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UNIT 1 PREVIEW, NPM (NET PROFIT MARGIN), RATIO ANALYSIS IS a quantitative…

- - - - (Total returns - Capital Cost) / Years of Usage / Capital Cost x 100
        Total returns = Summatory of all revenue streams
    - - Businesses can compare this figures with other projects and choose the project showing the highest rate.
        The highest the ARR is, the better for the business.
    - - This method measures the annual net return on an investment as a percentage of its capital cost. Which means it helps to asses the profitability per year generated by a project overtime.
  - - - NPV = Total Present Value - Original Cost
      - Net Cash Flow = Summation of all Cash Flows
    - - If the NPV is (+) you win, thence the project is viable, however, if the NPV is (-) you lose, therefore the project is not viable.
    - - This is defined as the difference in the summation of present values of future returns and the original cost of the investment.
        Present value is today’s value of an amount of money available in the future.
        
        To do this, we use a technique called the discounted cash flow.
        This technique considers how interest rates affect the present value of a future cash flow.
        It uses a discount factor that converts this future cash to their present value today.
  - - - Payback Period = Initial Investment Cost / Annual Cash Flow from Investment
      - Payback Period = Extra Cash Inflow Required / Annual Cash flow of the following year x 12 months
    - - Considering the results (Which are an estimation on how long it will take for an investment to make positive returns into the business), which can vary from years and months, whichever takes less time to recover the initial cost is the best.
    - - This method estimates the length of time required for an investment project to pay back its initial cost outlay. Its purpose is to look how long a business will take to recover from its capital invested in a project.
- - - - Stock turnover ratio: t measures how quickly a firm’s stock is sold and replaced over a given period. (considers number of times stock is sold and replaced)
        
        # of times: Looks at how many times in a given period a firm sells its stock
        
        # of days: At how many days it takes to sell the stock
        
        Solutions: - Increasing sales amount to result high turnover. - Low levels of stock has the added benefit of reducing cost of holding stock
      - Debtor days: Asesses how efficent is a business in its credit control period.(Measures the number of days it takes on average for a firm to collect its debts from customers it has sold goods to on credit.)
        
        Solutions:Provide disscoutns or incentives for debtors to pay earlier, Impose stiff penalties for late payers
      - Creditor days: Measures the average number of days a firm takes to pay its credit.
        
        Solutions: Have a good relationship with creditors for negotiations, and have effective credit control
      - Gearing ratio: It assess the level of debt the business is burdened with
        
        Solutions: Might decrease or not declare and issue dividens to shareholders
  - - - Shows the value of the Gross Profit in relation to the sales revenue, expressed s a percentage
      - Measures the financial performance of a firm, and how much it receives from its caoital employed
      - RAISING REVENUE:
        
        Increase prices in less competitive markets or when consumers are less sensitive to price changes.
        
        Adopt more aggressive promotional strategies.
        REDUCING DIRECT COSTS:
        
        Reduce labor costs by ensuring that the staff becomes more productive.
      - Show the precentage of sales revenue that is turned into net profit (in other words, the profit that remains after DEDUCTING ALL COSTS from the slaes revenue)
      - The NPM can be improved by financial and non-financial strategies such as those mentioned for GPM.
        
        Check indirect costs to avoid unnecessary expenses.
        
        Generate high levels of gross profit.
        
        Negotiate with key stakeholders in order to cut costs.