2 2 6.2 Analysis techniques Various analysis techniques exist: The most commonly used are equity statement analysis, ratio analysis and horizontal/vertical analysis, ‘The equity statement analysis provides insight inthe sources and uses of the funds used in the company. Ratio analysis uses ratios, comparisons of 2 or more related figures from the balance sheet and/or the income statement. Vertical analysis calculates the relative importance of each item on the belance sheet or the income statement. Each item on the balance sheet is ‘expressed as @ percentage ofthe balance sheet taal. Income statement Items are expressed as a percentage of sales Horizontal analysis or time-series analysis compares current ta past tems on the balance sheet and the Income statement. The values for each item In {2 reference year are set to 100. Subsequent values are expressed as percentages relative to this reference year. This way, the evolution of various company components can be compared 6.3 Ratio-analysis We wil discuss financial ratios based on the following data of Thomas inc. Balance sheet Thomas ine. Fixed assets Equity 1. Incorporation expenses 1.5001. capkal 18.600 I. Tangible fixed assets Iv. Reserves 60.660) Ae 150.000/ Liabilities 4 Instatations, Equipment 25-000) VII Long term bites 120.000 pease 20,000]1%. Short term labities [Current assets © dex ian 12.000] VE. tnventories and orders in | progress . NP + Trading goods 12,000 vat payable i {VIL Short term receivabies pares pee 3.000 + NR $2101 social security i ne. cash ce 5.350 Total 226.310] Total 265 Income statement Thomas Inc 1. Operating revenues a. Sales 98.000 TL Operating expenses A. Trading goods 16.570] B, Services and other goods 12.500] C. Payrol costs 40.500] ©. Depreciation and amortisation 11.500] IK. Operating result (E817) 16.930a ‘current lablities by new labilties. Ifthe crectors are not willing to renew the various forms of loans, the company faces a financing TV, Financia revenues V. Financia costs shortage VI. Profi (loss) of tre accounting period before taxes [A current ratio higher than 2 Is considered too high. It might imply Vit, Texation on resut that the company has too much inventory or high receivables: too DX. Net profit (loss) of the accounting period much money is tied up unproductively Inventories and AR are not immediately converted Into cash Inventory turnover, average collection period and average payment 6.3.1 Liquidity period influence @ company’s abllty to meet ts short-term lablities ‘+ Amore severe test of liquidity isthe actd test ratio, This ratio does not treat inventory as aliquid asset: Inventories are ‘not guaranteed to be sold they may become obsolete or deteriorate, “They become an account receivable before being convert into cash. ‘Some basic concepts: ‘+ Permanent funds = Equity + Provisions for risks and eosts+ long term labiiies + Shortterm assets = current assets ~ long term receivables “+ Extended xed assets = fixed assets + long term receivables Liquid assets Qckrale = Aedest = rent Ha ES Most companies will have permanent funds which are larger than the ‘extended fixed assets. This surplus Is called the working capital (WC). Its the part ofthe permanent funds used to finance part of the current assets, ‘The remaining part ofthe current assets needs tobe financed by current ablities, Current lialties are due on the short term. This isthe lauicty (restvabee + marketoble securities + cash) - GurentUaltes 'A quick rato higher than 1 means the company has adequate lquic challenge Aas ‘When the working capital > 0, 2 company has sound financing. The larger ‘the working capital, the sounder the company’s financial postion. A positive working capital isthe company’s liquidity buffer The lauicty of a company is also influenced by the iquity of inventories, receivables and payables. ‘+ Inventory turnover measures the liquidity of @ company’s Wic= shor term assets ~ current lablities = permanent funds ~ extended inventory. Fixed assets Cost of goods sold Insentory BUOY = erage Tentory and orders FORTE ‘+The currant ratio measures the company’s abilty to meet its short- term obligations. ‘The Inventory turnover ilustrates.how often the inventory is sold ‘during the accounting period. Since inventory Is valued at cos, sales ‘also need to be valued at cost. Dividing Inventory tumover into 365 ‘ives the average age ofthe inventory. When WC > 0, the current ratio >1 ‘The current ratio ilustrates a company’s ability to meet ts short term obligations. A value of 1,2 or 1,3 indicates a sound situation A value <1 means the company has liquidity problems. It has to replaceAverage age of toentory = eer ‘The average collection period calculates the lquldty of accounts receivable eccounts receivable ‘Gales +VAT on sates} "365 ‘Average collection period = ‘The smaller the average collection periad, the more liquid the receivables are. A