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Running a business
Margins, cashflow and the ratios a lender or a buyer will ask about, worked through on real numbers.
48 situations worked through, 43 of them with the sums shown. Each one links to the guide that sets out the rules behind it, and that guide is where any rate or threshold is kept current.
The people in these situations are illustrations written to show how the rules land on somebody, not real customers and not case histories. The arithmetic is real and the rules are real; the names and the circumstances are made up to teach.
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Asset Turnover Ratio Guide
Sarah's Coffee Shop vs Mike's Roastery
Two coffee businesses with very different asset bases and business models.
- Annual sales: $450,000
- Beginning assets: $150,000
- Ending assets: $170,000
- Average assets: ($150,000 + $170,000) รท 2 = $160,000
Asset Turnover: $450,000 รท $160,000 = 2.81x
Tech Startup Growth Story
A software company's asset turnover over three years of growth.
This one turns on the rules rather than on a calculation, so there are no sums to show.
Retail Store Expansion Decision
A clothing retailer considering whether to open a second location.
- Annual sales: $600,000
- Total assets: $250,000
Asset Turnover: 2.4x
A temporary drop in asset turnover ratio isn't necessarily bad! If the second store reaches projected sales within 12-18 months, this expansion makes sense. The key is tracking whether the ratio returns to 2.4x or higher once the new store matures. Many businesses accept short-term ratio declines for long-term growth.
Manufacturing Efficiency Improvement
A small manufacturer implements lean manufacturing principles.
- Annual sales: $2,000,000
- Average assets: $1,600,000
- Large inventory: $400,000
- Equipment utilization: 60%
Asset Turnover: 1.25x
CAPM Guide - Capital Asset Pricing Model
Comparing Two NZ Companies
Sarah wants to invest $20,000 in either Company A or Company B and wants to know which offers better value given the risk.
- NZ 10-year government bond yield (risk-free rate): 4.5%
- NZX 50 historical return (market return): 8.8%
- Market risk premium: 8.8% - 4.5% = 4.3%
Building a Balanced Portfolio
Mike wants to build a $50,000 portfolio with a target expected return of 9.5%.
- Risk-free rate: 4%
- Market return: 10%
- Market risk premium: 6%
Mike's portfolio has a beta of 0.99 (essentially market risk) and an expected return of 9.94%, exceeding his 9.5% target. The diversification across different risk levels helps balance risk and return.
Evaluating Company Cost of Equity
A NZ manufacturing company needs to calculate its cost of equity for a capital budgeting decision.
- Company: Manufacturing Ltd
- Industry beta: 1.1
- Risk-free rate (NZ 10-year bonds): 4.3%
- Expected market return (NZX 50): 9.2%
Market Crash Scenario
During a market downturn, understanding how different beta stocks react.
- Market drops: -15%
High beta stocks amplify gains in bull markets but also amplify losses in bear markets. A stock with beta 2.0 that rises 20% when markets rise 10% will also fall 20% when markets fall 10%.
Cashflow Management Guide - NZ Personal Finance
Salaried Employee - Fortnightly Pay
Emma, teacher in Wellington
- Rent: $550/week = $2,383/month
- Power: $180
- Internet: $85
- Phone: $45
- Groceries: $600
- Transport (bus): $150
- Insurance (monthly allocation): $140
- Subscriptions: $35
- Eating out: $250
- Entertainment: $150
- Personal care: $80
- Clothing: $100
- Miscellaneous: $120
- Total: $4,318/month
Contractor - Irregular Income
James, IT contractor in Auckland
- Rent: $2,800
- Car payment: $520
- Insurance: $320
- Internet/phone: $150
- ACC levy: $250
- Tax (set aside 30%): $3,000 average
- Fixed total: $7,040/month
Family - Rising Costs Crisis
Mike & Sarah, family of 4 in Christchurch
- 2023: $7,859 - $7,200 = +$659/month surplus
- Saving: $7,908/year
- 2024: $7,859 - $8,350 = -$491/month deficit!
- Going backwards: -$5,892/year
- Swing: $13,800/year worse off
Self-Employed - Tax & Lumpy Income
Lisa, landscape designer in Tauranga
- Profit: $93,000
- Income tax (33%): $30,690
- ACC levy: $1,800
- Available for living: $60,510
- Monthly average: $5,043
EBIT Guide - Earnings Before Interest and Tax
Comparing Two Competitors
Scenario: TechStart and InnovateCo are software companies. Which has better operational performance?
