bedrijfseconomie-d1-d25-hoofdstukken-en-kostentheorie-overzicht.pdf

# Calculating and interpreting net working capital Net working capital represents a crucial measure of a company's short-term financial health and operational efficiency by assessing its ability to cover short-term liabilities with short-term assets [34](#page=34) [35](#page=35). ### 1.1 Understanding working capital Working capital refers to the difference between a company's current assets and its current liabilities. It is a key indicator of a company's operational efficiency and short-term financial stability [34](#page=34) [35](#page=35). ### 1.2 Calculating net working capital Net working capital (NWC) can be calculated in two primary ways, each offering a different perspective on the company's financial structure [34](#page=34) [35](#page=35): * **Method 1 (Focus on Assets and Liabilities):** $$ \text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities} $$ This definition focuses on the company's ability to meet its short-term obligations with its readily available assets. A positive result indicates that current assets exceed current liabilities [35](#page=35). * **Method 2 (Focus on Long-Term Financing):** $$ \text{Net Working Capital} = \text{Permanent Capital} - \text{Extended Fixed Assets} $$ This calculation emphasizes how long-term financial resources are utilized to fund long-term assets. It reflects the extent to which a company finances its fixed assets with long-term sources of capital [34](#page=34) [35](#page=35). * **Permanent Capital (PV):** This includes equity and long-term debt [33](#page=33). * **Extended Fixed Assets (UVA):** This comprises fixed assets and long-term receivables [33](#page=33). * **Method 3 (Focus on Short-Term Financing):** $$ \text{Net Working Capital} = \text{Limited Current Assets} - \text{Short-Term Debt} $$ This approach highlights the company's capacity to cover its short-term debt with its liquid assets [34](#page=34) [35](#page=35). * **Limited Current Assets (Bep vl A):** This is calculated as current assets minus long-term receivables [33](#page=33). * **Short-Term Debt (VVKT):** This refers to liabilities due within one year [33](#page=33). ### 1.3 Interpreting net working capital The interpretation of net working capital is crucial for understanding a company's financial health and its ability to manage its short-term obligations [35](#page=35). #### 1.3.1 Positive net working capital A positive net working capital is generally considered a sign of a healthy financial policy. It indicates that a company has sufficient short-term assets to cover its short-term liabilities, suggesting a buffer against potential financial distress [34](#page=34) [35](#page=35). * **Positive but not too high:** While a positive NWC is good, an excessively high NWC might indicate inefficiencies. This could manifest as: * Too large a proportion of current assets: This might mean receivables are outstanding for too long, or inventory is not rotating sufficiently, potentially leading to issues in meeting short-term obligations [35](#page=35). * Too large a proportion of permanent capital: This could suggest that the company has taken on too much long-term debt [35](#page=35). #### 1.3.2 Factors influencing net working capital size The optimal size of net working capital varies significantly depending on the industry and the company's operational cycle [35](#page=35). * **Longer operating cycles:** Industries with long production or sales cycles, such as construction or metal processing, often require a strongly positive NWC due to the higher risk of unsaleable inventory [35](#page=35). * **Retail and hospitality:** These sectors typically have lower NWC requirements due to faster inventory turnover [35](#page=35). * **Perishable or fashion-sensitive products:** Companies dealing with these goods may need a strongly positive NWC to manage potential stock obsolescence or spoilage [35](#page=35). * **Start-up phase:** Companies in their initial stages may still have a positive NWC, often supported by sufficient equity [35](#page=35). #### 1.3.3 The "art" of interpretation It is important to note that the interpretation of the exact size of net working capital is somewhat artificial and requires careful consideration of context [35](#page=35). > **Tip:** Always compare net working capital figures with industry benchmarks and historical trends for the company to gain a more accurate understanding of its financial standing. ### 1.4 The role of cash flow While the balance sheet provides a snapshot of financial position, cash flow tables offer a more dynamic view of a company's liquidity and its ability to meet its obligations. Companies, like individuals, need to pay their creditors (suppliers, employees, tax authorities) on time [35](#page=35). #### 1.4.1 Cash flow components Cash flow is generated through various channels, often referred to as "cash sources". These sources can involve both inflows and outflows, distinct from accounting costs and revenues. The analysis of cash flows typically categorizes them into three main types [35](#page=35): * **Cash flow from operating activities:** Related to the core business operations [36](#page=36). * **Cash flow from investing activities:** Associated with the purchase and sale of long-term assets [36](#page=36). * **Cash flow from financing activities:** Pertaining to debt and equity transactions [36](#page=36). #### 1.4.2 Types of cash flow * **Operating cash flow:** This stems from a company's primary business activities. It can be viewed in a narrow sense (actual cash collected and paid) or a broad sense (including expected receipts from sales and payments for purchases) [37](#page=37). $$ \text{Operating Cash Flow} = \text{Operating Result} + \text{Non-Cash Expenses} $$ This metric indicates a company's ability to generate cash consistently in the future [37](#page=37). * **Current cash flow:** This includes the financial result in addition to the operating cash flow [37](#page=37). $$ \text{Current Cash Flow} = \text{Operating Cash Flow (Broad Sense)} + \text{Financial Result} $$ This shows how much cash a company retains from its operations after paying interest expenses. A positive operating cash flow but a negative current cash flow might suggest a poor financing structure with excessive interest payments due to high levels of debt [37](#page=37). * **Net cash flow and free cash flow:** * **Net cash flow:** This is considered a strong indicator of a company's financial health [37](#page=37). $$ \text{Net Cash Flow} = \text{Net Profit/Loss} + \text{Non-Cash Expenses} $$ * **Free cash flow:** This represents the cash available to the company after covering all operating expenses and debt principal repayments [38](#page=38). $$ \text{Free Cash Flow} = \text{Net Cash Flow} - \text{Loan Principal Repayments} $$ Loan repayments consist of both interest (already accounted for in current cash flow) and principal components, the latter impacting free cash flow [38](#page=38). > **Example:** A company might have positive operating cash flow from selling its products, but if it has significant interest payments on its loans, its current cash flow could be lower or even negative, indicating a potential strain from its debt burden. ### 1.5 Financial analysis and ratio analysis Financial analysis, particularly ratio analysis, uses comparative figures from financial statements to assess a company's performance and financial health. Ratios help in understanding strengths and weaknesses, comparing performance over time and against industry peers, and setting key performance indicators (KPIs) [38](#page=38). * **Liquidity ratios:** Assess a company's ability to meet its short-term obligations and manage its resources efficiently [38](#page=38). * **Solvency ratios:** Evaluate the soundness of a company's financial structure and its capacity to repay all its debts, analyzing the relationship between equity and debt [38](#page=38). * **Profitability ratios:** Measure how effectively a company generates profits relative to its invested capital [38](#page=38). --- # Activity based costing (ABC) for indirect cost allocation Activity-based costing (ABC) provides a more accurate method for allocating indirect costs compared to traditional systems, especially in complex manufacturing environments. It addresses the shortcomings of volume-based allocation methods by analyzing indirect costs at a deeper level and assigning them more precisely [18](#page=18). ### 2.1 Limitations of traditional costing systems Traditional costing systems often rely on volume-related allocation keys, which become inadequate in environments with diverse products and production volumes. Historically, direct labor constituted a significant portion of production costs, but automation has reduced this, increasing the relative importance of indirect costs. These indirect costs have grown due to the expansion of supporting functions such as product and process design, planning, administration, and marketing [17](#page=17). A significant drawback of traditional systems is that standard products can be burdened with costs actually incurred by specialized products, leading to an inflated cost price for standard products, making them less competitive. Conversely, specialized products may appear more profitable than they truly are, potentially leading to flawed strategic decisions. Moreover, traditional methods do not adequately account for product complexity, often resulting in standard products having an unfairly higher cost price than specialized ones [18](#page=18). ### 2.2 The ABC approach to indirect cost allocation Activity-based costing (ABC) aims to overcome these deficiencies by breaking down the company's processes into activities and identifying the primary cost drivers for each activity. Costs are then assigned to these activities and subsequently to products and services [18](#page=18). An ABC system involves three layers: 1. **Splitting indirect costs**: Identifying the key indirect costs and allocating them to specific activities. 2. **Determining activity costs**: Calculating the cost of each identified activity. 3. **Determining cost object costs**: Allocating the costs of activities to the final cost objects, such as products or services [20](#page=20). The ABC process involves two main steps: 1. **Allocation of indirect costs to activities**: This is achieved by using "resource drivers," which measure the extent to which activities utilize indirect resources and their associated costs [20](#page=20). 