long collection period may indicate a loose credit Policy. A very short collection periad an the other side, may indicate 2 very tight credit policy, where only the lowest risks are allowed credit. ‘The average payment period is ther important element of 2 company’s liquidity. It the number of days between the reception of trade goods, raw materials & consumables and other external ‘charges, and their payment by the company. . accounts payab urchase of Wading goods raw materiale: Consul “other external charges 4+ VAT on these purchases +365 A large average payment period may ilustrate suppliers’ confidence In the company. However, It can also ingicate a liquidity problem: the ‘company Is unable to pay within the requires timeframe. It can be an ‘expensive financing, when suppliers offer a dlscount for cash payments. In that case, it may be more interesting for @ company to ay cash, and receive the corresponding discount. ‘Assignment: calculate and discuss the lqullty for Thomas Inc. * Sometimes me use 9 trang year af 380 dee, ‘Assignment: calculate and discuss the proftabilty for Thomas Inc ice ‘oft tonal ar 2 6.3.2 Profitability Proftabllty expresses the result on a relative basis. We can compare the company’s result to sales, assets and equlty or total capital employed. We limit ourselves to calculating the operating profit margin and the return ‘on equty. ‘The operating profit margin illustrates the relative efficiency of the company, taking into account al the operating expenses (including non-cash costs) eperating profit Operating profit margin = =P ‘The Return on Equity (ROE) indicates to what extent the use of equity generates a profit return. Net result after tax row = (OF STO%S resul Before 128), Fyutty Tt shows the profit to the shareholders asa percentage of their equity Inthe ong run, this return needs to be higher than the isk free return (on fixed rate investments. Otherwise Its not advisable to keep equity employee I nly row ure for 1 fay, me alt the ROE By cvig bytheEa 6.3.3 Solvency ‘A company is solvent when itis abe to repay its long term debt and the related interest payments ‘+The debt ratio measures the proportion of total assets financed by the company’s various creditors. Total abies [A igh cbt ratio implies 2 low protection of the creiters. The equity buffer is small, asa consequence ofthis, Incase of forced liquidation, the crectors will not receive the total amount they ere due. The debt ratio Indicates the Financial risk ofa company. This isthe risk related to lables: they imply a fixed financing cost interest) and principal repayment, even In case of weak company results. The financial risk is ao influences by the interest rate and the length ofthe repayment period. + Another solvency ratio Is the degree of financial Independence (orn, Equity _ DF = Feet assets This ratio measures the percentage ofthe owner's means invested in the company. [Assignments Calculate and lscuss the solvency for Thomas Inc. Insights to costsIntroduction part IT Business economics, seen as a part of economic sclences, Is the study of economic actions in the context of entrepreneurial housekeeping. Considering business economics is, as such, an application of and e part of general economics, we need to briefly reference the economical principle ‘The goal of economics isto meet as many needs as possible, using only @ limited (or sparse) amount of given resources. ‘When applying this principle in entrepreneurial housekeeping, we are threading into the domain of Business economies. Ate al, @ business i= confronted with various needs while having only a limited budget. Because ofthis, the business will have to make choices between the separate needs. “The company management is tasked with applying ther sparse resources (le. the factors of production) in order to optimize the final resut. Usually, this entalis achieving the biggest profit possible. In this, however, one shouldnt limit themselves to the optimization ofthe turnover: ane should ico keep into account the minimaliztion of casts for the quantity of production as foreseen. In other words, when a business aims to meet 2 reed, they wil als try to iit as much as possible any necessary sacrifices (mature, labour, capital = Factors of procuction). ‘within this par, the emphasis remains on the cost calculation, asthe cost aspect is very important within the implementation of a company policy ‘The calculation of expenciture is, after all, an important ai, and can be used by the management of company In order to monetarily quantify the advantages and disadvantages of various policy alternatives. “The domain of business economics occupies itself withthe problems faced In entrepreneurial housekeeping. It intends to explain and analyse any economical happenings ané connections between various terms connected to business management (turnover, costs, prof). As such, It