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Posts Tagged ‘economics’

58The demise of this company was probably due not to any single factor or even to poor business decisions, but to a lack of focus on vision. At the very least its vision became blurred. Scrambling with temporary solutions failed to address the company’s fundamental issue. As its market changed, it needed to clarify and expand its vision rather than busy itself with diversions.

As the vision defines the ethereal qualities of the organization, the mission statement defines the task functions. It states how the vision will be accomplished. Generally the mission statement defines the area of the organization’s expertise and targets a specific industry or population. For example, the Minnesota Council for Preventive Medicine, a nonprofit organization of physicians, has the following mission statement:

  • To create a network of physicians interested in preventive medicine
  • To offer expertise in preventive medicine to interested individuals, organizations, learning institutions, and media
  • To influence public policy toward the prevention of physical and mental illness and injury
  • To support and promote specific initiatives that seek to prevent illness and injury

The costs of acquisition, enhancement and disposal of an asset can be deducted from the gain. Also, the cost of defending your right to ownership of the asset can be deducted, whilst the normal cost of repairs and maintenance and interest payments cannot. Special rules apply to the costs of ‘wasting assets’ (which are defined as assets which had a predictable life of less than 50 years when acquired).

Acquisition costs are defined as being costs wholly and exclusively incurred in acquiring the asset. Where the asset is business goodwill, any capital costs expressly incurred wholly and exclusively in creating the asset can be deducted. Enhancement costs are those costs wholly and exclusively incurred to enhance the asset as long as the costs are still reflected in the nature of the asset at the date of sale.

Incidental costs include costs of transfer or conveyance; and fees, commissions and remuneration for professional advice.

Quick (or acid-test) ratio. This is an assessment of a company’s liquidity,  showing how quickly a company’s assets can be turned into cash,  which is why it is known as the quick ratio or simply the acid ratio. The  most common expression of the quick ratio (although there are several  ways of deriving the same result) is to subtract inventory from current  assets, and then divide this by current liabilities. In general, the ratio  should be 1:1 or better, reflecting a healthy proportion of current assets  to current liabilities.

Stock turnover. This indicates how long cash is being tied up in stock.  It is calculated as the stock value divided by the average daily cost of sales. The quicker stock turns over the more efficiently cash is being  used.

Profit vulnerability. The vulnerability of profits to increasing costs can  be monitored by dividing fixed expenditure (for example, fixed overhead  costs such as premises or salaries) by total expenditure. This identifies  where costs are changing and which costs are causing fluctuations  in profitability over time.