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BU121 Study Guide - Midterm Guide: Contribution Margin, Variable Cost

Course Code
Roopa Reddy
Study Guide

of 2
Financing Cont’d
- Businesses that show a profit can still go bankrupt
o Lack of ‘real’ cash – profit is locked in accounts receivables
o Profit doesn’t = cash
- Breakeven
o Contribution margin the higher this is the easier it is to reach breakeven (less to sell)
you want to keep your variable costs low
o VCRR Variable cost to ….
o They go hand in hand and equal 100
Principle 1 entrepreneurial finance:
- Real human and financial capital must be ‘rented’ from owners
Principle 5
- A ventures financial objective is to increase value
- Different measures at different stages
o Development stages, survival stage, rapid-growth stage
- Development and startup issues
o Cash burn rate how quickly a venture uses cash
o Liquidity ability to meet short-term financial loans
o Conversion Period how quickly you convert to cash capital cycle (industry
- Survival Issues
o Leverage you are borrowing other people’s money to try to make more money –
taking on debt to try to get more inventory to be able to supply, etc.
o Profitability and Efficiency how profitable are you? How efficient? Investment returns
Financial Ratios
- Ratio groupings
o Liquidity ability to meet short term obligations
o Conversion period time to convert assets into cash (affects liquidity how fast
receivables are paid, etc.)
o Leverage implications relating to the use of debt
o Profitability and efficiency
- Compare the rations against average
o Compare across the whole industry industry comparable analysis
o Compare to specific firms (cross-sectional analysis) compare to firms that are most
similar to your own
o Compare to yourself over time trend analysis
o Bench mark standard ration the rough numbers that the ratio should be
Cash Burn Rate and Liquidity
- Cash Burn Rate: How quickly you spend or burn through your cash
- Cash Build Rate: how quickly you are able to build or increase your cash through sales revenue
on collections of sales (you have to collect the money on the sale before it counts
- Liquidity to be liquid enough to cover expenses
Measuring Cash Burn and Build Rates
Cash Burn
- = Cash Operating Expenses (cost of goods sold,, Administrative, marketing, interest, taxes) +
Increase in Inventories Payables and Accurals + Capital Expenditures (plant equipment)
- E.g. in slides
Cash Build
- =Net sales Increase in Receivables
Net Cash Burn when cash burn exceeds cash build
Month Burn rate monthly cash burn rate just divide by 12