part 2

• Break even output = fixed cost/contribution per unit
• contribution per unit = selling price - variable cost per unit
• margin of safety = actual output - breakeven output
• Pros of break even analysis

  useful for tool management since it makes prediction of profit and MOS

  highlights importance of reducing fixed costs

  data generated can be used in business plan
• cons of break even analysis

  based on predicted data not actual

  unrealistic assumptions
• Working capital is the ability to pay short term debts
• Current assets = cash + stock + debtors

  • stock to cash- increase sales don't overstock better market research
  • debtors to cash- reduce payment time increase credit
  • creditor to cash- increase time of repayment maintain a positive relationship
  • all of this leads to operational efficiency
• debt factoring is when a business with a large amount of debt sells its debt to a third party increasing its cashflow
• overdraft is when a business withdraws more cash from a bank account than it holds
• Pros of an overdraft

  • quick and simple to set up
  • useful for starter business
  • short term debt
  • no control of the business given up
• Cons of an overdraft

  • rise in interest rates
  • fall in credit rating
• pros of retained profit

  • no financial cost
  • no control given up
  • safe + low risk
• Cons of retained profit

  • shareholder conflict
  • finite retained profit
• New share issues pros

  • no interest
  • increased opportunity to raise finance
• New share issue cons

  • lose control
  • pay shareholders dividends
• trade credit buy raw materials or components from suppliers and pay them later

  short term
• pros of trade credit

  • easy to arrange
  • cheap form of short term finance
  • no control given up
• Cons of trade credit

  risk of ruining relationship

  large fine