Please have a look at the following questions and answer with a simple “True” or “False”
1. The cash figure in the balance sheet is a very good determinant of liquidity.
2. Return on Equity (ROE) is the best measurement of how a business utilises its capital.
3. If a company has made a loss in the current year it cannot pay dividends.
4. If total borrowings exceed total shareholders’ funds the company is technically insolvent.
5. Acquisition of fixed assets will affect Gross Profit.
6. An increase in turnover will cause a corresponding increase in free cash flow.
7. If we depreciate our machinery by charging against our profits we are in effect saving to replace it in the future.
8. By raising debt levels we actually boost the return to our shareholders.
9. A company with a high level of fixed costs is less risky. At least the costs are known in advance and will not fluctuate with activity
10. EBITDA (earnings before interest, depreciation, and amortisation) is a very good measure of cash flow.
11. A Director’s loan (i.e. loan made to the company by a Director) can only be repaid out of current profitability.
12. Contribution measures the level of contribution towards the recovery of fixed costs from a given level of sales.
13. Working capital is best measured by the amount of liquid resources a company has.
14. David Beckham was never on the Balance Sheet of Manchester United but Wayne Rooney is.
So, how did you get on; did any of these questions cause some concern?
If they did, why not give us a call? We run dedicated and highly customised finance training programmes for directors and executives on an in-house basis. Our consultants are also available to carry out one-to-one technical coaching with executives that can help you navigate through the maze that finance can be!
The answers by the way:
The only “True” ones are questions 8, 12 and 14.The rest are all “False”.