General Business Topics

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General Business Topics

• ELE 4EMT

George Alexander G.Alexander_at_latrobe.edu.au www.la
trobe.edu.au/eemanage
17 April, 2007
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Topics

• Business as a System
• Business Requirements
• Sources of Funds
• Business Finances/Analysis
• Cost Accounting Objectives
• Elements of Product Cost
• Fixed Variable Costs
• Assets/depreciation

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• Resources
• Human
• Materials
• Equipment
• Financial
• Information

• Managerial
• Planning
• Organisation
• Leading
• Controlling
• Technology

• Outcomes
• Products services
• Profit loss
• employees growth satisfaction

Inputs
Transformation Process
Outputs
Bartol Management A Pacific Rim Focus,
McGraw-Hill, 2001
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Types of Capital

• Working Capital - Required to finance the
  day-to-day running of the business.
• Long-term (Fixed) Capital - Required to finance
  the purchase of assets which will, directly or
  indirectly, contribute to profit over a period of
  years.
• When starting a business, all of this needs to be
  financed.

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Sources of Funds

• Shareholders funds (equity capital)
• Loans from directors
• Bank overdrafts loans
• Trade other creditors
• Government grants
• Venture capital companies
• Other loans

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What is Venture Capital ?
Venture capital (VC) is the process of investing
private equity in companies, typically in early
stages of development, that are believed to offer
significant potential to grow substantially and
reward investors accordingly.
Ref. www.investorhome.com
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Objective of VC
The objective of VC is to generate high rates of
return over long periods of time. VC offers
institutional investors and high-net-worth
individuals high returns (historically better
than stocks) and strong diversification benefits
from very low correlation with other asset
classes.
Ref. www.investorhome.com
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Negatives about VC

• The major negatives of investing in VC are
• Long time frames,
• Lack of liquidity, and
• High management fees.

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NOTE

• Regardless of the source of funds, you will need
  a convincing business plan to persuade investors
  to risk their money in your venture.
• If things do go wrong, there will be a priority
  allocation of the remaining assets. You, the
  owners , will be last in line.

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Need for Business Analysis

• The marketing concept stresses profitability as
  well as consumer orientation.
• Marketing managers need to know how to evaluate
  an organisations financial success.
• The evaluation process requires a good
  understanding of financial statements and
  performance ratios from a marketing perspective.

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Profit Loss Statement

• The basic equation for profit is
• Profit Sales - Costs
• Profit Loss Statement shows an organisations
  sales revenues and costs over a given period,
  typically a year, quarter or month.
• Note Profit and Loss Statement is increasingly
  referred to as Statement of Financial
  Performance.
• A well-written statement can help in identifying
  the areas of the business associated with profit
  or loss.
• Assessment can be based on a division,
  department, business unit, product line, etc.

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Example Profit Loss Statement
Net Sales 707,500 Less cost of goods
sold 340,000 Gross Margin (gross profit)
367,500 Less operating expenses 325,500 Net
Profit 42,000
Note Tax is calculated on the Net Profit
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Performance Ratios

• Return on Investment (refer last lecture)
• The gross margin percentage
• The net profit percentage
• The operating expenses ratio
• Debt/Equity (Gearing) Ratio
• The stock turnover ratio

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The Gross Margin Percentage
The Gross Margin Percentage is the percentage of
revenue available to cover expenses and provide
profit after the cost of goods sold has been paid.
Gross Margin
Gross Margin Percentage
Net Sales
367,500

0.52 or 52
707,500
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The Net Profit Percentage
The Net Profit Percentage (Net Income ratio)
identifies the percentage of profit from each
sales dollar.
Net Profit
Net Profit Percentage
Net Sales
42,000

0.06 or 6
707,500
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The Operating Expenses Ratio
The Operating Expenses Percentage is the
percentage of operating expenses needed from each
sales dollar.
Total Operating Expenses
Operating Expenses Ratio
Net Sales
325,500

0.46
707,500
or in percentage 46
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Improving Net Profit

• Increasing prices
• Pricing objectives
• Supply v demand, etc.
• Reducing cost of goods sold
• Alternative sources
• Make or buy, etc.
• Reducing operating expenses
• Efficient use of resources
• Management policies, etc.

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• Balance Sheet (Statement of Financial Position)
  as at
• Current Assets
• Cash at Bank 8 000
• Inventory 1 500
• Total Current Assets 9 500
• Non-Current Assets
• Equipment 5 000
• Total Non-Current Assets 5 000
• Total Assets 14 500
• Current Liabilities
• Accounts Payable 4 000
• Total Current Liabilities 4 000
• Net Assets 10 500
• Owners Equity
• Owner - Capital 10 500

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Debt/Equity (Gearing) Ratio

• Sometimes referred to as leverage
• Ratio of total debt to owners equity
• In the example balance sheet
• 4000/10,500 38
• The higher the ratio, the greater the risk of the
  company failing.
• High gearing means high interest which still has
  to be paid in times of business slowdown.