2. **Allocation of activity costs to cost objects**: This is done using "activity drivers," which measure the extent to which cost objects utilize the activities [20](#page=20). The general steps in implementing an ABC system are: * Identify the most significant indirect costs [20](#page=20). * Identify the most significant activities [20](#page=20). * Identify the cost objects (e.g., products, services) [20](#page=20). * Identify the resource drivers and their associated data [20](#page=20). * Identify the activity drivers and their associated data [20](#page=20). * Allocate indirect costs to activities, and then to cost objects [20](#page=20). > **Tip:** ABC provides a more insightful view of indirect costs by linking them to the specific activities that cause them, leading to more accurate product costing and better decision-making [18](#page=18). #### 2.2.1 Example of Activity Based Costing Consider a company with two machines [22](#page=22). * **Machine 1**: Costs 20,000 euros in depreciation and is used exclusively for the "goods receiving" activity [22](#page=22). * **Machine 2**: Costs 830,000 euros in depreciation and is used for machine setup, assembly, and packaging. Its total capacity is 8,300 hours [22](#page=22). Costs of materials and consumables are directly allocated to activities after reviewing invoices. The first allocation step of ABC involves distributing indirect costs to activities, resulting in the total cost of each activity being known [23](#page=23). ##### 2.2.1.1 Second allocation (ABC) The second allocation step involves assigning activity costs to cost objects using activity drivers [23](#page=23). * **Goods receiving**: If the cost object uses 20 out of 60 units of the driver for this activity, and the total activity cost is 120,000 euros, then the allocated cost is $(20/60) \times 120,000 = 40,000$ euros [23](#page=23). * **Machine setup**: If the cost object uses 40 out of 240 units of the driver, and the total activity cost is 240,000 euros, then the allocated cost is $(40/240) \times 240,000 = 40,000$ euros [23](#page=23). * **Automatic assembly**: If the cost object uses 20,000 out of 75,000 units of the driver, and the total activity cost is 750,000 euros, then the allocated cost is $(20,000/75,000) \times 750,000 = 200,000$ euros [23](#page=23). * **Packaging**: If the cost object uses 10 out of 48 units of the driver, and the total activity cost is 240,000 euros, then the allocated cost is $(10/48) \times 240,000 = 50,000$ euros [23](#page=23). For Product A, the total allocated indirect cost is $40,000 + 40,000 + 200,000 + 50,000 = 330,000$ euros. If Product A has a total production volume of 20,000 units, the indirect cost per unit for Product A is $330,000 / 20,000 = 16.50$ euros [23](#page=23). > **Example:** In the ABC example, Machine 2's depreciation cost is a resource cost. This cost is then allocated to the activities of machine setup, assembly, and packaging based on how much of Machine 2's capacity each activity uses, acting as the resource driver. The activity driver then determines how much of an activity's cost is assigned to a specific product, such as the number of setups or assembly hours used by that product [20](#page=20) [22](#page=22) [23](#page=23). --- # Directe en indirecte kosten, en kostprijsberekeningstechnieken This topic explores the distinction between direct and indirect costs and outlines various techniques for calculating the cost price of products or services [10](#page=10) [11](#page=11) [12](#page=12) [13](#page=13) [14](#page=14) [15](#page=15) [16](#page=16) [17](#page=17) [18](#page=18) [9](#page=9). ### 3.1 Classification of costs #### 3.1.1 Direct costs Direct costs are costs that can be directly attributed to a specific cost object, such as a product. This implies a causal relationship between the cost and the object. Examples include [15](#page=15): * Direct material consumption [15](#page=15). * Direct labor costs [15](#page=15). * Machinery used exclusively for one product [15](#page=15). #### 3.1.2 Indirect costs Indirect costs cannot be directly assigned to a specific cost object and lack a direct causal relationship. Examples include [15](#page=15): * Indirect material consumption [15](#page=15). * Indirect labor costs [15](#page=15). * Machinery used for multiple products [15](#page=15). Indirect costs are typically not expressed per unit but as a total cost, which is then allocated using a distribution key [15](#page=15). #### 3.1.3 Types of depreciation Depreciation can be calculated in various ways, reflecting different aspects of asset usage and value decline [9](#page=9). * **Depreciation according to straight-line depreciation:** This is a common and simple method where the same amount is depreciated each year [9](#page=9). * **Formula:** Not explicitly provided but implied to be a fixed annual amount. * **Disadvantage:** Does not reflect the reality of usage, leading to a constant annual amount regardless of actual wear and tear [9](#page=9). * **Depreciation according to pure operational intensity:** This method calculates the depreciation rate per performance unit [9](#page=9). * **Formula:** $D = \frac{\text{AW} - \text{RW}}{\text{Total performances to be delivered}}$ [9](#page=9). * $D$: Depreciation rate per performance unit. * AW: Acquisition value (purchase price). * RW: Residual value (salvage value). * **Fiscal acceptance:** Not fiscally accepted but is sometimes used [9](#page=9). * **Disadvantage:** Ignores the economic lifespan of the asset [9](#page=9). * **Advantage:** Considers the effect of wear and tear due to intensive use. Often used for rolling stock based on kilometers driven [9](#page=9). #### 3.1.4 Costs of land The function of land influences how its costs are treated [9](#page=9). * **Source of raw materials:** If land is depleted as a source of raw materials, depreciation is applied using a standard price [9](#page=9). * **Location for business establishment:** The value of land does not decrease due to the company's production activities, so no depreciation is applied to the land itself. Investments on the land (e.g., buildings) are depreciated. If land is rented, the cost is lease payments, considered a cost in the standard cost price calculation [9](#page=9). #### 3.1.5 Costs of services and third parties These costs arise from services provided by external parties or internal departments. Examples include [9](#page=9): * Sales costs: commission for own personnel [9](#page=9). * Distribution costs: depreciation of own truck [9](#page=9). * Administrative costs: personnel costs for the in-house accounting department [9](#page=9). These can also occur without the intervention of third parties. The standard cost price is an estimate of these services [9](#page=9). #### 3.1.6 Costs of taxes Taxes can be classified based on their impact on the cost price [9](#page=9). * **Cost-increasing taxes:** These taxes on goods and services are included in the cost price [9](#page=9). * **Value Added Tax (VAT):** Generally not a cost for regular VAT-taxable entities as it is reclaimable. However, it is a cost for VAT-exempt entities or when not reclaimable [9](#page=9). * **Cost-neutral taxes:** These taxes are levied on the profit of an enterprise, such as personal income tax (for sole proprietorships) and corporate tax [9](#page=9). #### 3.1.7 Interest costs Interest costs are incurred for financing investments [9](#page=9). * **External capital:** Involves paying interest costs, which are included in the total cost price calculation of a cost object [9](#page=9). * **Equity capital:** Represents a potential loss of interest income if the capital were invested elsewhere. This is an opportunity cost that should be included in the cost price calculation of a cost object [10](#page=10). #### 3.1.8 Waste and spoilage A distinction is made between waste and spoilage [10](#page=10): * **Waste:** Raw materials that are purchased but not incorporated into the final product (e.g., fabric scraps during T-shirt production) [10](#page=10). * **Spoilage (Uitval):** Products that have been produced but do not pass quality control. All costs have been incurred for these products. They might be sold at a reduced price in outlets [10](#page=10). **Formula for cost price after waste and spoilage:** $$ \text{Cost price} = \left( \frac{\text{% unapproved products (gross)}}{\text{% approved products (net)}} \right) \times \text{Cost per product} $$ [10](#page=10). The impact of waste and spoilage on the cost price depends on whether they incur additional costs or can be sold [10](#page=10). ### 3.2 Constant, variable, and semi-variable costs This section categorizes costs based on their relationship with the production volume or operational activity (bedrijfsdrukte) [11](#page=11). #### 3.2.1 Fixed (constant) costs Total fixed costs (TCK) remain constant irrespective of changes in operational activity [11](#page=11). * **Examples:** Rent of a building, depreciation costs, personnel costs for an accountant, monthly salary of an employee [11](#page=11). #### 3.2.2 Variable costs Total variable costs (TVK) change with increasing operational activity [11](#page=11). * **Examples:** Raw materials, some labor costs (hourly/daily wages) [11](#page=11). The total costs are the sum of fixed and variable costs: $ \text{Total Costs} = \text{Fixed Costs} + \text{Variable Costs} $ [11](#page=11). #### 3.2.3 Behavior of variable costs The behavior of variable costs can vary with changing production volumes (Q) [11](#page=11). * **Degressive variable costs:** Total variable costs increase less than proportionally with an increase in Q. This is often due to cost-saving factors emerging as production capacity increases [11](#page=11). * **Proportional variable costs:** Total variable costs increase proportionally with an increase in Q. A 10% increase in operational activity leads to a 10% increase in variable costs [11](#page=11). * **Progressive variable costs:** Total variable costs increase more than proportionally with an increase in Q. This occurs when production capacity nears its limit, leading to cost-increasing factors [11](#page=11). #### 3.2.4 Average costs Average costs are calculated per unit of product and are used for cost price calculations [11](#page=11). * **Average fixed costs (GCK):** $ \text{GCK} = \frac{\text{TCK}}{Q} $ [11](#page=11). * **Average variable costs (GVK):** $ \text{GVK} = \frac{\text{TVK}}{Q} $ [11](#page=11). * **Average total costs (GTK):** $ \text{GTK} = \frac{\text{TK}}{Q} $ [11](#page=11). #### 3.2.5 Semi-variable costs Semi-variable costs consist of both a fixed and a variable component [12](#page=12). * **Examples:** Machine usage (fixed depreciation, variable energy consumption), electricity consumption (fixed meter cost, variable usage) [12](#page=12). These costs are fixed within a certain capacity range but can increase if that limit is exceeded due to the need for additional resources [12](#page=12). #### 3.2.6 Standard cost price based on constant and variable costs The standard cost price can be calculated based on fixed and variable costs at normal capacity utilization [13](#page=13). **Formula:** $$ \text{Standard Cost Price} = \frac{\text{TCK}_{\text{per year at normal capacity}} + \text{TVK}_{\text{per year at normal capacity}}}{\text{Normal Capacity per year}} $$ [13](#page=13). ### 3.3 Standard costing and capacity #### 3.3.1 Standard cost price definition The standard cost price is a necessary or maximum allowable cost price per unit, based on expected future prices [13](#page=13). It is calculated as: $$ \text{Standard Cost Price per Unit} = (\text{st.QGS} \times \text{st.PGS}) + (\text{st.Qarb} \times \text{st.Parb}) + \dots $$ [13](#page=13) [16](#page=16). * $\text{st.QGS}$: Standard quantity of raw and auxiliary materials. * $\text{st.PGS}$: Standard price of raw and auxiliary materials. * $\text{st.Qarb}$: Standard quantity of labor. * $\text{st.Parb}$: Standard price of labor. #### 3.3.2 Impact of capacity on standard cost price The standard