/have ownership like shareholders)
3.5: Difference between GPM and NPM
- NPM considers expenses - larger difference, means it's more difficult to control overheads
3.9: Limitations of budgets
- Natural tendency for managers to overestimate their budgets - Budgets can be set by senior managers who have no direct involvement in the running of the department - It's less useful with seasonal fluctuations in demand where costs are harder to predict - Budgeting ignores qualitative factors that affect $$ performance
3.4: Intangible assets
- Non-physical fixed assets that are able to earn revenue for a firm e.g. brand names, copyrights, patents, trademarks & goodwill (value of firm's image/reputation) - Legally protected by intellectual property rights
3.7: Looking for additional finance
- Overdrafts o Gives immediate access to cash during times of (-) Cash Flow o May be difficult to pay back $ w/ Interest - Selling Fixed Assets o A ONE-OFF sale for cash (the asset cannot be resold) o Selling fixed assets is not advisable as they are needed for a bus. to operate & expand - Debt Factoring o Debt-Factoring Provider passes the $ owed to its clients ⇒ gives the biz immediate access to cash - Government Assistance o Can qualify for grants, subsidies & low-interest loans o Govts. are often reluctant to ignore struggling bizs that could lead to job losses & higher social welfare costs
3.9: Disadvantages of cost and profit centres
- Performance of a dept. can change b/c of external factors out of its control, this can show an inaccurate reflection of the efficiency of a dept. - Managing C & P centres can lead to stress on staff and managers - Data collection is required to accurately account for all costs and revenues of all C & P centres
3.3: Contribution Analysis uses
- Pricing strategy: helps set prices - Product portfolio mgmt. - helps decide which products should get investment priority - Fairly allocating overheads to cost & profit centres - Make-or-buy decisions - Special order decisions - e.g. when customer places an order at a price that's diff. from the normal price - Break-even analysis: monitoring cash-flow
3.5: Liquidity ratio: Current ratio
- Reveals whether a firm is able to use its liquid assets (assets that can be turned into cash fast) to cover short-term debts - e.g. if ratio is 2.5 : 1, the firm has $2.50 of current/liquid assets for every $1 of current liabilities - desirable ratio should be b/t 1.5 to 2.0 Current ratio = current assets ÷ current liabilities
3.7: Reducing cash outflows
- Seek preferential credit terms: biz can negotiate extended credit terms/seek out other creditors o Limitation: The admin costs & the time needed to investigate & negotiate better deals - Seek Alternative Suppliers o Limitation: cheaper raw materials & stock = lower quality of goods Might need to change marketing strategies to fit new product - Better Stock Control: reduce stock lvls by using a "Just-in-time" system to reduce cash being tied up in stocks o Limitation: does not work for all companies e.g. Offering a service does not hold much stock (e.g. Hair salons) - Reduce Expenses: e.g. reduce unnecessary "fancy" costs - Leasing: reduces the burden on cash flow: e.g. Renting and Leasing
3.3: Break-even graph
- Should have fixed costs line, total costs line, total revenue line, margin of safety area, break-even point, maximum capacity (maybe) & title obvs. (ALL LABELED) (5/6) - axes: x --> output in units, y --> costs & revenues
3.3: Break-even chart
- Should have quantity sold, fixed costs, variable costs, total costs, total revenue and profit/loss columns (6)
3.4: Equity
- Shows the value of the business belonging to the owners - Owner's Equity = Net Assets = Total assets - Total liabilities - Shareholders' equity/funds = owner's equity - Shareholders' equity = share capital + retained earnings
3.8: Pay back period (PBP)
- The amount of time needed for an investment project to earn enough profit to repay the initial cost of the investment - As: simplest method, can be used to compare w/ diff. investment projects by calculating fastest PBP of each, useful for firms w/ cash flow problems in identifying how long it will take for cash to be recouped - Ds: focuses on time as main criterion for investments rather than profit, contribution per month is unlikely to be constant, does not work for all firms (e.g. airline manufacturers) PBP (in months) = Initial investment cost ($) ÷ Contribution per month ($)
3.7: Improving cash inflows
- Tighter Credit Control: limit the trade credit to customers OR reduce the credit period o Biz receives cash sooner ⇒ improve Cash Flow o Limitation: Customers might switch over to rivals b/c trade credit terms have worsened for them o Can INSTEAD ask to pay EARLIER & offer incentives (e.g. discounts) - Cash Payments Only: removes the delay of paying by credit o Limitation: Customers might prefer to buy from rivals that have trade credit - Change Pricing Policy: cutting prices & offload excess stocks o Works BEST for products w/ no substitutes or @ the end of their Product Life Cycle • Improved Product Portfolio - provide a wide range of products o More likely to generate revenue o Limitations: Widening the Product Portfolio raises costs & risks and doesn't guarantee net Cash Inflows
