Division of costs to various categories

Costs can be divided into different categories according to their drivers or behavior. In general, cost classification helps understand the costs by studying their behavior and drivers with the aim of their reduction or optimization. And as in other life situations, it is much easier to influen

Distinction between economic and accounting profit

The general definition is valid for both economic and accounting profit: income - expenses But the terms differ in: what is included in the formula: economic profit: explicit (i.e. expenses in the profit and loss) and implicit costs (i.e. costs that would be sacrified if we would

Advantages and disadvantages of financing by equity and debt

In business world, debt financing is paradoxically cheaper than from equity, because: the cost of debt is interest, which is lower than the dividend (profit sharing) paid to shareholders – it is mainly due to the fact that equity holders are satisfied in case of liquidation either after deb

Financial leverage

Financial leverage is the ratio of debt capital to total assets, i.e. the formula is the same as for the Debt ratio. The effect of financial leverage is one of the effects causing the fact that the use of debt capital can be more advantageous than equity. It has a positive effect in the case that r


Solvency is the ability to pay the obligations on time. (14) Solvency is not the same as liquidity.   Solvency ratio / Cash-flow ratio belongs to the group of indicators of liquidity and financial structure/indebtedness and expresses the entity's ability to meet all its liabilities (both

Liquid assets

Liquid assets are current assets that will or could be converted into cash in a short period of time.

Budgeting and forecasting under risk or uncertainty

There are several approaches to planning (budgeting) that can be undertaken if uncertainty is a significant factor: rolling budgets scenario analysis/budgeting flexible budgeting calculating expected values carry out an sensitivity analysis

Difference between terms liquidity, solvency and liquidity of assets

There is a difference between the related terms of liquidity, solvency and liquidity of assets.   Liquidity Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) More here.

Net working capital

Net working capital is obtained by subtracting short-term borrowings from (gross) working capital.   Calculation formula working capital - short-term borrowings = current assets - short-term borrowings = long-term debt capital + equity – non-current assets   General interpretati

The indicator of overcapitalization / undercapitalization

The indicator of overcapitalization / undercapitalization is one of the indicators of indebtedness and financial structure and possibly also liquidity. The ratio indicates the proportion in which are fixed assets financed by long-term funds. The analysis provides similar result as the analysi


Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) Liquidity is not the same as solvency. Financial analysis deals with the following liquidity indicators.

Opportunity costs / Implicit costs

Opportunity cost (also called also implicit costs) is the highest possible amount that could be obtained if different alternative would have been adopted. For example rent income can be opportunity costs to using the factory premises for manufacturing. Opposite to implicit (opportunity) costs

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