cost price is influenced by the expected utilization of rational capacity [13](#page=13). * **Normal capacity (normale bezetting):** Refers to the normal production level [13](#page=13). * **Rational capacity:** Present capacity minus irrational excess capacity (overcapacity due to poor planning) [13](#page=13). * **Rational excess capacity:** Economically necessary reserve capacity, buffer capacity for operational disruptions, or due to indivisibility of production factors and seasonal fluctuations [13](#page=13). * **Underutilization:** Production is less than actual production due to unforeseen low demand, supplier issues, pandemics, new competition, etc [13](#page=13). * **Overutilization:** Production is more than actual production, due to a good season, low staff absence, or exceptional orders. This should never exceed rational capacity [14](#page=14). ### 3.4 Cost accounting techniques #### 3.4.1 Actual costing Actual costing uses current, real data to determine the cost price. This is also referred to as the "werkelijke kostprijs" [15](#page=15) [16](#page=16). #### 3.4.2 Standard costing Standard costing uses predetermined standards (future costs) to calculate the cost price. It is an estimated cost price [15](#page=15) [16](#page=16). * **Calculation for homogeneous production:** Determined by the standard cost price per cost type, including raw materials, labor, durable production means, land, services from third parties, taxes, and capital [16](#page=16). * **Norm:** The standard cost price serves as a benchmark against which actual costs are compared [16](#page=16). **Advantages of standard costing:** * **Budgeting:** Enables the estimation of total costs for a future period [17](#page=17). * **Determining floor price:** Sets the minimum selling price ($ \text{VP} = \text{Eigen KP} + \text{winstmarge} $) [17](#page=17). * **Cost control:** Allows for the comparison of actual costs with set standards [17](#page=17). #### 3.4.3 Normal costing Normal costing uses actual direct costs and estimated indirect costs [15](#page=15). #### 3.4.4 Primitive allocation method (normal costing) This method is used for calculating the cost price immediately after production. It involves [18](#page=18): * Actual direct material and labor costs [18](#page=18). * Estimated indirect production costs [18](#page=18). The cost price is calculated using an allocation method, such as the primitive allocation method, which distributes indirect costs using a single allocation key [18](#page=18). **Formula for allocation key:** $$ \text{Quantity} (Q) = \frac{\text{Total estimated indirect costs}}{\text{Total estimated allocation base}} $$ [18](#page=18). #### 3.4.5 Refined allocation method This method distributes indirect costs using multiple allocation keys [18](#page=18). ### 3.5 Traditional cost accounting system and its shortcomings #### 3.5.1 Calculating the total cost price The total cost price is the sum of direct and indirect costs. Direct costs are typically given per product type. Indirect costs, however, are for all product types and must be allocated using distribution keys [17](#page=17). **Example:** Total indirect costs of 1,220,000 euros are to be allocated to frying pans and grill pans [17](#page=17). * Indirect production costs: 420,000 euros, distributed by production volume [17](#page=17). * Indirect non-production costs: 800,000 euros, distributed by turnover [17](#page=17). If indirect production costs are allocated based on 100,000 units of product B and 200,000 units of product G (a 1:2 ratio), then $ \frac{1}{3} $ of the indirect production costs are allocated to B, and $ \frac{2}{3} $ to G [17](#page=17). Similarly, if turnover is split 60% for B and 40% for G, these percentages are applied to the indirect non-production costs [17](#page=17). #### 3.5.2 Shortcomings of the traditional cost accounting system Traditional cost accounting systems that rely on volume-related distribution keys are insufficient in complex business environments with diverse products and production volumes [17](#page=17). * **Decreased labor cost share:** Labor costs, once a significant portion of production costs, now often represent a much smaller percentage due to automation and flexible production systems [17](#page=17). * **Increased indirect costs:** The relative share of indirect costs has grown significantly due to increased support functions like product design, process planning, administration, and marketing. This necessitates a more careful allocation of indirect costs that accounts for production complexity [17](#page=17) [18](#page=18). * **Distortion of costs:** Using volume-based keys can lead to standard products being burdened with costs caused by specialized products. This results in: * Higher cost prices for standard products, making them less competitive [18](#page=18). * Lower cost prices for specialized products, making them appear more profitable and potentially leading to incorrect strategic decisions [18](#page=18). * **Limited consideration of product complexity:** Standard products may be unfairly assigned higher costs than specialized products due to the lack of consideration for complexity [18](#page=18). #### 3.5.3 Activity Based Costing (ABC) Activity Based Costing (ABC) addresses many of the shortcomings of traditional systems by analyzing indirect costs more deeply. It involves [18](#page=18): * Splitting the enterprise process into activities [18](#page=18). * Identifying the key cost drivers for each activity [18](#page=18). * Allocating costs to activities and subsequently to products and services [18](#page=18). ### 3.6 Waste and spoilage during production #### 3.6.1 Definition of waste and spoilage * **Waste (Afval):** Raw materials that must be purchased but are not incorporated into the final product [10](#page=10). * **Spoilage (Uitval):** Products that are produced but fail quality control. All costs associated with their production have been incurred [10](#page=10). #### 3.6.2 Accounting for waste and spoilage in cost price calculation * If waste processing incurs costs, it increases the selling price [10](#page=10). * If waste can be sold, it reduces the cost price [10](#page=10). * Spoilage can sometimes be resold, reducing the cost price [10](#page=10). * Processing spoilage can incur costs, increasing the cost price [10](#page=10). --- # Analysis of a company's financial structure This section delves into the analysis of a company's financial structure, utilizing historical data from financial statements to assess its past performance and predict future financial health [27](#page=27). ### 8.1 The annual accounts (D17) The annual accounts (jaarrekening) serve as the primary source of information regarding a company's assets, results, and financial position [27](#page=27). #### 8.1.1 Components of the annual accounts * **Balance sheet and income statement:** * The balance sheet provides a snapshot of assets and liabilities at a specific point in time, reflecting the company's financial situation [27](#page=27). * The income statement details costs and revenues over a specific period, indicating changes in the company's financial status [27](#page=27). * **Notes to the financial statements (Toelichting):** This section provides supplementary information on sub-categories of the balance sheet and income statement, valuation rules, shareholder structure, details of non-recurring items, and breakdowns of provisions [27](#page=27). * **Social balance sheet:** This component includes data on the workforce, such as the number of employees, staff turnover, and training hours [27](#page=27). #### 8.1.2 Publication and recipients of annual accounts * **Publication:** Belgian companies with limited liability for shareholders or partners must publish their annual accounts annually, typically electronically via the National Bank of Belgium's Central Balance Sheet Office [28](#page=28). * **Recipients (stakeholders):** Various groups are interested in a company's financial aspects, including: * Owners: interested in dividends and capital gains [28](#page=28). * Creditors: concerned about the company's ability to pay interest and long-term debts (solvency and profitability) [28](#page=28). * Employees: concerned about the company's continuity [28](#page=28). * Suppliers: interested in the company's short-term debt-paying ability [28](#page=28). * Government: concerned with tax and social security contributions [28](#page=28). * Customers: interested in sufficient stock availability [28](#page=28). * Competitors: interested in market share [28](#page=28). #### 8.1.3 Information requirements for financial statements The information presented in annual accounts must meet several criteria to be useful and meaningful [28](#page=28): * **Relevance:** The report must be usable for the intended audience, and no critical information should be omitted that would obscure the true financial state [29](#page=29). * **Comparability:** Consecutive annual accounts should be comparable [29](#page=29). * **Periodicity:** Annual accounts are a snapshot of the past year, and their utility for decision-making can be limited [29](#page=29). * **Objectivity:** The financial statements should not be manipulated to favor any particular audience [29](#page=29). * **True and fair view (Getrouw beeld):** An objective representation of the entire reality, often verified by an independent external accountant for accuracy and precision [29](#page=29). * **Clarity (Duidelijkheid):** Simple language and avoidance of jargon incomprehensible to those outside a specialized group [29](#page=29). * **Completeness (Volledigheid):** All factors influencing the company's assets and/or results must be recorded. Accounting should encompass all transactions, claims, rights, debts, and commitments [29](#page=29). There can be a certain contradiction between complex financial statements and the requirement for clarity [29](#page=29). ### 8.2 Concepts of double-entry bookkeeping Double-entry bookkeeping relies on a dual recording of assets, ensuring the balance sheet remains in equilibrium [29](#page=29). #### 8.2.1 The balance sheet The balance sheet is structured around the origin and application of capital [29](#page=29): * **Origin of capital (liabilities side):** Represents the company's debts to its owners and third parties [29](#page=29). * **Application of capital (assets side):** Represents the company's possessions [29](#page=29). ##### 8.2.1.1 The balance sheet: Assets Assets are categorized based on their liquidity (how quickly they can be converted into cash) or their intended use [30](#page=30): * **Fixed assets (Vaste activa):** Used long-term, with the goal of retention. Examples include land, buildings, machinery, and software [30](#page=30). * **Current assets (Vlottende activa):** Consumed in the short term, intended for operations. Examples include raw materials, supplies, and cash in the bank [30](#page=30). ##### 8.2.1.2 The balance sheet: Liabilities Liabilities describe where the company obtains its funds, categorized by their demandability and time horizon [30](#page=30): * **Equity (Eigen vermogen):** Not demandable, remaining within the company. Includes capital, profits, losses, and legal reserves [30](#page=30). * **Debt (Vreemd vermogen):** Demandable, representing