We see a lot of examples in the press stating that shops are being closed, or various products terminated because they are unprofitable. Before any such action is taken we need to be clear what we mean about being unprofitable. We need to examine and question the figures that are offered to support this decision. This is a simple example where most will automatically choose to terminate product Y, or branch Y.
If you are not involved in a manufacturing environment, you may be tempted to ignore this blog on the grounds that make or buy decisions will be irrelevant to you. Nothing could be further from the truth! This we will demonstrate in the next section, which is concerned with the evaluation of providing internal services against the use of outside contractors, and represents a good illustration of an application of make or buy principles.
In this example we will first produce a budgeted Income Statement (without the special order); We will then construct a total Income Statement (including the special order); Finally, we will produce an Income Statement - showing incremental income and costs for a special order
One issue likely to be appropriate to all managers at some time in their careers is whether to accept what we will refer to as a special order. By this we mean, 'Are there circumstances in which it might make sense in financial terms to sell products or services at a lower price than normal, or alternatively, to provide a service internally at less than its full cost?'
In some production and distribution decisions, management may be confronted with the question of how best to allocate the firm’s limited resources. Where demand for the product is greater than the production or distribution capabilities available, a company should seek to maximise its total contribution margin from these limited resources.
This is a fully worked example with comments. It covers the calculation of break-even, minimum selling price and volume required at a fixed selling price. It concludes with the construction of a break-even chart.
There are many examples of organisations using competitive tendering in an attempt to obtain savings in the services they provide. These include, local authorities with refuse collection; health authorities with domestic, catering and building maintenance services; and the Royal Navy with ship repair.
For this blog I will describe a ratio model developed by Robertson in 1983. It is a model that has stood the test of time since the ratios included are those that best measure overall changes in financial health
This blog will introduce five employee ratios and provide comments on each one. I will then attach a table that will show the results using data taken from the Polly Ester case study and conclude by giving an interpretation of each ratio.
This blog will introduce five working capital ratios and provide comments on each one. I will then attach a table that will show the results using data taken from the Polly Ester case study and conclude by giving an interpretation of each ratio.
I will introduce four profitability ratios and provide comments on each one. I will then attach a table that will show the results using data taken from the Polly Ester case study and conclude by giving an interpretation of each ratio.
This blog will use data taken from the Polly Ester case study. The common size statement takes data from the income statement and the balance sheet and calculates movements from a starting (base) year. It does help to provide useful information that can be used when carrying out an analysis of the financial position of a company.
Corporate reports do in fact contain much useful information but it may not necessarily be (and is not usually) organised in the most appropriate way to permit analysis. All too often the inexperienced analyst will focus attention upon hard forms of analysis like the calculation of ratios without setting the scene appropriately.
There are good gearing ratios but there are also gearing ratios that are not sufficiently robust. Quite simply, gearing is the relationship between borrowings (interest bearing debt) and equity (the shareholders interest in the company).
To illustrate the application of the net present value (NPV) technique, where for a given rate of interest, future cash flows are discounted using the principle discussed in the The principle of discounting blog. The sum total of these discounted future cash flows is compared with the capital outlay and where it is greater than the outlay, the NPV is said to be positive and the project is acceptable on economic grounds.
In order to present the capital appraisal technique of net present value (NPV), it is necessary to explain the principle discounting, or scaling-down, future cash flows. I will do this by comparing discounting with the more familiar but related technique of compounding.
Simple payback is the most widely used technique when it comes to appraising capital projects. The reason for this is that it is used most often by small to medium businesses where their aim is to try to find out how long it will take them to recover their outlay.
In this blog I want to cover the important topic of gearing. In accounting it is simply the relationship between debt i.e. the lenders and equity i.e. the owners capital. Should a company increase it debt, then all other things being equal, this will tend to increase the gearing and at some stage the risk. It is similar to an individual or a country borrowing more than they can afford, at some stage there is a tipping point.
In this blog I want to discuss the two basic types of business. These are the ones that many small business will tend to operate under. The sole trader is owned and run by an individual; it has a simple structure, only requiring key decisions to be made by one person. The partnership is also a common type of business. Often professional firms operate under this system. It will normally have two or more partners and will require an agreement outlining such things are sharing of profits, interest on capital, partners salaries.
The main objective of credit control is to minimise bad debts. This requires that a balance is achieved between the risk of granting credit to a customer and, the loss of profits through not trading with that customer.
The preparation of a SWOT gives some useful insights into possible objectives for the coming year. When preparing a SWOT simply do a brainstorm and record the items as a list against each of the four segments. At this stage don't question any of the items in the list. Just keep it going for several minutes.
In the UK profitability is typically measured using the formula, profit expressed as a percentage of net assets (RONA%). Profit is taken before tax and before the payment of interest while net assets is taken as total assets minus current liabilities. In the USA they use the same profit figure but express it as a percentage to total assets (ROTA%).
All content provided on the w3b-Doctor.com blog is for informational purposes only. We makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
The owner of w3b-Doctor.com will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.
This terms and conditions is subject to change at anytime with or without notice.