- Revenue: $2,000,000
- COGS: $400,000
- Operating Expenses: $1,100,000
- EBIT: $500,000
- Interest Expense: $150,000 (lots of debt)
- Tax: $105,000
- Net Income: $245,000
Tracking Performance Over Time
Scenario: CafeCo wants to see if their efficiency initiatives are working.
This one turns on the rules rather than on a calculation, so there are no sums to show.
Service Business EBIT Analysis
Scenario: ConsultPro is a consulting firm analysing their profitability.
- Revenue (consulting fees): $1,200,000
- COGS: $0 (service business, no physical products)
- Gross Profit: $1,200,000
- Operating Expenses:
- Employee salaries: $680,000
- Office rent: $85,000
- Technology/software: $45,000
- Travel: $75,000
- Marketing: $40,000
- Other expenses: $35,000
- Total Operating Expenses: $960,000
- EBIT = $1,200,000 - $960,000
EBIT = $240,000
Service businesses often have $0 COGS because they don't sell physical products. This means Gross Profit = Revenue. Their main costs are in operating expenses (mostly salaries). A 20% EBIT margin is solid for consulting, showing they keep $0.20 of every dollar after paying all operating costs.
Negative EBIT (Operating Loss)
Scenario: StartupCo is a new business in its first year.
- Revenue: $180,000
- COGS: $95,000
- Gross Profit: $85,000
- Operating Expenses: $145,000
- EBIT = $85,000 - $145,000
EBIT = -$60,000 (loss)
Negative EBIT isn't always bad. Many successful companies (especially tech startups) deliberately run negative EBIT while investing in growth. The key is having a path to profitability and sufficient cash/funding to get there.
EBITDA Guide
Telecom Company Valuation
Scenario: TelecomNZ is being valued for potential acquisition.
- Revenue: $800,000,000
- COGS: $320,000,000
- Operating Expenses (cash): $240,000,000
- Depreciation: $120,000,000 (huge network infrastructure)
- Amortization: $20,000,000 (spectrum licenses)
- Interest: $30,000,000
- Taxes: $21,000,000
Restaurant Chain Analysis
Scenario: DinerChain owns 15 restaurants and wants to open 10 more.
- Revenue: $12,000,000
- Food costs (COGS): $3,600,000 (30%)
- Labor: $4,200,000
- Rent: $1,800,000
- Other operating: $900,000
- Depreciation: $360,000 (equipment, furniture)
- Interest: $180,000
- EBITDA = $12M - $3.6M - $4.2M - $1.8M - $0.9M
EBITDA = $1,500,000
With 8.3x interest coverage and healthy 12.5% EBITDA margin, DinerChain has strong capacity to take on debt for expansion. Lenders typically want minimum 2-3x coverage, so 8.3x provides comfortable cushion. The EBITDA metric shows they generate sufficient operating cash to service expansion debt.
Software vs Manufacturing Comparison
Scenario: Comparing two $10M revenue companies in different industries.
This one turns on the rules rather than on a calculation, so there are no sums to show.
Private Equity Acquisition
Scenario: PE firm is acquiring SmallBiz for 6x EBITDA.
- EBITDA: $4,000,000
- Purchase Price: 6x EBITDA = $24,000,000
- Down Payment (equity): $6,000,000
- Debt Financing: $18,000,000
- Interest Rate: 6% = $1,080,000/year
Private equity focuses on EBITDA because: (1) it's a good proxy for debt servicing capacity, (2) multiples are standard for valuation, (3) improvements in EBITDA directly increase exit value, and (4) it's comparable across different capital structures (important when using leverage).
EBT Guide
Impact of Refinancing Debt
Scenario: ManufactureCo refinances its debt at a lower interest rate.
- EBIT: $500,000
- Debt: $2,000,000 at 8% = $160,000 interest
- EBT: $340,000
- Tax (28%): $95,200
- Net Income: $244,800
Startup to Profitability Journey
Scenario: TechStartup's 3-year journey from losses to profit.