debts that must be repaid (either within or after one year). Examples include loans, supplier debts, and employee debts [31](#page=31). The fundamental principle of the balance sheet is equilibrium: $$ \text{Assets} = \text{Liabilities} $$ This signifies that the application of assets equals their source of funding [31](#page=31). #### 8.2.2 The income statement The income statement details a company's operating and financial results [32](#page=32). ##### 8.2.2.1 Operating results * **Operating revenues (Bedrijfsopbrengsten):** * Turnover (Omzet) [32](#page=32). * Changes in inventory of goods in progress and orders in execution [32](#page=32). * Produced fixed assets [32](#page=32). * Other operating revenues [32](#page=32). * Non-recurring operating revenues [32](#page=32). * A simplified scheme allows for optional reporting of operating revenues, but the **gross margin** is mandatory. Gross margin is calculated as turnover minus purchases of goods for resale, raw and auxiliary materials, services, and miscellaneous goods [32](#page=32). * **Operating costs (Bedrijfskosten):** * Purchases of goods for resale, raw and auxiliary materials [32](#page=32). * Services and miscellaneous goods [32](#page=32). * Salaries, social security charges, and pensions [32](#page=32). * Depreciation and write-downs on formation expenses, intangible and tangible fixed assets [32](#page=32). * Write-downs on inventories, orders in progress, and trade receivables [32](#page=32). * Provisions for risks and charges [32](#page=32). * Other operating costs [32](#page=32). * Operating costs capitalized as restructuring costs [32](#page=32). * Non-recurring operating costs [32](#page=32). ##### 8.2.2.2 Financial results * **Financial revenues (Financiële opbrengsten):** * Revenues from financial fixed assets (e.g., interest and dividends) [32](#page=32). * Revenues from current assets (e.g., interest on financial investments and liquid assets) [32](#page=32). * Other financial revenues (e.g., capital gains on financial investments, cash discounts on trade payables) [33](#page=33). * Non-recurring financial revenues [33](#page=33). * **Financial costs (Financiële kosten):** * Costs of debt [33](#page=33). * Write-downs on current assets [33](#page=33). * Other financial costs (e.g., foreign exchange losses, stock exchange taxes) [33](#page=33). * Non-recurring financial costs [33](#page=33). ### 8.3 Revised balance sheet (D18) The revised balance sheet restructures the original balance sheet to emphasize financial structure analysis. Key adjustments include [33](#page=33): * **Extended fixed assets (Uitgewerkte vaste activa - UVA):** Fixed assets plus receivables due in more than one year [33](#page=33). * **Limited current assets (Beperkt vlottende activa - Bep vl A):** Current assets minus receivables due in more than one year [33](#page=33). * **Permanent capital (Permanent vermogen):** Equity plus long-term debt [33](#page=33). * **Short-term debt (Vreemd vermogen op korte termijn - VVKT):** Debt due within one year [33](#page=33). ### 8.4 Calculating working capital (D19) A healthy financial structure focuses on matching the duration of assets with the duration of their financing sources [33](#page=33). #### 8.4.1 The main financing rule The core principle is that assets should be financed by funds that remain available for at least as long as the asset is used within the company [34](#page=34). * **Long-term assets (UVA)** are financed by **permanent capital (PV)** [34](#page=34). * **Short-term assets (limited current assets)** are financed by **short-term debt (VVKT)** [34](#page=34). This rule is accompanied by the need for a buffer to manage risks [34](#page=34). #### 8.4.2 Net working capital Net working capital acts as this crucial buffer and can be calculated in two ways: * **Green calculation (Long-term focus):** $$ \text{Permanent Capital} - \text{Extended Fixed Assets} $$ This emphasizes the extent to which a company can finance its extended fixed assets with long-term resources [34](#page=34). * **Blue calculation (Short-term focus):** $$ \text{Limited Current Assets} - \text{Short-Term Debt} $$ This highlights the company's ability to cover its short-term payment obligations with its limited current assets [34](#page=34). The concept of "Werkkapitaal" (Working Capital) is also mentioned, referring to a separate diagram for further details [34](#page=34). --- # Investeringsvraagstukken en financiële analyse This section delves into the core concepts of investment decisions and the analysis of a company's financial health. ### 7.1 Investments: concept, types, and lifespan #### 7.1.1 What is investing? Investing can be understood in two ways: * **Narrow sense:** The acquisition of durable production resources [24](#page=24). * **Broad sense:** Committing capital to fixed and current assets [24](#page=24). #### 7.1.2 Types of investments and investment needs * **Replacement investment:** The act of replacing existing capital goods [24](#page=24). * **Expansion investment:** Increasing the stock of capital goods or production capacity [24](#page=24). #### 7.1.3 Specific issues with expansion investments ##### 7.1.3.1 The optimal location The optimal location is where the total production costs are minimized. Key location factors include [24](#page=24): * Labor costs [24](#page=24). * Availability of skilled employees [24](#page=24). * Government subsidies [24](#page=24). * Transportation costs for raw materials and finished products [24](#page=24). * Geographical factors [24](#page=24). * Proximity to the sales market [24](#page=24). ##### 7.1.3.2 The optimal company size or capacity This refers to the capacity at which the total production cost per unit of capacity is as low as possible [24](#page=24). * **Capacity expansion and cost behavior:** * Initially, increasing capacity often leads to costs increasing less than proportionally (degressive cost increase). This is due to economies of scale [25](#page=25). * However, further capacity expansion can lead to costs increasing more than proportionally (progressive cost increase). This is due to diseconomies of scale [25](#page=25). * **Explanations for scale degressivity (cost advantages of larger scale production):** * More advantageous purchasing of production resources [25](#page=25). * Easier access to the capital market [25](#page=25). * More efficient use of machinery [25](#page=25). * Further specialization of labor [25](#page=25). * Better coordination of capacities across different company parts [25](#page=25). * **Explanations for scale progressivity (cost disadvantages of continued scaling):** * More expensive organizational measures [25](#page=25). * Increasing transportation costs [25](#page=25). * Production facilities not being well-aligned [25](#page=25). * Loss of personal contact with customers [25](#page=25). The optimal company size is found between the phases of degressivity and progressivity, where capacity is most favorable, provided there are sufficient sales opportunities for the production [25](#page=25). #### 7.1.4 Specific issues with replacement investments ##### 7.1.4.1 Optimal useful life = economic lifespan * **Technical lifespan:** The period during which a durable production resource can technically deliver productive performance. This is often longer than the economic lifespan [25](#page=25). * **Economic lifespan:** The period during which a durable production resource can deliver performance that is economically rational and justifiable. This is also known as the optimal useful life and corresponds to the minimum depreciation cost [25](#page=25). ### 7.2 The payback period method The **payback period (TVT)** is the number of years required for the net cash inflows generated by an investment to recover the initial investment cost. A quicker payback period is generally preferred [26](#page=26). **How to calculate the payback period:** 1. Determine the investment amount to be recovered (e.g., purchase price, transport costs) [26](#page=26). 2. Determine the annual cash flow (net profit + non-cash expenses) generated by the investment [26](#page=26). 3. Calculate the number of years needed to recover the investment: $$ \text{Payback Period} = \frac{\text{Initial Investment Outlay} - \text{Salvage Value}}{\text{Annual Cash Flow from Investments}} $$ [26](#page=26). **Assessment of the payback period method:** * **Pros:** Simple to use [26](#page=26). * **Cons:** * Does not consider cash flows after the payback period [26](#page=26). * Does not account for the timing of cash flows over the project's life [26](#page=26). * Ignores the time value of money [26](#page=26). * Accurate estimation of cash flows is crucial and often difficult [26](#page=26). ### 7.3 The net present value (NPV) method The **net present value (NPV)** method compares the sum of the present values of expected net cash inflows with the initial investment outlay. A project is economically acceptable if the sum of the present values of expected net cash inflows exceeds the initial investment outlay. This method accounts for the time value of money [26](#page=26). **How to calculate the net present value:** 1. Determine the minimum required rate of return (cut-off rate), which represents the company's average cost of capital, denoted by '$r$' [26](#page=26). 2. Determine the annual cash flow generated by the investment (net profit + non-cash expenses) [26](#page=26). 3. Discount the annual cash flows to calculate their present values [26](#page=26). 4. Compare the sum of the present values of the annual cash flows with the initial investment outlay and evaluate [27](#page=27). The formula for NPV is: $$ \text{NPV} = \sum_{t=1}^{n} \frac{K_t}{(1+r)^t} + \frac{RW}{(1+r)^n} - \text{AW} $$ [27](#page=27). Where: * $K_t$ = expected net cash inflow after year $t$ [27](#page=27). * $RW$ = any future salvage value [27](#page=27). * $\frac{K_t}{(1+r)^t}$ = present value of expected net cash inflow after year $t$ [27](#page=27). * $\frac{RW}{(1+r)^n}$ = present value of the expected salvage value of the investment at time 0 [27](#page=27). * $AW$ = initial investment outlay [27](#page=27). **Assessment of the net present value method:** * **Pros:** * Considers the timing of cash flows over the project's life [27](#page=27). * Accounts for the time value of money [27](#page=27). * **Cons:** * Does not provide insight into the investment's actual rate of return [27](#page=27). * Accurate estimation of cash flows and the correct cut-off rate are critical [27](#page=27). ### 8 Analysis of a company's financial structure This section shifts from cost/management accounting to financial accounting, focusing on analyzing a company's financial statements. #### Introduction to financial analysis Financial analysis involves reviewing historical data from financial statements to predict future financial performance. The primary source of this information is the company's annual report. Financial analysis serves as a tool to provide information to various stakeholders, including creditors, employees, competitors, suppliers, customers, the government, and owners. Financing involves attracting capital to meet the company's needs, encompassing determining capital requirements, selecting the most favorable financing methods, studying financial flows, and adhering to principles of a sound financial structure [27](#page=27) [28](#page=28). #### 8.1 The annual report The annual report is the primary source of information regarding a company's assets, results, and financial position. It typically includes [28](#page=28): 1. **Balance Sheet & Income Statement:** * **Balance Sheet:** A snapshot of assets and liabilities, showing the company's asset and liability situation [28](#page=28). * **Income Statement:** Reports costs and revenues over a specific period, showing changes in assets [28](#page=28). 