# Basic Business Formulas

There are many good reasons to enter management consulting, including the opportunity to work in a variety of different functions across many various industries. The formulas below are basic business formulas for the most common business problems.

# Management Consulting Formulas

## Return on Investment (ROI)

```
ROI = (Gain from Investment - Cost of Investment) / (Cost of Investment)
```

## Breakeven Formula

### Units to Breakeven

```
Total Fixed Costs = (Price Volume) - (Variable Cost Volume)
```

Then solve for volume.

### Price to Breakeven

```
Total Fixed Costs = (Price Volume) - (Variable Cost Volume)
```

Then solve for price.

## Time to Breakeven

```
Total Fixed Costs = (Revenues per [Day / Month / Year]) - (Costs per [Day/Month/Year])
```

Then solve for day/month/year.

## Profitability Formula

```
Profitability = Revenues - Costs
```

```
Revenues = (Price * Volume)
```

```
Costs = (Fixed Costs) + (Variable Costs * Volume)
```

## Profit Margin or Net Margin

```
Profit Margin or Net Margin = (Profits) / (Revenues)
```

## Gross Margin

```
Gross Margin = (Revenues - Cost of Goods Sold) / (Revenues)
```

## Net Present Value (NPV)

```
NPV = Initial Investment + (Cash Flow Year 1) / ( 1 + discount rate) + (Cash Flow Year 2)/(1 + discount rate)^2 + ... + (Ultimate Cash Flow Year X) / (1 + discount rate) ^ x
```

## Incremental Revenue Gain/Loss

```
Incremental Revenue Gain/Loss = (Revenues from new product/company/etc.) - (Revenues from old product/company/etc.)
```

## Breakeven Market Share

```
Breakeven Market Share = (Breakeven Volume) / (Total Market Size)
```

## Return on Assets (ROA)

```
Return on Assets (ROA) = (Net Income) / (Total Assets)
```

## Return on Equity (ROE)

```
Return on Equity (ROE) = (Net Income) / (Shareholders' Equity)
```

## EBITDA

```
EBITDA = Earnings Before Income, Tax, Depreciation, and Amortization
```

## Quick Ratio

```
Quick Ratio = (Current Assets - Inventory)/(Current Liabilities)
```

## Current Ratio

```
Current Ratio = Current Assets/Current Liabilities
```

## Debt Ratio

```
Debt Ratio = Total Debt/Total Assets
```

## Debt-to-Equity Ratio

```
Debt-to-Equity Ratio = Total Debt/Total Equity
```

## Free Cash Flow (FCF)

```
FCF = EBIT (1 - Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
```

## Future Value

```
Future Value = (Present Value)*(1 + i)^t
```

## Present Value

```
Present Value =(Future Value)/(1 + i)^t
```

## Perpetuity Formula

```
Perpetuity Formula = =(Cash Flow)/(discount rate - growth rate)
```

## Price Elasticity of Demand

```
Price Elasticity of Demand = (% Change in Quantity)/(% Change in Price)
```

## Cross Elasticity of Demand

```
Cross Elasticity of Demand =(% of change in Quantity for Good X)/(% of change in Price for Good Y)
```

## Payback Period

```
Payback Period = Cost of Project/Annual Cash Inflows
```

## Contribution Margin

```
Contribution Margin = Price/Unit - Variable Cost/Unit
```