forms the basis of any policy decisions. i 7 Business economics and cost calculation 7.1 What problems occupy the business economist? Le. What are the managements options with regard to cost calculation in the long and short term? 7.4.4 On the long term Before the start-up of a business: + What products wil be produced or sola? + What isthe most favourable location? + What capacity should the company have? + What method of production should be opted for? + What legal form of enterprise? + What financing resources? + How wil the internal organisation be developed (flowchart)? + How much stat with what training? After the start-up of a business Should the company be expanded? Should new financing resources be searched for? ‘+ Are we sufficiently profitable or should we reform our company? Should we look into collaboration with other companies? In general, these concern investment projects. The management of the company has to choose the most cost-effective of various investment possibilities ‘Once 2 choice has been made, this determines the future ofthe company. ‘One wrong choice cen lead to financial loss and even to bankruptcy. A good choice wil result in profit and an advantage over the competition. (Once a choice has been executed, Its, for our company, a given on the short term.7.4.2 On the short term Taking Into eccount the Infrastructure (buildings, machinery, knowhow, ..) '8 company is equipped with, 3 production plan and a sales plan for the following period (1 year, @ couple of months, ..) are drawn up. E.g. the set- up of certain promotion campaigns: does this fit within the available budget? Example from touristic-recreational sect Long term plans -> butiding a theme park + What attractions? + Location? ‘Short term plans > .9.: summer season 1+ ring student workers ‘+ Purchasing drinks, ice cream 7.2 How does the entrepreneur solve this decision- acting? ‘They will opt for whatever solution offers the biggest possiblities for prof. In doing so, one needs to emphasise that this concerns the biggest possible profit on the longterm, e.g any possibilities for profit an the short term are exploited, unless these might negatively aectthe possibiltes for profit on| the long term, E.g, _-In order to create some goodwill: temporanly offer anew product 3 (drastically) lower prices. “Ina new hotel: providing stellar offers during the frst season, ‘A company does not need to have the maximalisation of proft as its goal. ‘One might focus on the (International) growth of a business, or the ‘expansion or maintenance of employment, or the general welibeing (public ‘enterprises, environmental care, ..). However, these goals are usually ‘2chieved more easily as more proftis realised, Within the context ofthis ‘course, the maximalisation of profit will be seen as the main goal. 7.3 Why business economics? “The continued existence of a business depends on: “~The right decisions at the right moment.” Im order to take the right decisions, one needs to thoroughly know (analyse) the company. Any business needs to handle thelr limited resources as efficiently as possible in order to achieve a supply at an ‘acceptable price (while maintaining the highest possible profit). Both current and future costs need to be calculated. ‘what does It cost and what does it deliver?” “There’s an added aificuty in the touristic-recreatlonal sector, as not all factors can be determined by the business: the weather, the hotel staf fellow passengers, .. What's more, this industry is currently exploding and) is characterized by a lot of competition. In these circumstances especially, correctly estimating (calculating) costs and profits Is Imperative, 7.4 From cost price to selling price In a commercial enterprise, goods are bought and sold in the same ‘condition. The cast price of these goods equals thelr purchase price, to Which additional costs such asthe costs of transport are added. ‘In an industrial enterprise, raw materials are bought and transformed ‘through a production process into sellable (semi-finished products. All ‘costs of this production process have to be calculated into the cost price. As ‘uch, the cost price ofthe raw materials counts for only 8 part ofthe total ‘2st price of the (semi-)fnished product. Apart from the purchase price, Yarious production costs need to be addt to the cost price. Naturally this Same problem can be seen in service-based enterprises, including the touristic-recreational sector, where the cost price is calculated per service performance, ‘The g10ss profit, Lc. the difference between the selling price and the cost rice, should always sutice to cover any costs not directly atrbutable to the company’s output (sales- and administrative costs, financial costs, ‘te. Quite often, the seling price per units calculated by adding a profit ‘margin tothe calculated cost price per unit product (cost plus pricing).