3.5 Flashcards
Define income statement
Measures business performance (income and costs) over a given period of time. Also known as a profit and loss account.
Define balance sheet
A Snapshot of the business assets and its liabilities on a particular day.
Who is interested in an income statement?
-Shareholders
-Government
-Employees/Managers
Who’s interested in a balance sheet?
-Shareholder
-Managers
-Suppliers & Creditors
Define Non-current assets
Items owned by a business for the long term eg machinery and buildings.
Define Current assets
Items converted to cash easily eg trade, cash balances and inventories.
Define Current liabilities
Money a business owes eg short term borrowing, bank overdrafts.
Define Non-current liabilities
Money a business owes in the long term eg bank loan, mortgages
What does Gearing measure?
Measures the proportion of a business’ capital provided by debt and the long term funding that comes from debt
Define equity?
Amounts invested by owners of the business eg share capital, retained profits
Define debt
Finance provided to the business by external parties eg bank loans, other long term debt
What is the gearing ratio formula?
Non-current liabilities / Total equity + non current liabilities x100
What does a high gearing of 50% mean?
Substantial levels of interest will need to be paid back which means:
-Profit is reduced
-Business is considered risky for further investment
-Difficulties arising further loan capital
What does a low gearing on less than 20% mean?
-Less finance comes from debt
-Business may be missing out on oppotunity to access finance
-Banks more likely to approve loan applications
-Unwillingness to take risks may deter investors.
Define employee retention
The ability of a business to convince its employees to remain with the business
Define labour turnover
The percentage of the workforce that leave a business within a given period
What is the formula for labour turnover?
number of employees leaving during period / average number employed during period x100
What are some problems of high staff turnover?
-Pressures on remaining staff
-Disruption to production
-Higher costs
-Hard to maintain standards
What are some ways to improve staff turnover?
-Effective recruitment / training
-Provide competitive pay
-Job enrichment
-Reward staff loyalty
What are some factors affecting staff turnover?
-Type of business
-Pay & other rewards
-Competitor actions
-Opportunities for promotion
Formula for labour productivity
output per period (units) / number of employees at work
What are some ways to improve labour productivity?
-Measure performance and set targets
-Streamline production process
-Invest in employee training
Define absenteeism
Proportion of staff not present at work
Formula for absenteeism
number of staff absent during period / number employed during period x100
What are some steps to reduce high gearing levels?
-Issue ordinary shares to create further capital
-Retain more profits so less borrowing is needed
Steps to increase gearing levels?
-Pay back ordinary shares
-Obtain more loans
Rewards of high gearing
-Borrowing can fund expansion which many increase profits allowing a business to pay off loan quickly
-Attractive during growth phase to gain competitive advantage
Risks of high gearing
-Borrowing money comes with risk of not being able to afford the repayments
-Interest rates might go up so repayment more expensive
What is the formula for return on capital employed?
Operating proft/Capital employed x100
What is Return on Capital Employed (ROCE)?
Compares profit made by a business to the amount of capital invested in the business.
What are some limitations of ratio analysis?
- Making comparisons, important to compare like for like so comparisons only useful for firms with significant similarities.
- Balance sheet might not be representative
Strategies to improve employee perofrmance
-Offer financial rewards
-Offer shares in the company
-Consultation
-Empowerment
Define Gearing
Shows where a business gets its capital from
Gearing ratio formula
Non-current liabilities / Capital employed x100
Formula for capital employed
Total equity + NCL
Why are shareholders interested in a balance sheet?
Identifies the asset structure and how their investment has been put to use & wether the bussines is growing.
Why are Managers interested in a balance sheet?
Used to identify financial position, access working capital to determine if theres enough liquid assets to pay debts
Why are suppliers interested in a balance sheet?
Used to judge solvency of the business to determine the risks when offering firms trade credit
