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

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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
NOT ON MID-TERM
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
dependent)
- 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
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Document Summary

Businesses that show a profit can still go bankrupt: lack of real" cash profit is locked in accounts receivables, profit doesn"t = cash. Real human and financial capital must be rented" from owners. A ventures financial objective is to increase value. Different measures at different stages: development stages, survival stage, rapid-growth stage. Development and startup issues: cash burn rate how quickly a venture uses cash, liquidity ability to meet short-term financial loans, conversion period how quickly you convert to cash capital cycle (industry dependent) 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. = cash operating expenses (cost of goods sold,, administrative, marketing, interest, taxes) +

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