3.8: Discounting
- Used to convert the future net cash flow to its present-day value - Also represent the inflation and/or interest rate - discount factor are given in a table
3.1: Venture capital
- Venture capitalists invest in small/medium size biz w/ growth potential - Criteria before committing capital in an investment proj: - Return on investment: new biz needs to be highly profitable - Business plan: needs to show direction & purpose of biz so investors feel confident in the biz - People: investors want effective ppl mgmt. - Track record: investigation into firm's ability to pay back lenders/success record of entrepreneurs
3.7: Cash
- a current asset that represents actual $ a biz received from sale of goods/services
3.9: Cost centre
- a department/unit that incurs cost but isn't involved in making any profit - these costs are attributed to the activities of that department e.g. salaries, wages, lighting, capital expenditure - manager assigned to monitor each centre's expenditure
3.7: Cash flow statement
- a financial document that shows the details of actual Cash Inflows & Outflows of a biz per period of time - aids in making CFFs
3.9: Budget
- a financial plan of expected revenue & expenditure for an organization, or departments within the business, for a given period of time - should be set in line w/ aims of the biz
3.1: Overdrafts
- allow a biz to temporarily withdraw more money out of its account than it has - short-term source - demand high interest rate, but more cost-effective than bank loans - Advantage: suitable when there's need for large cash outflow e.g. biz awaiting payments from customers - Disadvantage: repayable on demand from lender
3.1: Hire purchase
- allows a biz to pay its creditors in installments - often need a deposit/down payment to secure HP deal from a lender - at the last installment the biz eventually owns the asset
3.1: Debt factoring
- allows a biz to raise funds based on value owed by debtors - long-term source - Debt factoring service providers offer 80-85% of outstanding payment from debtors b/t 24 hrs & chase down debtors - acts as immediate source of finance for biz w/ cash flow problems - Disadvantage: high fee charged by service providers, not all biz are eligible for service
3.1: Trade credit
- allows biz to 'buy now pay later' - Creditors: org. that offers trade credit, allows payment b/t 30-60 days for customers (debtors) - E.g. credit cards = similar to trade credit - short-term
3.7: Opening balance
- amount of cash @ the beginning of the trading period
3.7: Closing balance
- amount of cash @ the end of the trading period Closing Balance = Opening Balance + Net Cash Flow
3.4: Dividends
- amount of net profit after interest and tax that is distributed to owners (shareholders) of the company - usually paid biannually - listed in balance sheet under current liabilities
3.6: Efficiency ratio: Gearing ratio
- assesses firm's long-term liquidity position - if gearing ratio is 33%, it means 33% of the firm's sources of finance come from external interest-bearing sources, & the other 67% represent internal sources of finance - Highly geared: when a firm has a gearing ratio of 50% or above --> makes firms vulnerable to rising interest rates, prone to being taken over by rivals, financiers are less likely to lend $ - low ratio favoured - o High gearing ratio = high dependence on long-term sources of borrowing Gearing ratio = (long term liabilities ÷ capital employed) x 100 OR Gearing ratio = (loan capital ÷ capital employed) x 100
3.2: Indirect costs (overheads)
- can't be clearly traced to production or sale of any single product e.g. advertising, insurance, accounting fees, legal expenses - don't relate to lvl of output
3.2: Semi-variable costs
- change only when production or sales exceed a certain lvl of output e.g. internet service/cell phone providers - if you go over data usage, commission
3.2: Fixed costs
- costs of production a biz has to pay regardless e.g. rent, mgmt. salaries, security - not related to output level
3.2: Variable costs
- costs of production that change according to lvl of output - As output increases, so do variable costs - E.g. wages, packaging costs, raw materials, sales commissions
3.9: Profit centre
- department/unit of a firm that incurs both costs and revenues - having profit centres allows an org. to identify areas that generate the most/least revenue
3.3: Break-even analysis
- determines if it's financially worthwhile to produce/launch a product - and the expected lvls of profit a biz will earn if everything goes according to plan Limitations of the break-even model: - Assumes all cost functions are linear - not true b/c economies of scale can be gained on a larger scale - Assumes sales revenue function is linear - this ignores price discrimination - Assumes the biz will sell all of its output - ignores qualitative factors Beneficial to firms that: - Produce and/or sell a single standardised product - Operate in a single market - Make products to order - i.e. all output is sold