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Break-Even Calculations

• The Break-Even Point is defined as the point at
  which costs and revenues meet (costs revenue).
• The concept is best described graphically,
  mathematically it is written as

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Elements of Product Cost

• Direct material
• Direct labour
• Manufacturing overhead
• Indirect material,
• Indirect labour,
• Light and power,
• Repair and maintenance, and
• Depreciation of equipment, etc.

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Fixed Variable Costs

• Fixed Costs
• These are costs which do not vary with changes in
  the volume of production.
• Variable Costs
• These are costs which vary proportionately with
  the volume of production.

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Break-Even Analysis
Revenue
Area of profit
Revenue and cost
Loss Profit
Cost
Break-even point
Area of loss
Quantity of units produce and sold
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Example Break-Even Calculation
Suppose the following Selling price
10 Variable cost 5 Fixed cost 50,000
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Interpretations of breakeven analysis

• The example showed how many units need to be sold
  in order to break even
• The question then may be how long will it take to
  sell that many units?
• A more detailed method, based on time may need to
  be used
• Note that the fixed costs and volume refer to a
  monthly or annual rate. E.g. for an annual fixed
  cost, there will be an annual breakeven volume.
• Breakeven should not be confused with payback

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Payback

• Payback can be expressed as the volume of product
  to be sold before the initial investment outlay
  is recovered
• Initial outlay/Average unit profit
• E.g. 200,000/2.00 100,000 units
• Alternatively it can be expressed in time
• Initial outlay/(annual volume X average unit
  profit)
• E.g. 200,000/(50,000 X 2.00) 2 years
• Payback is not highly regarded as a means of
  assessing an investment but does provide a simple
  guide.
• (More detail available in ELE22EMT Economics
  Lecture 5)

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Cost Accounting Objectives

• To measure, for profit determination purposes
• The cost of goods manufactured, or
• The cost of services performed
• To measure the cost and thus the Balance Sheet
  value of inventories, which include
• Raw materials
• Work in process
• Finished goods
• Store and supplies

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Cost Accounting Objectives - Continued

• To assist management in their planning and
  decision making by reporting costs relevant to
  decisions
• Targeted volume,
• Pricing levels,
• Make or buy,
• Purchase or lease, and
• Introducing or phasing out products, etc.

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Cost Accounting Objectives - Continued

• To assist management in monitoring and
  controlling costs in order to ensure that, as far
  as possible, management strategies and plans are
  implemented.
• In summary, cost accounting objectives cater for
• Requirements of financial accounting
• Management planning and control

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Why capitalise/depreciate?

• Capital assets have an estimated useful lifetime.
• Consequently, it would be misleading to account
  for the associated expenditure in just one
  accounting period.
• As a result, the expenditure is accounted for
  over the assets lifetime through depreciation.
• This also provides a basis for valuing the asset.
• ATO requires that the asset expense deduction is
  claimed over the assets lifetime.

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Depreciation

• Capital investment in tangible fixed assets -
  equipment, computers, vehicles, buildings, and
  machinery - are commonly recovered through
  depreciation.
• Depreciation also referred to as capital recovery
  (US) and capital allowance (ATO)
• Visit www.ato.gov.au - search for depreciation.
• The depreciation amount itself is not an actual
  cash flow.

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- cont.

• The process of depreciating an asset accounts for
  the decrease in an assets value because of age,
  wear, and obsolescence.
• Depreciation is a tax-allowed deduction included
  in tax calculations.
• Taxes (income - deductions)(tax rate)

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Depreciation Terminology - cont.

• Salvage Value
• The estimated trade-in or market value at the end
  of the assets useful life.
• Market Value
• The estimated amount realisable if the asset was
  sold on the open market.
• The market value and book value may be
  substantially different.
• Book Value
• The remaining, undepreciated capital investment
  on the books after subtracting all depreciation
  to date.

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Straight Line Depreciation

• The book value decreases linearly with time.
• The depreciation rate, d 1/n, is the same each
  year of recovery period n.
• It is considered the standard against which any
  depreciation model is compared.
• The annual SL depreciation is determined by
• (first cost - salvage value) d

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Example
B 50,000 n 5 years S 10,000 at t
5 Dt for each year is (50,000 - 10,000)/5
8,000/year
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Table of Results
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Useful References

• The Small business handbook how to start and
  successfully operate a small business, ISBN
  1-86350-004-9, Small Business Corporation (Vic.)
• How companies work, ISBN 0-725-10689-1, Nicholas
  Brash, Timothy Lindsey
• The Australian Taxation Office website
• http//www.business.vic.gov.au Refer Plan to
  Succeed.

Note Please search for newer editions for the
above references
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Group Presentations

• At this stage, it looks like these will take
  place in Weeks 12 and 13 beginning 21/5 and
  ending 30/5.
• We will use all lecture timeslots over these 2
  weeks.
• A detailed schedule will be provided beginning of
  May.
• As a general rule, the larger teams will present
  earliest.

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Thanks for your attention