Financial Concepts and Inventory in Business
Key Financial Concepts and Inventory Management
The reorder point is the inventory level that determines when to place an order.
Leverage
Leverage is defined as the company’s use of fixed operational and financial costs to increase profitability. It is a measure of risk:
- Operational Leverage: Refers to the multiplier effect that fixed costs have on profits. It’s a measure of operational risk.
- Combined Leverage: Occurs when a company employs both types of leverage to increase income for the owners.
- Financial Leverage: Derived from using debt to finance an investment. This debt creates a financial cost (interest), but if the investment generates an income higher than the interest due, the surplus increases the company’s profit.
Cost-Volume Analysis
This analysis aims to determine the breakeven point or profitability threshold, which determines the level of sales (in units and dollars) at which the company has no income or operating loss.
Cash Breakeven
If the amount of cash available to the company is limited, or the cost of maintaining cash is high, the company needs to know the sales volume to cover all cash costs in a period.
Financial Equilibrium Point
The financial equilibrium point is a measure of financial risk arising from fixed costs.
Forecasting Method
A forecasting method consists of estimating expenditures, assets, and liabilities for a future period as a percentage of sales.
Statement of Source and Use of Funds
The statement of source and use of funds shows us where the funds were obtained and where they were used. It shows the movement of funds to make investment and financing decisions.
Cash Flow Statement
The cash flow statement is an accounting report aimed at providing relevant information on inflows and outflows of cash for an entity during a given period.
Classification of Cash Flow Activities
- Operating Activities: Related to income statement items and the movement of current assets.
- Investing Activities: Includes purchases and sales of fixed assets and debt instruments or shares of other companies. It also includes the collection of loans made to a related company.
- Financing Activities: Relates to share sales, mortgage bonds, commercial papers, and other funds to finance either long or short-term investments.
Inventory Management
ABC Inventory Analysis
ABC Graphics Inventory: A tool to visualize this relationship and determine, simply, what items are of greater value, thus optimizing inventory resource management and decision-making.
Types of Inventory
- Raw Material Inventory: Products that will undergo a transformation.
- Work-in-Process Inventory: Products that have not yet completed their production process and, therefore, are not available for sale.
- Finished Goods Inventory: Products that have completed their production process and are available for sale.
ENTEL Case Study
ENTEL was founded in 1964. After an earthquake seriously damaged the long-distance network, the Chilean government saw the need for a long-distance company to improve telecommunications quality and build a new network. Currently, the company operates in the telecommunications industry, divided into five main segments: basic fixed-line, long-distance telephony (LDN and LDI), and wireless/mobile phones.
ABC Graphics Inventory: A tool to visualize this relationship and to determine, simply, what items are of greater value, thus optimizing the resource management of inventory and decision-making by allowing more efficient. Raw Material Inventory products that will undergo a transformation to in-process inventory are those products which has not yet completed its production process, and therefore are not available for sale. Finished Goods Inventory, are all products that have completed their production process, and are available for sale ENTEL: born in 1964. After an earthquake seriously damaged the long distance network, the Chilean government of the time saw that it was essential to have a long distance company that would improve the quality of telecommunications in the country and build a new network that currently the company is inserted into the telecommunications industry, which has been divided into five main segments. These are the basic fixed-line or, The Long-distance telephony, which includes long distance, LDN, and internationally, LDI, the wireless or mobile phone