2. **Notes to the Financial Statements:** Provides additional information on: * Sub-categories of the balance sheet and income statement [28](#page=28). * Valuation methods [28](#page=28). * Shareholder structure at the balance sheet date [28](#page=28). * Details of non-recurring income/expenses [28](#page=28). * Breakdown of provisions [28](#page=28). 3. **Social Balance Sheet:** Contains personnel data such as the number of employees, staff turnover, and training hours [28](#page=28). ##### 8.1.1 Who must publish their annual report? Belgian companies with limited liability for shareholders (e.g., BV, NV) must publish their annual report annually. This is done via the National Bank of Belgium's Balance Sheet Center, primarily electronically [28](#page=28). ##### 8.1.2 Who are the potential recipients of the annual report? Various stakeholder groups are interested in different aspects of a company's performance [28](#page=28): * **Owners:** Interested in dividends and capital gains [29](#page=29). * **Lenders:** Assess the company's ability to pay interest and long-term debts (solvency and profitability) [29](#page=29). * **Employees:** Concerned about the company's continuity [29](#page=29). * **Suppliers:** Evaluate short-term debt repayment capacity [29](#page=29). * **Government:** Monitors RSZ contributions [29](#page=29). * **Customers:** Ensure supply continuity [29](#page=29). * **Competitors:** Analyze market share [29](#page=29). ##### 8.1.3 Demands placed on the information The information presented must be useful and meaningful. Key qualitative characteristics include [29](#page=29): * **Relevance:** Usable for the target audience, ensuring no crucial information is hidden [29](#page=29). * **Comparability:** Sequential annual reports should be comparable [29](#page=29). * **Periodicity:** Annual reports are snapshots and may have limitations for decision-making [29](#page=29). * **Objectivity:** The report should not be biased towards any specific group [29](#page=29). * **Fair Presentation:** An objective expression of reality, ideally reviewed by an independent external auditor [29](#page=29). * **Clarity:** Simple language, avoiding excessive jargon [29](#page=29). * **Completeness:** All factors affecting assets and/or results must be recorded, encompassing all transactions, assets, rights, debts, obligations, and commitments. A complex annual report can sometimes conflict with clarity [29](#page=29) [30](#page=30). #### 8.2 Concepts of double-entry bookkeeping ##### 8.2.1 The balance sheet In double-entry bookkeeping, the balance sheet equilibrium rests on a dual recording of assets [29](#page=29): * **Origin of assets (Liabilities side):** Represents the company's debts to owners and third parties [29](#page=29). * **Application of assets (Assets side):** Represents the company's possessions [29](#page=29). ###### 8.2.1.1 The balance sheet: ASSETS Assets are what a company owns and are categorized based on liquidity (how quickly they can be converted into cash) or time horizon [30](#page=30): * **Fixed Assets:** Used long-term, intended for retention (e.g., land, buildings, machinery, software) [30](#page=30). * **Current Assets:** Consumed short-term, intended for exploitation (e.g., raw materials, supplies, cash in bank) [30](#page=30). ###### 8.2.1.2 The balance sheet: LIABILITIES Liabilities represent where the company obtains its funds and are categorized by collectability and time horizon [30](#page=30): * **Equity:** Not callable, remains within the company (e.g., capital, retained earnings, reserves) [30](#page=30). * **Debt:** Callable, represents obligations to be repaid (either long-term or short-term) (e.g., loans, supplier debts, employee debts) [31](#page=31). **Balance Sheet Equilibrium:** $$ \text{Assets} = \text{Liabilities} $$ [31](#page=31). This signifies that the application of funds equals the origin of funds [31](#page=31). #### 8.2.2 The income statement ##### 8.2.2.1 Operating results * **Operating Revenues:** Includes turnover, changes in inventory of work-in-progress and orders in progress, produced fixed assets, other operating revenues, and non-recurring operating revenues. A shortened schema may list operating revenues as optional, but the gross margin (turnover minus cost of goods sold and services) is mandatory [32](#page=32). * **Operating Expenses:** Includes costs of goods sold, raw and ancillary materials, services, personnel costs, depreciation, value adjustments, provisions for risks and costs, other operating expenses, and non-recurring operating expenses [32](#page=32). ##### 8.2.2.2 Financial results * **Financial Revenues:** Income from financial fixed assets (interest, dividends), income from current assets (interest on investments), and other financial revenues (e.g., gains on investments, discounts) [33](#page=33). * **Financial Expenses:** Costs of debt, value adjustments on current assets, and other financial expenses (e.g., exchange rate losses, stock exchange taxes) [33](#page=33). #### 8.3 Rewritten balance sheet The **rewritten balance sheet** adjusts the original balance sheet for analytical purposes. Key adjustments include [32](#page=32): * **Developed Fixed Assets (UVA):** Fixed assets + long-term receivables [33](#page=33). * **Limited Current Assets (Bep vl A):** Current assets - long-term receivables [33](#page=33). * **Permanent Capital:** Equity + long-term debt [33](#page=33). * **Lower part (short-term debt):** Short-term debt (VVKT) [33](#page=33). * **Lower part (limited current assets):** Limited current assets (Bep Vl A) [33](#page=33). #### 8.4 Calculating working capital A healthy financial structure involves aligning financing sources with capital needs [33](#page=33). **Main financing rule:** Assets should be financed by funds that remain available for as long as the asset is held in the company [34](#page=34). * Long-term assets (UVA) are financed by permanent capital (PV) [34](#page=34). * Short-term assets (limited current assets) are financed by short-term debt (VVKT) [34](#page=34). This requires a buffer to manage risks. **Net Working Capital (NBK):** This buffer can be calculated in two ways: 1. **Green approach (long-term focus):** Permanent Capital (PV) - Developed Fixed Assets (UVA). This highlights how well the company can finance its fixed assets with long-term resources [34](#page=34). 2. **Blue approach (short-term focus):** Limited Current Assets (Bep Vl A) - Short-Term Debt (VVKT). This emphasizes the company's ability to meet its short-term payment obligations with its current assets [34](#page=34). A positive Net Working Capital (>0) is generally considered healthy. However, a very high NBK might indicate inefficient use of assets (e.g., excessive inventory, slow-paying customers) or too much long-term debt. The ideal NBK varies by industry and the company's life cycle [35](#page=35). #### 8.5 Cash flow statement A cash flow statement tracks the actual movement of cash into and out of a company, distinguishing between cash flows and accounting profits/costs. Cash can originate from three main areas [35](#page=35): 1. **Cash flow from operating activities:** Generated by the company's core business operations [36](#page=36). 2. **Cash flow from investing activities:** Related to the purchase and sale of long-term assets [36](#page=36). 3. **Cash flow from financing activities:** Involving debt and equity transactions [36](#page=36). ##### 8.5.1 Types of cash flows Cash flows are categorized into operating, investing, and financing activities. Non-cash expenses (like depreciation) are added back to net profit to calculate cash flow from operations. Outgoing cash for asset purchases represents investing cash outflows [36](#page=36). ##### 8.5.2 Operating cash flow Operating cash flow (Op. CF) is primarily derived from the company's business activities [37](#page=37). * **Narrow view:** Only considers cash actually received and paid [37](#page=37). * **Broad view:** Includes unreceived sales and unpaid purchases [37](#page=37). The calculation is: $$ \text{Operating Cash Flow} = \text{Operating Result} + \text{Non-cash Expenses} $$ [37](#page=37). It indicates the company's ability to generate future cash [37](#page=37). ##### 8.5.3 Current cash flow Current cash flow includes the financial result in addition to the operating cash flow [37](#page=37). $$ \text{Current Cash Flow} = \text{Operating Cash Flow (broad view)} + \text{Financial Result} $$ [37](#page=37). This shows how much cash remains after paying interest. A positive operating cash flow but negative current cash flow can indicate a poor financing structure leading to high interest payments [37](#page=37). ##### 8.5.4 Net cash flow and free cash flow * **Net Cash Flow (netto CF):** Calculated as net profit/loss plus non-cash expenses [37](#page=37). * **Free Cash Flow (vrije CF):** Considered the best indicator of financial health, it accounts for principal repayments on loans, which are not included in current cash flow [38](#page=38). $$ \text{Free Cash Flow} = \text{Net Cash Flow} - \text{Loan Principal Repayments} $$ [38](#page=38). #### 8.6 Concept of financial analysis and ratio analysis Financial analysis uses **ratios**, which are calculated by relating two or more figures from financial statements to assess a company's performance and financial health [38](#page=38). ##### 8.6.1 The utility of ratio analysis * Tracks the overall evolution of a company's strengths and weaknesses over time [38](#page=38). * Allows comparison with other companies in the same sector, neutralizing size differences [38](#page=38). * Enables companies to set targets (Key Performance Indicators - KPIs) [38](#page=38). * Ratios are limited predictors of bankruptcy; softer symptoms like legal actions or past management issues in failed companies are better indicators [38](#page=38). ##### 8.6.2 Ratio analysis categories * **Liquidity Ratios:** Assess the ability to meet short-term obligations and manage cash flows efficiently [39](#page=39). * **Solvency Ratios:** Evaluate the company's financial structure, ability to repay all debts, and the relationship between equity and debt [39](#page=39). * **Profitability Ratios:** Measure performance, comparing revenues to costs relative to invested capital, indicating how well the company is generating profits [39](#page=39). #### 8.7 Liquidity ratios: what and why? A company is considered liquid if it can meet its short-term payment obligations (short-term debt) using its current assets. This is a crucial parameter for suppliers, tax authorities, credit insurers, and social security institutions [39](#page=39). #### 8.8 Calculating and interpreting liquidity in a broad/narrow sense ##### 8.8.1 Liquidity in a broad sense (Current Ratio) The **current ratio** is a static measure derived from balance sheet items. A company is liquid if its current ratio is greater than or equal to 1 [39](#page=39). $$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Short-Term Debt}} $$ Norms vary by industry and growth phase, often considered favorable from 1.2 to 2. A current ratio of 1.08 suggests the company can *just* meet its short-term debt obligations if current assets rotate sufficiently quickly. Inventory and accrued accounts represent weaker components of liquidity, necessitating stricter ratios [39](#page=39). ##### 8.8.2 Liquidity in a narrow sense (Acid Test / Quick Ratio) The **acid test** (or quick ratio) is a stricter liquidity measure that excludes inventory and accrued accounts, which are less liquid assets [39](#page=39). $$ \text{Acid Test} = \frac{\text{Current Assets} - \text{Inventory} - \text{Accrued Accounts}}{\text{Short-Term Debt} - \text{Accrued Liabilities}} $$ [39](#page=39). An acid test ratio greater than 1 indicates strong liquidity. A ratio of 1.09 suggests the company can meet its short-term obligations even with a more stringent assessment, relying on receivables, investments, and cash [40](#page=40). #### 8.9 Calculating and interpreting Net Working Capital Need (NBKB) **Net Working Capital Need (NBKB)** represents the financial resources required during the operating cycle to purchase raw materials, process them, and finance sales to customers who do not pay cash. Part of this financing occurs spontaneously through payment terms from suppliers and delayed payments to employees and tax authorities [40](#page=40). * **Positive NBKB (>0):** Indicates that current operating assets are not fully financed spontaneously, requiring external financing [40](#page=40). * **Negative NBKB (<0):** Means there are sufficient spontaneous funds to finance inventories and receivables; the company is self-financing. A negative NBKB is considered favorable [40](#page=40). **Net Cash:** The difference between payments to suppliers and receipts from customers, representing the amount the company must finance itself. Strategies to shorten this period include extending supplier credit, incentivizing faster customer payments, and increasing inventory turnover [41](#page=41). * **Positive Net Cash (>0):** Indicates sufficient liquidity at year-end, but not necessarily throughout the year. Excessive net cash can negatively impact profitability [41](#page=41). * **Interpretation of NBK and NBKB:** If NBK is less than NBKB, it signifies that short-term financial liabilities exceed short-term liquid assets, which is unfavorable [41](#page=41). #### 8.10 Calculating and interpreting customer and supplier credit ##### 8.10.1 Average number of days of customer credit This ratio measures the average number of days between a sale and its payment by the customer [42](#page=42). $$ \text{Days of Customer Credit} = \frac{365 \times \text{Trade Receivables (≤ 1 year)}}{\text{Sales + VAT}} $$ [42](#page=42). A lower number of days indicates better liquidity. An extremely high number (like 1,051.63 days, nearly 3 years) suggests a very lenient credit policy, potential issues with collecting debts, or errors in data [42](#page=42). ##### 8.10.2 Average number of days of supplier credit This ratio measures the average number of days between a purchase and its payment to the supplier [42](#page=42). $$ \text{Days of Supplier Credit} = \frac{365 \times \text{Trade Payables (≤ 1 year)}}{\text{Purchases + VAT}} $$ [42](#page=42). A higher number of days is generally better for liquidity, as it represents a form of inexpensive financing. A short payment period is less favorable [42](#page=42). --- # Calculating and interpreting net working capital needs and net cash This topic focuses on understanding and quantifying the working capital requirements and cash flow dynamics within a business, particularly in the context of investment decisions and financial analysis. ### 6.1 Investment decision-making: Methods and Interpretation Investment decisions are crucial for a company's growth and sustainability. Various methods are employed to evaluate potential investments, focusing on their financial viability and impact on cash flows. #### 6.1.1 The payback period method The payback period method determines how long it takes for an investment's initial cost to be recovered from the net cash inflows generated by the investment [26](#page=26). * **Calculation:** 1. Identify the total investment amount to be recovered (e.g., purchase price, transport costs) [26](#page=26). 2. Determine the annual cash flow generated by the investment, calculated as net profit plus non-cash expenses [26](#page=26). 3. Calculate the number of years required to recover the investment: $$ \text{Payback Period} = \frac{\text{Initial Investment Outlay} - \text{Residual Value}}{\text{Annual Cash Flow from Investment}} $$ * **Interpretation:** A shorter payback period is generally preferred, indicating a quicker return of the initial capital [26](#page=26). * **Limitations:** * It does not consider cash flows occurring after the payback period [26](#page=26). * It ignores the timing of cash flows within the project's lifespan [26](#page=26). * It does not account for the time value of money [26](#page=26). * Accurately estimating cash flows can be challenging [26](#page=26). #### 6.1.2 The net present value (NPV) method The net present value (NPV) method compares the sum of the present values of expected net cash inflows to the initial investment cost [26](#page=26). 1. Determine the minimum required rate of return, also known as the cut-off rate ($r$), which represents the company's average cost of capital [26](#page=26). 2. Determine the annual cash flow expected from the investment (net profit + non-cash expenses) [26](#page=26). 3. Discount each annual cash flow to its present value: $$ \text{NPV} = \frac{K_1}{(1+r)^1} + \frac{K_2}{(1+r)^2} + \frac{K_3}{(1+r)^3} + \dots + \frac{K_n}{(1+r)^n} + \frac{\text{RW}}{(1+r)^n} - \text{AW} $$ Where: * $K_t$ = expected net receipts of the investment after year $t$ [27](#page=27). * RW = potential residual value [27](#page=27). * AW = initial investment outlay [27](#page=27). * $r$ = minimum required rate of return (cut-off rate) [27](#page=27). * The terms $\frac{K_t}{(1+r)^t}$ and $\frac{\text{RW}}{(1+r)^n}$ represent the present value of expected net receipts and residual value, respectively [27](#page=27). * **Interpretation:** A project is considered economically acceptable if the sum of the present values of expected net cash inflows is greater than the initial investment [26](#page=26). * **Advantages:** * It accounts for the timing of cash flows over the project's life [26](#page=26). * It considers the time value of money [26](#page=26). * It does not provide insight into the actual interest rate of the investment itself [26](#page=26). * Accurately estimating future cash flows and selecting the correct cut-off rate are crucial [26](#page=26). ### 6.2 Financial statement analysis Financial analysis involves examining historical financial data to understand a company's financial health and predict its future performance. This is essential for various stakeholders, including creditors, employees, suppliers, customers, owners, and government bodies [27](#page=27). #### 6.2.1 Funding and capital needs Funding refers to securing capital to meet a company's needs. This process involves [27](#page=27): * Determining the company's capital requirements [27](#page=27). > **Tip:** Understanding the difference between cash costs and non-cash costs is crucial for accurate financial analysis. Non-cash costs, like depreciation, are expenses that do not involve an outflow of cash but still represent a cost [5](#page=5). --- ## 6. Calculating and interpreting net working capital needs and net cash This section delves into the calculation and interpretation of net working capital needs and net cash flow as crucial indicators of a company's financial health and operational efficiency. ### 6.1 Understanding the Balance Sheet and Income Statement The annual financial statements, specifically the balance sheet and income statement, serve as the primary source of information regarding a company's assets, liabilities, equity, and profitability [28](#page=28). #### 6.1.1 The Balance Sheet The balance sheet provides a snapshot of a company's assets and liabilities at a specific point in time, reflecting its overall financial position [28](#page=28). * **Assets:** These represent what a company owns and are categorized based on their liquidity or how quickly they can be converted into cash [30](#page=30). * **Fixed Assets:** Used long-term, intended for retention (e.g., land, buildings, machinery, software) [30](#page=30). * **Current Assets:** Consumed short-term, intended for operations (e.g., raw materials, consumables, bank balances) [30](#page=30). * **Liabilities:** These represent the sources of a company's funds and are categorized based on their claimability and time [30](#page=30). * **Equity:** Not claimable, remains within the company (e.g., capital, profit, loss, legal reserves) [31](#page=31). * **Debt (Foreign Capital):** Claimable, represents debts that need to be repaid (either within or after one year) (e.g., loans, supplier debts, personnel debts) [31](#page=31). The fundamental principle of the balance sheet is the balance equation: **Assets = Liabilities**. This signifies that the application of funds equals the origin of funds [31](#page=31). #### 6.1.2 The Income Statement The income statement details a company's costs and revenues over a specific period, reflecting changes in its financial position [28](#page=28). * **Operating Results:** * **Operating Revenues:** Includes sales, changes in inventory of goods in progress and orders in execution, produced fixed assets, other operating revenues, and non-recurring operating revenues. A simplified schema may only require the gross margin (sales - cost of goods sold) [32](#page=32). * **Operating Costs:** Includes costs for goods, services, personnel, depreciation, provisions, other operating costs, and non-recurring operating costs [32](#page=32). * **Financial Results:** * **Financial Revenues:** Income from financial fixed assets (e.g., interest, dividends), income from current assets (e.g., interest on short-term investments), and other financial revenues [32](#page=32). * **Financial Costs:** Costs of debt, write-downs on current assets, and other financial costs (e.g., foreign exchange losses, stock exchange taxes) [33](#page=33). ### 6.2 Revised Balance Sheet and Operating Capital A revised balance sheet restructures the original balance sheet to better analyze the company's financial structure. Key adjustments include [33](#page=33): * **Extended Fixed Assets (UVA):** Fixed assets plus claims exceeding one year [33](#page=33). * **Limited Current Assets (Bep vl A):** Current assets minus claims exceeding one year [33](#page=33). * **Permanent Capital (PV):** Equity plus long-term debt [33](#page=33). * **Short-Term Debt (VVKT):** Short-term debt [33](#page=33). #### 6.2.1 Calculating Operating Capital The core question for a healthy financial structure is which financing sources should fund which capital needs. The main financing rule states that assets should be financed by resources available for as long as the asset remains in the company [33](#page=33) [34](#page=34). * **Long-term assets (UVA) are financed by permanent capital (PV).