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16. Financial control

Businesses have to work out the most efficient ways to produce products and services at a profit. This test introduces some key terms for this aspect of managing company finances. Match the term on the left to the correct definition on the right.

Financial planning term

Definition

1.

profitability

a)

the amount of products or services a company needs to sell to cover all its costs

2.

return on investment

(ROI)

b)

ratio of total debts to total assets

3.

liquidity

c)

measure of profitability obtained from dividing net income by total amount invested

4.

leverage

d)

ratio of total sales to total cost of inventory (goods in storage)

5.

break-even point

(BEP)

e)

ratio of cost to benefit

6.

efficiency

f)

measure of how well a business can meet its short term cash needs

1

2

3

4

5

6

e

A key function in financial planning is to keep control of investments (spending). All the terms in this test are important in ensuring the efficiency of a business. Good planning often means making separate calculations and judgements for different activities in the same business. In this way, profitable units can be further developed. Weak units can be changed or abandoned. The correct term for these units is strategic business unit (SBU). A company treats each separate SBU as an individual cost centre.

17. If the price is right …

In an interview with a journalist, Jan Horst, a marketing consultant, speaks about pricing policies. Complete the text of the interview with words or phrases from the box.

competition

cost plus

discount

margin

marginal cost

market price

penetration strategy

skimming strategy

Journalist:

So, in terms of pricing, what mistakes do small companies often make?

Horst:

They take the cost of sales, and add to it – inventing a (1) margin . This is a (2) __________ __________ approach.

Journalist:

What’s the alternative?

Horst:

First, fix a price somewhere near or below the competition, the (3)__________ __________ . This can get you market share, using a so-called (4) __________ __________ .

Journalist:

What about (5) __________ __________ , just a bit above variable costs?

Horst:

Marginal cost pricing only works if you have a lot of spare stock. It can help with a (6) __________ policy.

Journalist:

And how can pricing help to build up market share?

Horst:

First, a low price is essential to build up market share in many markets. This is the penetration strategy approach. Or you can have a (7) __________ __________ , with high margins to help to pay costs quickly. This is often used with hi-tech goods. They start expensive but prices come down quickly once the (8) __________ arrives.