Professional Documents
Culture Documents
Chapter 5 Financial Management
Chapter 5 Financial Management
5
Financial Management
2
Sources of finance and Types of Capital
3
TYPES OF CAPITAL REQUIRED
• When the business assesses it capital
requirement, it must consider the need for
current asset capital and fixed asset capital.
1. Current asset capital
• Current assets are part of business capital that
are used for the current business operations
– Cash:
– Inventor
– Receivables:
4
Cont…
6
Cont…
Variable
Variablecosts
costsfluctuate
fluctuatein
intotal
total(not
(notper
perunit)
unit)
as
asthe
thevolume
volumeofofproduction
productionororsales
sales
fluctuates
fluctuates
Direct
Directlabour
labourcosts,
costs,Direct
Directmaterial
materialcosts
costsused
usedinin
production,
production, and
and sales
sales commissions
commissions are
are examples
examples
ofofvariable
variablecosts.
costs.
8
Types of costs
p
p lleess
m
EExxaam Materials used to Wages paid not
Example: support the directly involved in
production process. production work.
Example: The tires installed in an
Wages paid to automobile Examples:
Examples: maintenance
automobile lubricants and workers, janitors
assembly workers cleaning supplies and guards.
Direct
Direct
Materials
Materials
Direct
Direct Manufacturing
Manufacturing
Labor
Labor Overhead
Overhead
Other
Adminis
Costs
trative
Costs
12
THE TAILOR SHOP of Wro Addis - COST STRUCTURE
Cost
(ETB) per
month
[(Cloth 2x150ETB)+
(Button 20x5ETB) + 2.5 dresses per day x [2*150+20
Direct material & (Belt 1x50 ETB)] per 20days= 50dresses *5+1*50]*
expenses unit per month 50 = 22500
Variable cost 22,500 (22500/35000)=64.3%
[amount x int. rate x years]/month = [ETB 30,000 x 12 %
Monthly interest x 1]/12 = 300
Depreciation: ETB 24,000 ÷ 60 months = 400
Auxiliary materials & packaging 700
Maintenance / repairs 200
Administration cost 400
Salaries (regular salaries in production) 2000
Salaries (Wro Addis) 3000
Rent 2500
Utilities 400
Selling expenses 600
Total Fixed Cost 10,500 (10500/35000)=30%
Total cost (Variabl+ fixed) 33,000(33000/35000)=94.3%
13
Profit / loss Calculation
Turnover:
50 dresses per month x ETB 700.00 each = ETB 35,000 per month
15
Break-even Analysis
• “A firm Breaks Even if it doesn’t make a profit or a loss”
• In other words profit = 0
• Total Revenue = Total Costs
• Total Revenue (TR)= Price per unit x Number of units sold
• Used to evaluate whether the organisation will be able to cover costs (break even)
at a particular price
ETB 6 000
Variable Costs
ETB 5 000
BE-Point
ETB 4 000
ETB 3 000
Margin of
Safety
ETB 2 000 Loss Fixed Costs = ETB 1 600
ETB 1 000
10 20 30 40 50 60 70 80 90 100 110
17
Cont…
SP = selling price
Costs = FC + VC(units manufactured)
FC = fixed cost
VC = unit variable costs.
• We are assuming that units manufactured equal units
sold
18
What if we want to know how much product
we must sell to break even?
19
Breakeven revenue
20
Break even analysis
• Break-Even in Birr =
21
• Example
• A small street side cafe offers fresh traditional coffee to the
general public. Total variable costs per coffee (including coffee
beans, water, firewood, sugar) amount to ETB 1.60 per cup. The
cafe has fixed costs per week of ETB 360.00, being the rental of
the place. The selling price is ETB 4.00.
Solution
– From the problem
– Total Fixed costs =360ETB/week and
– Total Variable costs =1.6ETB / cup
– sales price = 4ETB/cup
• Calculate
• The number of units to break-even
• break-even revenue and the profit / loss that the business will make
• The diagrammatic presentation of the break – even analysis.
22
• Break- Even in unit = [fixed costs / (Sales-variable cost)]
• =[360/ (4-1.6)]= 150 units
• Therefore, the business must sell 150 cups of coffee (per week!) in order to
break-even. Let us put it to the test:
• Sales 150 x ETB 4.00 = ETB 600
• Variable costs 150 x ETB 1.60 = ETB 240
• Fixed costs = ETB 360
• Profit / loss = Sales- (fixed + variable) costs =600-(360+240) =0
• Break-Even Revenue =
Margin of
Safety
24
Margin of Safety (MoS)
25
Calculation of Break-Even
27
Computing Multiproduct Break-Even Point
28
Cont… Multiproduct Break-Even Point
29
Cont… Multiproduct Break-Even Point
Windows Doors
Selling Price $200 $500
Variable Cost 125 350
Unit Contribution $ 75 $ 150
Sales Mix Ratio 4 1
30
Cont… Multiproduct Break-Even Point
Windows Doors
Selling Price $200 $500
Variable Cost 125 350
Unit Contribution $ 75 $ 150
Sales Mix Ratio
Composite C/M
31
Cont… Multiproduct Break-Even Point
32
Cont… Multiproduct Break-Even Point
Fixed costs
Break-even point
=
in composite units
Contribution margin
per composite unit
$900,000
Break-even point
=
in composite units $450 per composite unit
Break-even point
= 2,000 composite units
in composite units
33
Cont… Multiproduct Break-Even Point
Sales Composite
Product Mix Units Units
Window 4 × 2,000 = 8,000
Door 1 × 2,000 = 2,000
34
Multiproduct Break-Even
Income Statement
Step 4: Verify the results.
• It is only a forecast!
• Assumes all products are made AND sold
• Assumes that sales prices are constant at all levels of
output
• Costs may change
• It can only apply to single product or single mix of
products
37
PROFIT FORECAST
38
Example: Block Enterprise
Suppose you are the owner of hollow blocks manufacturing enterprise. Hollow
blocks are sold for ETB 850 per 100 blocks. The monthly cost structure of your
enterprise looks the following
Salaries ETB 3,000 per month
Production Labour ETB 50 per 100 blocks
Rent ETB 3,000 per month
Cement, sand and stone ETB 500 per 100 blocks
Machine credit payment ETB 1,000 per month
Delivery costs ETB 50 per 100 blocks
Telephone / Communication ETB 500 per month
- Material Cost
- Production Labor
Contribution
Salaries
Rent
Machine Rent
Delivery Expense
Telephone
-Total Expense
Profit Before Tax
40
Sales forecast (profit forecast)
850 birr / 100 unit blocks
Sep. Oct. Nov.
Forecasted sales amount ( units) 5000 6500 7000
Forecasted sales revenue (income) 42500 55250 59500
Description of costs ETB Sep. Oct. Nov.
Salaries 3000/month 3000 3000 3000
Labor cost (Wage) 50birr/100 unit 2500 3250 3500
Rent 3000/month 3000 3000 3000
500
Material (cement, sand.. birr/100unit 25000 32500 35000
Machine credit payment 1000/month 1000 1000 1000
Delivery cost 50birr/100 unit 2500 3250 3500
Communication 500/month 500 500 500
Total cost 37500 46500 49500
PBT =Revenue – total expenses 5000 8750 10000
41
Cash flow
Prepare a cash flow forecast for the period September, October
and November of the Yared Hollow Block Enterprise.
During August you produced and sold bricks to the amount of ETB
30,000. All sales are on credit and debtors take one month on
average to pay. However, you pay cash for the materials in the
moment of production. You had ETB 25,000 in the bank at the end
of March.
42
Cash flow
43