3.1: Capital expenditure
- finance spent on fixed assets (have monetary value and can be used repeatedly e.g. machinery, land) - sources of finance come from medium-long sources
3.7: Cash flow
- financial document that shows the expected movement of cash into and out of a biz per period of time
3.6: credit control
- firm's ability to collect debts w/in a suitable time frame
3.4: Type of depreciation - Wear and tear
- fixed assets are used over time, so they wear out and raise maintenance costs → value decreases over time - e.g. computers & motor vehicles
3.9: Types of budgets
- flexible budgets - incremental budgets: add a certain % onto the previous year's budget - marketing budgets - production budgets: plans for the level of output - sales budgets - staffing budgets - overall (master) budget - zero budgeting: sets each budget holder's account to zero --> Holders must seek approval for any planned expenditure
3.1: Share capital
- from selling shares - long term - E.g. using initial public offerings/share issues (for existing public limited companies) - IPOs are great for immediate large cash flow
3.1: Grants
- govt. financial gifts (non-repayable funds), e.g. used to stimulate economic activity, help biz start-up - difficult to get
3.6: Improving a firm's efficiency position
- increasing stock turnover, reducing debtor days & increasing creditor days This can be done by: - Developing closer relationships w/ customers, suppliers and creditors, thereby helping to reduce debt collection time and extend the credit period - Introducing a system of 'just-in-time production' to eliminate the need to hold large amounts of stock - Improving credit control, i.e. managing risks regarding the amount of credit given to debtors E.g. giving customers an incentive to pay earlier/on time helps reduce chances of bad debts (loans that don't get repaid)
3.4: Expenses
- indirect or fixed costs of production
3.4: The 5 principles and ethics of accounting practice
- integrity: straightforward, fair, honest - objectivity: unbiased - professional competence and due care: use skills - confidentiality - professional behaviour: comply with regulations, behave w/ courtesy
3.1: Leasing
- lessee pays rental income to hire assets from lessor who owns assets - Advantage to the lessee: lessor is responsible for repairs/maintenance, tax bill of lessee is reduced - Disadvantage: in long term, leasing is more $ than purchase of assets
3.9: Advantages of cost and profit centres
- managers forced to be more accountable for their dept. 's contribution towards the firm's costs, since the direct costs of production can easily be allocated to C & P centres - Managers can easily identify areas of weakness in diff. departments - Departments/smaller teams tend to work better than larger ones - Delegating power to those in charge of C & P centres can improve their motivation
3.6: Efficiency ratio: Creditor days
- measures the # of days it takes on avg. for a firm to pay its trade creditors - high ratio can help free up cash for other use (in short term) but could mean firm is taking too long to pay creditors who could impose financial penalties Creditor days = (creditors ÷ cost of goods sold) x 365
3.6: Efficiency ratio: Debtor days
- measures the # of days it will take on avg. for a firm to collect $ from debtors - low ratio favoured --> b/c firm improves cash flow if customers pay on time Debtor days = (debtors ÷ sales revenue) x 365
3.6: Efficiency ratio: Stock turnover
- measures the # of times a firm sells its stocks w/in a time period, usually 1 year - high ratio favoured Stock turnover (# of times) = cost of goods sold ÷ avg. stock OR Stock turnover (# of days) = (avg. stock ÷ cost of goods sold) x 365 Improving the ratio: - Divestment/getting rid of obsolete stock and unpopular products in the firm's portfolio - Reduce range of products being stocked by only stocking the best-selling product
3.5: Efficiency ratio: Return on Capital Employed (ROCE)
- measures the $ performance of the firm with the amount of capital invested - high ROCE is favourable - Around 20% is a benchmark - For every $100 invested in the business - improve ratio by improving net profit *ROCE %* dollars of profit is generated." ROCE = (Net Profit before interest and tax ÷ Capital Employed) x 100%
3.4: Type of depreciation - Obsolescence
- newer and better products become available, which makes the demand & value for existing fixed assets to fall - e.g. old versions of iPhone, software
3.7: Cash flow forecast (CFF)
- opening balance - cash inflows label - cash inflows - total cash inflows - cash outflows label - cash outflows - total cash outflows - net cash flow - closing balance (9)
3.7: Causes of cash flow problems
- overtrading: Purchase of fixed assets for rapid expansion - overborrowing - overstocking - poor credit control - unforeseen changes e.g. machinery breakdown
