Value
Added = Sales value of goods & services sold - Cost of raw materials, part
finished goods and components. Value
added is needed to pay the Factors of Production including the Entrepreneur who
is rewarded with profit as a reward for taking risk. No
added value means no profit i.e. the value of sales is less than the cost of raw
materials (resulting in a loss). Net
Operating Cycle = 10 + 40 - 30 = 20 days when the business does not have cash
which it needs to pay its suppliers. This is a cash flow problem. There
is a need for what is referred to as working capital (funds to finance the day
to day operations of the business). Also
see Working
Capital.
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