Formulas for Business Management:
• Gross Profit Margin;
o Determines the Org’s profitability of production
( 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 )
o 𝐺𝑟𝑜𝑠𝑠 Pr 𝑜 𝑓𝑖𝑡 𝑀 arg 𝑖 𝑛 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
× 100
• Operating Profit Margin;
o Determines the Org’s profitability of operations
o Can be referred to as EBITDA (Earnings before interest, taxes,
depreciation and amortisation
(( 𝑇𝑜𝑡𝑎𝑙𝑅𝑒𝑣𝑒𝑛𝑢𝑒 −𝐶𝑜𝑠𝑡𝑜𝑓𝐺𝑜𝑜𝑑𝑠𝑆𝑜𝑙𝑑) +𝑂𝑡ℎ𝑒𝑟𝐼𝑛𝑐𝑜𝑚𝑒 )−𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
o 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 Pr 𝑜 𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
× 100
• EPS (Earnings Per Share);
o How much of the org”s profit belongs to shareholders
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 −𝐷𝑖𝑣𝑒𝑑𝑒𝑛𝑑𝑠 𝑜𝑛 Pr 𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘
o 𝐸𝑃𝑆 = × 100
𝐴𝑣𝑟 𝑂𝑢𝑡𝑠 tan 𝑑𝑖𝑛𝑔 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠
o It is reasonable to assume that an org with a higher EPS is better to invest in than one
with a lower EPS however a highly efficient org can have a low EPS ratio because it has
a large number of shares outstanding
• 3 Main calculations for a Statement of Financial Position;
o Looks at org’s financial health and liquidity
▪ Working Capital
• What is left after the business pays off Current Liabilities using Current
Assets
• 𝑊𝑜𝑡𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)
▪ Current Ratio
• AKA: Liquidity Ratio
• Can the bus pay off its debts
• 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 ÷ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)
• A healthy ratio is 2:1
o 𝐴𝑐𝑖𝑑 𝑇𝑒𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 = (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 −
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦) : 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠Healthy ratio is 1:1
▪ Debt to Equity Ratio
• AKA: Gearing
• How much debt an org has relative to its assets
• 𝐷𝑒𝑏𝑡 − 𝑡𝑜 − 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑂𝑤𝑛𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
× 100
• Cost-volume-profit Analysis: Break-even analysis;
o CVP-analysis Sales – variable costs = Contribution
o Sales – variable costs – fixed costs = profit or loss
Or
o Sales – total costs = profit or loss
o Note: variable cost + fixed cost = total cost
• Break Even Unit;
o 𝐵𝑃 = (𝑆𝑒𝑙𝑙𝑖𝑛𝑔 Pr𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝑖 𝑐𝑒−𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡)
o Note that you must calculate to 4 decimal places and round your answer off
to 2 decimal places
• Profit;
o Like really ? This is math lit work
o = SP – (FC + VC)
• EVA (Economic Value Adding;
o Measures of economic value added (EVA) and market value added (MVA), best apply
to public companies, to evaluate a comp’s performance in terms of return for
shareholders.
o 𝐸𝑉𝐴 = 𝐸𝐵𝐼𝑇 (1 − 𝑇 ) − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑟𝑒𝑠𝑠𝑒𝑑 𝑖𝑛 𝑅𝑎𝑛𝑑
▪ Where 𝐸𝐵𝐼𝑇 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥
▪ 𝑇 = 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒
• MVA (Market Value Added);
o AKA: Future cash flows
o Positive return, Positive Economic Value Added (EVA)
o 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + Pr 𝑒 𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑙𝑙 𝐹𝑢𝑡𝑢𝑟𝑒 𝐸𝑉𝐴
o 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
• Future Value;
o “A PIN”
o Compound Interest
o 𝐹𝑉 = 𝑃𝑉 (1 + 𝑖 )𝑛
• Present Value;
1 𝑛
o 𝑃𝑉 = 𝐹𝑉 (1=𝑖 )
• Cash Conversion Cycle Model;
o The length of time between the payments are made by the org and its reciept of cash
o 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 + 𝑅𝑒𝑐𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 − 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝐷𝑒𝑓𝑒𝑟𝑟𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑
= 𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