IB Business Unit 3, Case Study

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Flashcards on IB Business Unit 3, Case Study, created by mayjr on 09/07/2014.

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Investment Shares held in other businesses are called ‘investments’ on the Balance Sheet. Investments could also be medium to long term financial assets that the business might hold that generate revenue. Roger Williams’ large fortune from being in the primary sector of British East Africa would have been tied up in investments mostly in the primary sector itself. Global Properties invested in The Imperial by purchasing the hotel in 1989.
Cash flow The movement of cash into and out of a business is called cash flow. Inflows come mostly from revenue and capital injection. Outflows are related to expenses. The Imperial was facing cash flow problems in its initial years due to the cash outflows being greater than the cash flowing into the business.
Liquidity Liquidity management is the monitoring of liquid assets (easily turned into cash) of a business to ensure that it can always pay its bills and current liabilities. Part of the financial problems faced by The Imperial in its initial years related to liquidity management. Seasonality in the hotel industry also causes liquidity problems for The Imperial.
Profit The surplus left after all costs are deducted from sales revenue. GP expected the Hotel Manager at The Imperial to generate profits for the investment group.
Dividends The share of the net profits that a company distributes to shareholders. Preference shares usually carry a fixed dividend while ordinary shares are variable depending on the profitability of the company. Most of the profits generated at The Imperial were usually paid back as dividends to GP.
Working capital Also referred to as net current assets, this represents the amount of finance available to a business for its day to day operations. The formula used to calculate is: current assets – current liabilities Too little working capital would indicate strained liquidity while too much working capital would indicate conservatism and wasted investment opportunities. The seasonal nature of the business had created working capital worries for Martin Kimathi.
Revenue Revenue is the income of a business derived from its daily operations (ie: from the sale of goods or services). If Option 2 is adopted, the sales revenue acquired from renting self-service apartments to business travellers would be almost the same as the sales revenue earned from The Imperial in its current state.
Final Accounts Also called “published accounts”, these are the annual financial statements that all limited liability companies are obliged to produce and report, namely the Balance Sheet and the Profit and Loss Account. Also, a Cash Flow Statement. Martin had to organize the preparation of final accounts for GP as he was accountable for financial performance.
Profit and loss account P&L is part of the final accounts of a business, which is a statement of a business’ trading activities over a period of time. It is usually split into 3 parts: the Trading account, the P&L account and the Appropriation account. Martin Kimanthi was expected by GP to organize the preparation of the P&L account for The Imperial.
Balance sheets Also part of the final accounts of a business, the balance sheet is a financial statement showing the assets and liabilities at a point in time, usually the end of the financial year. In a balance sheet the sources of funds must be balanced with the use of funds. Martin was expected by GP to organize the preparation of a balance sheet for The Imperial.
Financial performance Final accounts and ratios could be used to determine the financial performance of The Imperial and strategies could be determined from analyzing these documents / figures.
Stock Also called “inventory”, stock are physical materials and goods that a business holds for further production or sale. They appear on the Current Assets of the Balance Sheet of a business. The Head of Catering at the Imperial was unable to manage the actual stocks.
Fixed Costs Fixed costs do not change with the level of output or sales. The fixed costs for the Imperial are for example: advertising, insurance, management salaries and loan repayments.
Variable Costs Variable costs are costs which change with the level of output or sales. The variable costs for the Imperial include: food, housekeeping wages, cleaning materials.
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