For example, the significant decrease in the interest coverage ratio may in fact hide the fact that the company has taken an extra loan to improve its equipment and that this new equipment is expected to generate higher earnings at a later period.
Section B
3. The business life cycle involves, similarly to the product life cycle, five different stages, namely the establishment of the business, the growth period, the expansion, the maturity and the decline. All these stages have different impacts in terms of business risks, sales volumes, cash flows and profits. The first two stages imply high business risks, as well as high costs that are associated with the development of a new project or service, the marketing costs associated with its launch on the market, as well as any additional costs aimed at making the company better known on the market. This also means that the profits are significantly low in this period, even negative.
With the expansion and maturity periods,...
A successful product or service on the market means higher earnings and the capacity to further develop the business. Lower costs and higher revenues also increase the profit margins. At the same time, business risks are lower than in the first two periods. With the decline period, one is likely to see a decline in profits, along with the overall decline of earnings.
4. Budgeting is essential because it helps companies keep track of their finances and help them balance the costs proportional to the earnings. The need to have a proper budgeting policy is also reflected by the fact that a company uses a wide variety of budgets, including master budgets, operating and financial budgets and cash budgets. These budgets give the analysts and decision makers in the company an overview of costs and revenues on certain segments of the company's operations, going from the general (master budget) to the particular (operating budgets).