3.1: Revenue expenditure
- payments for daily running of business e.g. wages, raw materials & indirect costs like advertising
3.1 Internal sources of finance
- personal funds: short-term - retained profits: after paying taxes & dividends to shareholders - sale of assets: short-term
3.7: Strategies to deal w/ cash flow problems
- reducing cash outflows - improving cash inflows - looking for additional finance
3.2: Direct costs
- related to the output of a particular product w/out which costs wouldn't be incurred - Not necessarily related to lvl of output - E.g. direct costs for buying a comm. building = postage, photocopying costs, phone bills
3.1: Business angels
- rlly wealthy ppl that invest their money in biz w/ high-growth potential - likely take a big role in running of the biz - Disadvantage: owner loses some control of biz, and biz eventually might have to buy out the stake owned by the biz angel - Advantage: biz angels have experience & financial backing
3.1: External sources of finance
- share capital - loan capital - overdrafts - trade credit - grants - subsidies - debt factoring - leasing - venture capital - business angels
3.4: Balance sheet
- shows assets, liabilities and the capital invested by a biz at a particular point in time - shows the firm's sources of finance (the equity) and where that money has been used (the net assets)
3.5: Profitability ratio: NPM
- shows the % of sales turnover that is turned into net profit - NPM is a better measure of a firm's profitability b/c it accounts for both cost of sales (direct costs) AND expenses (indirect costs) - used mainly for profit-seeking firms - high NPM is favourable - Use Net Profit before Interests and Tax when calculating for NPM - For every $100, *NPM %* dollars is net profit NPM = (Net Profit ÷ Sales Revenue) x 100%
3.4: Profit and loss account/income statement
- shows trading position of a biz at the end of a specific accounting period, usually 1 year 3 sections: 1. Trading account: sales revenue, less COGS, gross profit 2. Profit & loss account: less expenses, net profit/loss before tax and interest, less interest, net profit before tax, less tax, net profit after tax and interest 3. Appropriation account: less dividends, retained profit Title: 'profit and loss account for (company name) for the year ended (date)'
3.7: Working capital
- the cash or liquid assets available for the daily running of a business - pay for e.g. wages, raw materials Working Capital (Net Current Assets) = Current Assets - Current Liabilities
3.9: Variance
- the difference b/t the budgeted figure and the actual outcome - Budgets holders need to investigate the cause of any variance Variance = Actual outcome - Budgeted outcome 2 types of variance: --> Favourable variances (F): exist when the discrepancies are financially beneficial to the org. E.g. for COSTS - if actual costs are smaller than the budgeted costs = :) E.g. for SALES - if actual sales are BIGGER than budgeted sales = :) --> Adverse/unfavourable variances (A): exist when the discrepancies are financially detrimental to the org. - provide warnings of rising costs and/or falling revenues - managers can then implement corrective measures to offset them E.g. Occur when actual costs are HIGHER than expected (overspending) = :( E.g. Or when actual revenue is LOWER than budgeted (underselling) = :(
3.4: Depreciation
- the fall in the value of fixed assets - Appreciation = opposite - Depreciation = Expense on Income Statement ⇒ reflects the fall in value
3.7: Working capital cycle
- the interval b/t cash payments for COPs and cash receipts from customers --> goods sold --> cash in --> payments to suppliers/employees --> goods produced --> *cycle*
3.7: Profit
- the positive difference between a firm's total sales revenue and its total costs of production Profit = Revenues - Costs • when a biz sells its products on credit, the automatically earn profit on the sale • the biz can be profitable but cash deficient
3.8: Investment
- the purchase of an asset w/ the potential to yield future financial benefits
3.8: Investment appraisal
- the quantitative techniques used to calculate the financial costs & benefits of an investment decision - 3 main methods: Pay back period, Average rate of return & Net present value
3.3 Contribution
- the sum of $ that remains after all direct & variable costs have been taken away from the sales revenue - is used to pay fixed costs of production Contribution per unit = P - AVC Total contribution = (P - AVC) * Q
3.1: Subsidies
- to reduce costs of production, purpose: provide extended benefits to society
3.1: Sale and leaseback
- type of leasing - biz sells particular asset & immediately leases it back
3.5: Profitability ratio: GPM
- used mainly for profit-seeking firms - high GPM is favourable - For every $1.00, *GPM* cents is gross profit, with other accounting for Costs of Production GPM = (Gross Profit ÷ Sales Revenue) x 100%
3.4: Amoritisation
- used to reduce the value of non-physical fixed assets (intangible assets) on a balance sheet