** * **Short-term assets (limited current assets) are financed by short-term debt (VVKT).** This principle necessitates a buffer, leading to the concept of **Net Operating Capital (Netto Bedrijfskapitaal - NBK)** [34](#page=34). * **Net Operating Capital (NBK):** Represents the buffer and can be calculated in two ways [34](#page=34): 1. **Permanent Capital - Extended Fixed Assets:** Emphasizes the extent to which a company can finance its extended fixed assets with long-term resources. This provides a long-term perspective [34](#page=34). 2. **Limited Current Assets - Short-Term Debt:** Focuses on the extent to which a company can cover its short-term payment obligations with limited current assets. This provides a short-term perspective [34](#page=34). A positive NBK ($>0$) indicates a healthy financial policy [35](#page=35). > **Tip:** The size of the Net Operating Capital (NBK) is industry-dependent. Industries with long operating cycles or high risks of unsaleable inventory (e.g., construction, metal processing, fashion, perishable goods) typically require a stronger positive NBK [35](#page=35). * **Interpretation of NBK:** * **Positive NBK:** Indicates that current assets are greater than short-term debt, and permanent capital is greater than extended fixed assets [35](#page=35). * **Slightly Positive NBK:** Generally favorable, showing the company's ability to meet short-term obligations [35](#page=35). * **Excessively High NBK:** May suggest inefficiencies, such as accounts receivable remaining open for too long, insufficient inventory turnover, or excessive long-term debt [35](#page=35). * **Negative NBK:** Implies that short-term liabilities exceed current assets, indicating potential liquidity issues [35](#page=35). * **Example:** NBK = 847,130 EUR (PV – UVA). This positive NBK signifies a buffer, with sufficient permanent capital to finance the extended fixed assets [40](#page=40). * **Example:** NBK = 847,130 EUR (Limited Current Assets – VVKT). This positive NBK shows the company can cover its short-term payment obligations with its limited current assets [40](#page=40). ### 6.3 Cash Flow Analysis Cash flow analysis is crucial because, like individuals, companies must meet their obligations to creditors (suppliers, employees, tax authorities) on time. While the balance sheet shows liquidity at a point in time, cash flow reveals the actual movement of cash over a period [34](#page=34) [35](#page=35). #### 6.3.1 Sources of Cash Flow Cash flows occur through various channels, known as "cash sources," which can generate both income and expenses. These are distinct from costs and revenues, which determine profit [35](#page=35). * **Cash Flow from Operating Activities:** Arises from the company's core business operations [36](#page=36). * **Cash Flow from Investments:** Related to the acquisition and disposal of assets [36](#page=36). * **Cash Flow from Financing:** Involves debt and equity transactions [36](#page=36). #### 6.3.2 Types of Cash Flows * **Operational Cash Flow (Op. CF):** The most significant cash flow considered, stemming from the company's business activity [37](#page=37). * **Narrow Definition:** Considers only cash actually collected and paid [37](#page=37). * **Broad Definition:** Includes unreceived sales and unpaid purchases [37](#page=37). * **Formula:** `Operational Cash Flow = Operating Result + Non-Cash Expenses` [37](#page=37). * This flow enables a company to generate cash continuously in the future [37](#page=37). * **Current Cash Flow (Courante CF):** Includes the financial result in addition to operational cash flow [37](#page=37). * **Formula:** `Current Cash Flow = Operational Cash Flow (Broad Definition) + Financial Result` [37](#page=37). * This indicates how much money a company retains from its operations after paying interest. A positive operational cash flow can be offset by a negative current cash flow due to excessive interest payments from a poor financing structure [37](#page=37). * **Net Cash Flow (Netto CF) and Free Cash Flow (Vrije CF):** * **Net Cash Flow:** The best indicator of a company's financial health is its free cash flow [37](#page=37). * **Formula:** `Net Cash Flow = Net Profit/Loss + Non-Cash Expenses` [37](#page=37). * **Free Cash Flow:** Considers capital repayments of loans, which are not included in current cash flow but significantly impact the company's cash flows [37](#page=37). * **Formula:** `Free Cash Flow = Net Cash Flow – Capital Repayments on Loans` [38](#page=38). ### 6.4 Net Working Capital Needs (NBKBehoefte) Net working capital needs (NBKB) arise during the operating cycle, where financial resources are required for purchasing raw materials, processing them, and financing sales to customers who don't pay immediately [39](#page=39). * **Spontaneous Financing:** Part of this financing occurs "spontaneously" through payment terms granted by suppliers and by paying employees and third parties after their performance [39](#page=39). * **NBKBehoefte:** Represents the extent to which a company's operating activities can self-finance its current assets [39](#page=39). * **Positive NBKB ($>0$):** Current operating assets are not fully financed by the company's activities, indicating a need for external financing [39](#page=39). * **Negative NBKB ($<0$):** The company has sufficient spontaneous funds to finance purchased or produced inventory and trade receivables; it is self-financing. A negative NBKB is considered favorable [39](#page=39) [40](#page=40). * **Example:** NBKB = 1,872,059 EUR. This indicates a need for additional financing because the current operating assets are not fully spontaneously financed [40](#page=40). ### 6.5 Net Cash (Nettokas) Net cash represents the difference between when you pay suppliers and when you receive money from customers – it's the amount you have to finance yourself [40](#page=40). #### 6.5.1 Reducing Net Cash Needs Strategies to reduce net cash needs include: * Extending supplier credit terms [41](#page=41). * Encouraging customers to pay faster (e.g., through financial discounts) [41](#page=41). * Increasing inventory turnover by purchasing raw materials faster and accelerating production [41](#page=41). #### 6.5.2 Interpretation of Net Cash * **Positive Net Cash ($>0$):** Indicates that the company has sufficient liquid assets at the end of the fiscal year. However, it doesn't guarantee liquidity throughout the entire year. An excessively large net cash position can negatively impact profitability [41](#page=41). * **Comparison:** If NBK < NBKB, it suggests that short-term financial liabilities are greater than short-term liquid assets, which is unfavorable [41](#page=41). ### 6.6 Customer and Supplier Credit Analyzing customer and supplier credit periods provides insights into the company's cash management and financing practices. #### 6.6.1 Days Sales Outstanding (Klantenkrediet) This metric represents the average number of days between a sale and its payment by customers [42](#page=42). * **Formula:** `Days Sales Outstanding = (365 * Trade Receivables) / (Sales + VAT)` [42](#page=42). * **Interpretation:** * A lower number of days indicates better liquidity [42](#page=42). * A very high number of days can suggest issues with credit policy, extensive dubious customers, or lax debt collection [42](#page=42). * The ideal is neither too high nor too low, depending on industry norms [42](#page=42). * **Example:** Klantenkrediet = 1,051.63 days. This means customers pay, on average, after almost three years, which is not favorable [42](#page=42). #### 6.6.2 Days Payable Outstanding (Leverancierskrediet) This metric indicates the average number of days between a purchase and its payment to suppliers [42](#page=42). * **Formula:** `Days Payable Outstanding = (365 * Trade Payables) / (Purchases + VAT)` [43](#page=43). * A higher number of days is generally better for liquidity, as it represents a low-cost form of financing [43](#page=43). * However, excessively long periods might signal trust issues with suppliers or payment problems [43](#page=43). * Comparing supplier credit days to customer credit days is crucial [43](#page=43). * **Example:** Leverancierskrediet = 75.77 days. The company pays suppliers, on average, after approximately 76 days [43](#page=43). * **Customer vs. Supplier Credit Interpretation:** * **Example:** Klantenkrediet = 1,051.63 days, Leverancierskrediet = 75.77 days. The difference (-975.86 days) is unfavorable, meaning the company pays suppliers much faster than it receives payment from customers [43](#page=43). ### 6.7 Solvency Ratios Solvency measures a company's ability to meet all its debt obligations, both short-term and long-term. It focuses on the relationship between equity and debt financing [43](#page=43). #### 6.7.1 Debt Ratio (Schuldgraad) This ratio assesses the proportion of debt financing relative to equity or total assets. * **Method 1 (Ratio):** `Debt Ratio = Debt / Equity`. For production companies, a ratio between 1.5 and 3 is common [43](#page=43) [44](#page=44). * **Method 2 (Percentage):** `Debt Ratio = (Debt / Total Assets) * 100`. For production companies, this is approximately 60% (a failure zone is considered 80% or more) [44](#page=44). #### 6.7.2 Degree of Financial Independence (Solvabiliteitsgraad) This ratio highlights the proportion of equity financing. * **Method 1 (Ratio):** `Degree of Financial Independence = Equity / Debt`. The ratio is typically between 0.25 and 0.40 [44](#page=44). * **Method 2 (Percentage):** `Degree of Financial Independence = (Equity / Total Assets) * 100`. For production companies, this is between 30% and 40%; for service companies, between 25% and 30% [44](#page=44). > **Note:** These solvency ratios are rough measures and do not account for the maturity of debts (short-term debt poses a greater risk), interest rates, or cash flow dynamics, as they are based solely on balance sheet data [44](#page=44). ### 6.8 Profitability Ratios Profitability ratios assess how well a company generates profits relative to its invested capital. #### 6.8.1 Return on Equity (ROE) / Rentabiliteit van het Eigen Vermogen (REV) This ratio measures the profitability with respect to the equity invested in the company. It indicates the return generated for every dollar of shareholder equity [44](#page=44) [45](#page=45). * **Formula:** `ROE = Net Profit / Equity`. Can be calculated before or after tax [44](#page=44). * **Interpretation:** A ROE of 5.95% means that for every 100 units of equity, a net profit of 5.95 units was earned. This should be compared to industry benchmarks and market interest rates [45](#page=45). #### 6.8.2 Return on Assets (ROA) / Rentabiliteit van het Totale Vermogen (RTV) This ratio measures the profitability of all assets employed by the company [45](#page=45). * **Formula:** `ROA = Operating Result / Total Assets` (often calculated before taxes and financial costs to avoid double taxation) [45](#page=45). * **Interpretation:** An ROA of 10.00% signifies that for every 100 units of total assets, a return of 10.00 units was generated. This should also be compared to industry benchmarks and market interest rates. A positive ROA indicates profit, while a negative ROA indicates a loss [45](#page=45). