Business Finance

FORMULAS

Additional Funds Needed

𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑆𝑝𝑜𝑛𝑡𝑎𝑛𝑒𝑜𝑢𝑠 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 − 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

Projected Increase in Assets

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑝𝑟𝑒𝑠𝑒𝑛𝑡)
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑙𝑒𝑠 ×
𝑆𝑎𝑙𝑒𝑠 (𝑝𝑟𝑒𝑠𝑒𝑛𝑡)
Spontaneous Increase in Current Liabilities
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (𝑝𝑟𝑒𝑠𝑒𝑛𝑡)
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑙𝑒𝑠 ×
𝑆𝑎𝑙𝑒𝑠 (𝑝𝑟𝑒𝑠𝑒𝑛𝑡)
Dividend payment

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 × 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑎𝑙𝑙𝑜𝑡𝑒𝑑 𝑓𝑜𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

Increase in Retained Earnings

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

Return on Equity
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑒𝑞𝑢𝑖𝑡𝑦
*Note: The reason as to why ordinary shares are used in this formula is because it does NOT have a fixed rate unlike preferred shares.

Cash Conversion Cycle

𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐴𝑔𝑒 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 − 𝐴𝑔𝑒 𝑜𝑓 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

Unit of measurement - Days

Operating Cycle

𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐴𝑔𝑒 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Unit of measurement - Days

Age of Inventory
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑂𝐺𝑆
Unit of measurement - Days

Inventory Turnover Ratio

𝐶𝑂𝐺𝑆
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Unit of measurement - Times

Average Age of Inventory

360 𝑑𝑎𝑦𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜
Unit of measurement - Days

Age of Receivable
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
(𝑆𝑎𝑙𝑒𝑠 ÷ 360 𝑑𝑎𝑦𝑠)
Unit of measurement - Days

A/R Turnover Ratio

𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴/𝑅
Unit of measurement - Times
Average Collection Period
360 𝑑𝑎𝑦𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜
Unit of measurement - Days

Age of Payable
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
(𝐶𝑂𝐺𝑆 ÷ 360 𝑑𝑎𝑦𝑠)
Unit of measurement - Days

Cash Contribution Margin

Cash sales XXXXX

Less: Variable cash payment (XXXXX)
Cash contribution margin XXXXX

Cash Contribution Margin Ratio

Cash contribution margin XXXXX

Divide by: Cash sales ÷XXXXX
Cash contribution margin ratio XXXXX

Cash break-even point

Fixed cash outlay XXXXX

Divide by: Contribution margin ratio ÷XXXXX
Cash break-even XXXXX

Number of unit to sell on cash

Cash break-even sales XXXXX

Divide by: Selling price per unit ÷XXXXX
Number of unit to sell on cash XXXXX

To prove the cash break-even point

Cash break-even point XXXXX

Less: Variable cash payments (cash break-even point × % for variable cash payments) (XXXXX)
Contribution margin XXXXX
Less: Fixed monthly cash payments (XXXXX)
Available cash -

Economic Order Quantity (EOQ)

2 × 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑(𝑢𝑛𝑖𝑡𝑠) × 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟

√
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟

Total inventory cost

𝑇𝑜𝑡𝑎𝑙 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡

Total ordering cost
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 (𝑢𝑛𝑖𝑡𝑠)
× 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝐸𝑂𝑄 𝑜𝑟 𝑂𝑟𝑑𝑒𝑟 𝑆𝑖𝑧𝑒
Total carrying cost

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 × 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Average inventory
𝐸𝑂𝑄 𝑜𝑟 𝑂𝑟𝑑𝑒𝑟 𝑠𝑖𝑧𝑒
2
Reorder point

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 𝑢𝑠𝑎𝑔𝑒 + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘

Average lead time usage

𝐿𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 × 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑠𝑎𝑔𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑡𝑖𝑚𝑒

Average usage per unit of time
𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠/𝑢𝑠𝑎𝑔𝑒
𝑁𝑜. 𝑜𝑓 𝑤𝑒𝑒𝑘𝑠/𝑑𝑎𝑦𝑠