3.7: Insolvency
- where working capital is not sufficient to meet current liabilities
3.7: Limitations of cash flow forecasting
1. Marketing - Poor Market Research can lead to incorrect Sales Forecasts 2. Human Resources - Demoralized Workforce becomes less productive and delivers poor customer service a. Can lead to industrial action (ex. strikes) ⇒ BAD for CF 3. Operations Management - Machine Failure can cause delay in work and to CF 4. Competitors - Rivals firms' behaviours can be hard to predict a. Aggressive marketing can make rival stronger and hurt our CF 5. Economic Changes - Present Opportunities or Threats a) Lower Interest rates → increased borrowing → boosts consumer & investment expenditure - Should increase employment & stimulate economic growth → boost CF b) Higher rates → economic downturn 6. External Shocks - Events like war & Stock Market crashes make initial CF Forecast less accurate • Limitation: CF Forecasts are just for the immediate & foreseeable future • CF Forecasting should be a continuous process w/ regular updates being made
3.9: Budgets are produced for 4 reasons
1. planning & guidance: Budgets help plan & anticipate $$ problems before they occur 2. coordination: helps the entire workforce to focus on a common goal --> Budgetary Control: corrective measures taken to ensure that actual performance = budgeted performance - prevent conflict b/t departments 3. control: Budgeting helps control bus. expenditure 4. motivation: involving staff in budgeting promotes teamwork, delegating budgetary control
3.2: Average revenue formula
Average revenue = revenue / quantity sold = price
3.3: Break-even
Break-even = fixed costs / contribution per unit - when costs of production = revenue
3.9: The role of budgets and variances in strategic planning (CUEGIS)
Budgeting has a central role in strategic planning - Orgs. that adopt an authoritarian culture tend to be arranged by a tightly controlled budgetary system, such as a zero budgeting arrangement - By contrast, orgs. that have an open/entrusting culture tend to use budgets as a form of empowerment and motivation - Therefore, it depends on the organizational culture SMART budgeting requires budgets to be: - Specific: Budgets should be set in line with the strategic vision of an org. - Measurable: Any budgeting system should ensure that budget holders are held accountable for their successes/shortcomings --> Variance analysis can help here - Agreed: For budgeting to work properly, budgets should be set through a process of negotiations & discussions to ensure appropriate budgets are set - Realistic: Only realistically set budgets can motivate people to reach the set targets --> Under-funding will hinder output, whilst over-funding is likely to lead to complacency and wastage - Timed-constrained: Since budgets are financial plans for the foreseeable future, there must be a time constraint
3.4: COGS Formula
COGS = opening stock + purchases - closing stock
3.5: Capital employed
Capital employed = (non-current assets + current assets) - current liabilities = non-current liabilities + Shareholder's Equity = Loan capital + Share Capital + Retained Profits
3.3: Margin of safety
MOS = lvl of demand/sales volume - break-even quantity (+) MOS means firm makes profit (-) MOS means loss
3.8: Net present value
NPV = Sum of Present Values - Cost of Investment PV = Net Cash Flow x Discount Factor Greater NPV (+) = Invest (-) = Reject project Ds: Can be complex and results are only comparable if initial investment cost is the same between competing projects
3.4: Net assets
Net Assets = Fixed assets + Working Capital - Long term Liabilities ⇒ Total assets - Total liabilities = Net assets = Owner's equity
3.7: Net cash flow
Net cash flow = cash inflow per period of time - cash outflow per period of time o Should be (+), but can be (-) & still surviving business o Profitable biz can only survive in the long-term if its cash inflows (receipts) are greater than outflows (expenses)
3.3: Profit
Profit = total contribution - TFC
3.5: Improve profitability ratios by...
Raising Revenue: - Reduce the selling price of products when there are many substitutes for it - Raising the selling price for products for which there are few, if any, substitutes - Marketing strategies to raise sales revenue (ex. promotions) - Promotion & Product extension strategies - Seek other revenue streams to boost sales Reducing Direct Costs: - Cutting direct material costs Use cheaper suppliers/material - Cutting direct labour costs Reduce staff numbers or get them to do more for the same pay Can cause resentment and demotivation
3.4: Method 1 - Straight-line method
Residual value of the asset: how much it is worth at the end of its useful life Annual depreciation = Purchase cost ÷ Lifespan WHERE residual value = $0 OR Annual depreciation = (Purchase cost - Residual Value) ÷ Lifespan WHERE residual value ≠ $0
3.2: Sales revenue formula
Sale revenue = price x quantity sold
3.2: Formula for total costs (TC)
total costs = TVC + TFC