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Net Working Capital | The difference between a company's current assets and its current liabilities, representing the buffer available to cover short-term obligations. It can be calculated as either limited current assets minus short-term debt, or permanent capital minus extended fixed assets. | | Extended Fixed Assets (UVA) | This refers to the company's fixed assets plus receivables due in more than one year. It represents the long-term investments of the company. | | Limited Current Assets (Bep vl A) | This category includes current assets minus receivables due in more than one year. It focuses on the assets that are expected to be converted into cash within one year. | | Permanent Capital (PV) | This comprises the company's equity plus long-term debt. It represents the stable, long-term sources of financing available to the company. | | Short-Term Debt (VVKT) | This refers to the company's liabilities that are due within one year. It represents the short-term obligations that need to be met. | | Positive Net Working Capital | Indicates that a company's limited current assets exceed its short-term debt, or its permanent capital exceeds its extended fixed assets. A positive net working capital is generally considered a sign of a healthy financial policy. | | Operational Cash Flow | The cash generated from a company's core business activities. In a narrow view, it includes only cash actually received and paid, while in a broad view, it also accounts for unreceived sales and unpaid purchases. It is calculated as operating result plus non-cash expenses. | | Current Cash Flow | This includes the operational cash flow plus the financial result. It reflects how much cash a company retains from its operations after paying interest expenses. | | Net Cash Flow | Calculated as net profit/loss plus non-cash expenses. It is considered a strong indicator of a company's financial health. | | Free Cash Flow | Calculated as net cash flow minus loan principal repayments. This metric accounts for the cash available to the company after all operating expenses, interest, and debt principal repayments have been made. | | Ratio Analysis | A method of financial analysis that uses ratios to evaluate a company's performance and financial health. Ratios are calculated by comparing two or more figures from the balance sheet, income statement, or notes to the financial statements. | | Liquidity Ratios | Ratios that assess a company's ability to meet its short-term obligations, such as paying cash expenses and short-term debts. They also indicate how efficiently the company manages its assets. | | Activity Based Costing (ABC) | A costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. It aims for a more accurate allocation of indirect costs by analyzing the underlying activities and their cost drivers. | | Indirect Costs | Costs that are not directly attributable to a specific product or service but are incurred for the overall operation of the business. These costs must be allocated to cost objects using appropriate allocation keys or drivers. | | Direct Costs | Costs that can be directly traced and assigned to a specific product or service, such as direct materials and direct labor. | | Allocation Keys / Allocation Bases | Criteria or metrics used to distribute indirect costs among different products, services, or cost objects. Traditional systems often use volume-related bases, while ABC uses activity drivers. | | Cost Driver | A factor that causes a change in the cost of an activity. In ABC, resource drivers link indirect costs to activities, and activity drivers link activities to cost objects. | | Resource Driver | A measure of the quantity of resources consumed by an activity. It is used to allocate indirect costs to specific activities. | | Activity Driver | A measure of the frequency and intensity of the demand placed on activities by cost objects. It is used to allocate the costs of activities to products or services. | | Cost Object | Any item for which a separate measurement of cost is desired, such as a product, service, customer, or project. | | Traditional Costing System | A costing system that typically allocates indirect costs using a single, volume-based allocation rate (e.g., based on direct labor hours or machine hours). This can lead to distortions in cost allocation in complex environments. | | Volume-Related Allocation Keys | Allocation keys that are based on the volume of production or sales, such as units produced or sales revenue. These are common in traditional costing systems and are criticized for their inaccuracy in complex settings. | | Primitieve Opslagmethode (Primitive Markup Method) | A traditional costing method where indirect costs are allocated using a single markup key or rate. This is a basic form of overhead allocation. | | Verfijnde Opslagmethode (Refined Markup Method) | A traditional costing method where indirect costs are allocated using multiple markup keys or rates, attempting to provide a more refined allocation than the primitive method. | | Cost Price Calculation Techniques | Methods used to determine the cost of producing a product or service. This involves summing up all direct and indirect costs associated with the production process. | | Standard Cost Price | The necessary or maximum allowable cost price per unit, determined based on expected future prices and the estimated required quantity. It serves as a benchmark for comparison with actual costs. | | Actual Costing | A costing method that uses actual, historical data to determine costs. This approach reflects the real costs incurred during a specific period. | | Standard Costing | A costing method that uses predetermined standards for costs. It involves estimating future costs for materials, labor, and indirect expenses per unit, serving as a norm for cost control and comparison. | | Normal Costing | A costing method that combines actual direct costs with estimated indirect costs. This approach provides a more immediate cost price calculation after production, using a single overhead rate. | | Fixed Costs (Constant Costs) | Costs that remain constant in total, regardless of changes in the volume of business activity or production output. Examples include rent, depreciation, and fixed salaries. | | Variable Costs | Costs that change in total in direct proportion to changes in the volume of business activity or production output. Examples include raw materials and hourly wages. | | Semi-Variable Costs | Costs that have both a fixed and a variable component. These costs remain constant within a certain capacity range but can increase if that range is exceeded, requiring additional resources. | | Degressive Variable Costs | Variable costs where a percentage increase in production volume leads to a less than proportional increase in total variable costs. This is often due to cost-saving factors emerging at higher production levels. | | Proportional Variable Costs | Variable costs where a percentage increase in production volume leads to an exactly proportional increase in total variable costs. The cost per unit remains constant. | | Investment | In the broad sense, it refers to the commitment of capital to both fixed and current assets. In a narrow sense, it specifically means the acquisition of durable production resources. | | Replacement Investment | An investment made to substitute existing capital goods with new ones, often to maintain or improve operational efficiency. | | Expansion Investment | An investment aimed at increasing the stock of capital goods or the production capacity of a company, allowing for greater output. | | Optimal Location | The location where the total production costs are minimized, considering factors such as labor costs, transport, and proximity to markets. | | Optimal Company Size/Capacity | The production capacity at which the total production cost per unit of capacity is as low as possible, balancing economies and diseconomies of scale. | | Economies of Scale (Size Degression) | Cost advantages realized when a company increases its production scale, leading to total production costs increasing less than proportionally to output. | | Diseconomies of Scale (Size Progression) | Cost disadvantages incurred when a company continues to scale up production, resulting in total production costs increasing more than proportionally to output. | | Technical Lifespan | The period during which a durable production resource is technically capable of performing productive tasks. | | Economic Lifespan | The period during which a durable production resource can be used economically and rationally, representing the optimal period of use. | | Pay-Back Period Method | A method of investment appraisal that calculates the time required for the initial investment to be recovered from the net cash inflows generated by the investment. | | Net Present Value (NPV) Method | An investment appraisal technique that compares the sum of the present values of expected future net cash flows to the initial investment cost. | | Cut-off Rate | The minimum acceptable rate of return for an investment, often representing the company's average cost of capital. | | Activity Drivers | Factors that measure the consumption of an activity by a cost object, used to allocate indirect costs to activities. | | Activity-Based Costing (ABC) | A costing method that identifies the main indirect costs, activities, and cost objects, and then allocates indirect costs to activities based on resource drivers and activity drivers. | | Activity | A specific task or process undertaken by a business that incurs costs. | | Allocation | The process of distributing indirect costs to specific activities or cost objects based on identified drivers. | | Capital Expenditure | The purchase of durable production resources or the commitment of capital to fixed and current assets. | | Cash Flow | The movement of money into and out of a business, representing actual cash inflows and outflows, distinct from costs and revenues. | | Cost-Benefit Analysis | A systematic approach to estimating the strengths and weaknesses of alternatives to determine whether they are viable and justifiable. | | Depreciation | The systematic allocation of the cost of a tangible asset over its useful life. | | Economic Life | The period during which a durable production asset can deliver economically rational performance, often referred to as the optimal usage period. | | Costs | Resources that have been or will be purposefully deployed within a company to produce a desired end product or service. This represents the monetary value of resources sacrificed or consumed by a business. | | Cost Price | The sum of all costs incurred for a specific cost object, representing the value of purposefully deployed resources. This is determined by collecting and allocating cost data to each cost object. | | Constant Costs | Costs that remain constant regardless of changes in business activity or production volume. Examples include rent for a building, depreciation costs, and fixed salaries. |