- Revenue: $200,000
- Operating Expenses: $350,000
- EBIT: -$150,000 (operating loss)
- Interest: $15,000
- EBT: -$165,000
- Net Income: -$165,000 (no tax on losses)
Tracking EBT shows the inflection point clearly. Year 1 had negative EBT (losing money even before tax). Year 2 achieved positive EBT for the first time ($60k). Year 3 reached solid profitability with $375k EBT. The prior losses reduced Year 3 tax burden, boosting net income.
Service Business EBT Analysis
Scenario: ConsultCo evaluates profitability after taking on a bank loan.
- Revenue: $900,000
- COGS: $0 (service business)
- Operating Expenses: $600,000
- EBIT: $300,000
- Interest: $0
- EBT: $300,000
- Tax: $84,000
- Net Income: $216,000
- EBT Margin: 33.3%
Seasonal Business Tax Planning
Scenario: TourismCo has seasonal revenue and plans tax payments.
This one turns on the rules rather than on a calculation, so there are no sums to show.
By tracking quarterly EBT, TourismCo can forecast tax obligations and manage cash flow. Q1 generates $225k EBT requiring $63k tax payment, while Q3 only generates $15k EBT needing just $4.2k. This helps them reserve cash during peak season to cover obligations during slow season.
Gross Margin Guide
Coffee Shop Margin Analysis
A cafe wants to understand profitability across different products.
- Flat whites sold: 150 ร $4.20 profit = $630
- Muffins sold: 45 ร $3.30 profit = $148.50
- Sandwiches sold: 60 ร $5.50 profit = $330
- Smoothies sold: 30 ร $5.00 profit = $150
- Total daily gross profit: $1,258.50
E-commerce Pricing Decision
Online retailer must decide between two pricing strategies.
- Selling price: $120
- COGS (product + shipping): $45
- Gross profit per unit: $75
- Gross margin: 62.5%
- Expected monthly sales: 200 units
- Monthly gross profit: $15,000
Option B wins on total gross profit ($17,600 vs $15,000) despite lower margin. However, Option A requires fulfilling 50% fewer orders (200 vs 400), which means lower shipping costs, packaging costs, and customer service workload. The final choice depends on operational capacity and strategic goals.
Manufacturing Cost Reduction
Manufacturer finds ways to reduce COGS without changing price.
- Selling price: $500
- Current COGS breakdown:
- - Raw materials: $180
- - Direct labor: $90
- - Packaging: $30
- Total COGS: $300
- Gross margin: 40%
- Monthly production: 500 units
- Monthly gross profit: $100,000
Consulting Firm Margin Squeeze
Consulting firm faces margin pressure from rising labor costs.
- Project fee: $100,000
- Consultant hours: 800 at $50/hour = $40,000
- Gross margin: 60%
Price Elasticity of Demand Guide
Streaming Service Price Increase
Netflix NZ raises subscription price
- Old price: $14.99/month
- New price: $16.99/month (13.3% increase)
- Subscribers before: 850,000
- Subscribers after: 810,000
Airline Ticket Pricing
Air NZ adjusts domestic flight prices
- Price increase: $180 โ $220 (22% increase)
- Weekly bookings drop: 1,200 โ 1,140 (5% decrease)
- PED = 5% / 22% = 0.23 (Very inelastic)
Supermarket Bread Pricing
Countdown tests bread price changes
- Price: $5.50 โ $6.50
- Daily sales: 200 โ 140 loaves
- % ฮQ = -30%, % ฮP = 18.2%
- PED = 1.65 (Elastic)
Premium products are luxuries (elastic). Budget staples are necessities (inelastic). Different pricing strategies needed for different segments, even within the same product category.
Gym Membership Price Testing
Les Mills gym tests membership pricing
- Price drop: $65 โ $49/month
- Memberships increase: 400 โ 580
- % ฮQ = +45%, % ฮP = -24.6%
- PED = 1.83 (Elastic)
- Revenue: $26,000 โ $28,420 (+9.3%)
Price Elasticity of Supply Guide
COVID-19 Mask Supply Response
Pandemic creates sudden demand spike
- Price: $2 โ $8 per mask (300% increase)
- Global supply: 50M โ 60M per day (20% increase)
- PES = 20% / 300% = 0.07
- Nearly perfectly inelastic
Initial PES of 0.07 (inelastic) caused massive price spikes and shortages. Within 3 months, PES rose to 1.5 (elastic) as clothing factories pivoted, new entrants emerged, and supply chains adapted. Prices fell 60% from peak.
NZ Housing Market
Auckland housing demand surge (2015-2021)
- Average price: $800k โ $1.2M (50% increase)
- Dwellings: 500,000 โ 510,000 (2% increase)
- PES = 0.04 (extremely inelastic)
Uber Driver Supply
Surge pricing activates driver supply
- Average fare: $20
- Drivers active: 500
Software Development Capacity
Tech company scales development team
- Developer salary: $100k โ $130k (30% increase)
- Team size: 50 โ 52 developers (4% increase)
- PES = 0.13 (very inelastic)
- Reason: Can only hire immediately available talent
Profit Margin Guide
Coffee Shop Margins
Analysing profitability by product
- Selling price: $5.00
- Coffee beans: $0.40
- Milk: $0.35
- Cup/lid: $0.25
- Total cost: $1.00
- Gross margin: 80%
Online Retailer Price Testing
Testing price points for maximum profit
This one turns on the rules rather than on a calculation, so there are no sums to show.
SaaS Company Margins
Software-as-a-Service profitability model
- Revenue per customer: $99
- Hosting costs: $5
- Support (allocated): $4
- COGS: $9
- Gross margin: 91%
Supermarket vs Luxury Retail
Comparing business models
- Gross margin: 25%
- Net margin: 2%
- Annual revenue: $500M
- Net profit: $10M
- Strategy: High volume, low margins
Both models work, but require different strategies: Supermarket: Needs huge volume, tight cost control, efficient operations. 1% cost increase wipes out 50% of profit! Luxury: Needs brand strength, customer experience, pricing power. Can absorb cost increases easily.
ROI Guide
Tech Startup Investment
Angel investor evaluates early-stage startup
- Investment: $100,000 for 10% equity
- Company valuation: $1,000,000
- Time: 5 years
Solar Panel Installation (Personal)
Homeowner considers solar investment
- Solar panels + installation: $15,000
- Government rebate: -$2,000
- Net investment: $13,000
Employee Training Program
Company invests in staff development
- Training course costs: $50,000
- Lost productivity (time away): $25,000
- Total investment: $75,000
KiwiSaver vs Property Deposit
30-year-old choosing between KiwiSaver and saving for house deposit
- Contribute $300/month + employer match $150
- Total contribution: $450/month ร 12 ร 35 = $189,000
- Average return: 7% per year (growth fund)
- Final value at 65: $738,500
- Gain: $549,500
- ROI = $549,500 / $189,000 ร 100
ROI = 291%
Property shows 2,413% ROI because you only invested the deposit ($37,800) but gained from the entire property value increase. The mortgage used leverage (borrowing) to magnify returns. However, this ignores mortgage interest paid, maintenance, rates, and risk. KiwiSaver provides diversification and employer contributions. Both are valuable, not either/or.
WACC Explained
NZ Electricity Company
Utility company evaluating grid upgrade investment
- Market cap (equity): $2,400M
- Debt outstanding: $1,600M
- Total value: $4,000M
- Equity weight: 60%
- Debt weight: 40%
Tech Startup Valuation
High-growth SaaS company raising capital
- Recent funding round valuation: $80M
- Equity: $80M (investors + founders)
- Debt: $5M (equipment financing)
- Equity weight: 94.1%
- Debt weight: 5.9%
Tech startups have high WACC (14%+) due to: high business risk, volatile earnings, high beta, limited debt capacity, and investor return expectations. They must generate high returns to justify investment. Most VCs expect 25-30%+ returns to compensate for risk.
Retail Chain Expansion
NZ retail company planning store rollout
- Market cap: $350M
- Bank debt: $120M
- Bonds: $80M
- Total debt: $200M
- Equity weight: 63.6%
- Debt weight: 36.4%
Capital Structure Optimisation
Manufacturing company considers refinancing
- Current WACC = (0.75 ร 10.5%) + (0.25 ร 4.0%)
= 8.88%
Saving and investing Buying a first home Running a household Debt you cannot pay Scams, faulty goods and your rights Changing or losing a job Separation, death and estates Understanding your pay and tax Owning a rental or holiday home Starting work for the first time
Every situation
Situations are taken from the guides listed above and are worked examples for education, not advice. Figures used in an example were current when the guide was written; the guide holds the maintained figure. Last reviewed 2026-09-07. See also the arithmetic on its own, every question the site answers and the guides.