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business- year 2 > 3.5 assessing competitiveness > Flashcards

3.5 assessing competitiveness Flashcards

1
Q

what is the statement of comprehensive income?

A

shows the income and expenditure of a business over a period of time

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2
Q

how do you work out gross profit ?

A

revenue - cost of sales

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3
Q

how do you work out operating profit ?

A

gross profit - expenses

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4
Q

which stakeholders are interested in the account and why ?

A
  1. shareholders - interested in dividend
  2. employees - wage and stability
  3. managers - key performance data
    4.suppliers - need to determine level of trade credit to give
  4. gov - how much tax is payable
  5. community - jobs
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5
Q

what is liquidity ?

A

ability of a business to meet its short term commitments (e.g. payments to creditors) with its available assets

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6
Q

what is the total funding known as?

A

capital employed

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7
Q

what are the differences between non current (assets + liabilities) and current

A

non current are things that are owned long term and current are things owned soon

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8
Q

why are shareholders interested in the balance sheet?

A
  • Used to identify the asset structure of the business and how their investment has been put to use
  • Used to determine the rough value of a business which helps a judgement on whether their investment is growing
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9
Q

why are managers interested in the balance sheet?

A
  • Used to identify the financial position of the business at a given point in time
  • Useful to assess the working capital position of the business and determine if there are enough liquid current assets to pay its bills
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10
Q

why are suppliers and creditors interested in the balance sheet?

A
  • See the risk with trade credit
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11
Q

why are employees interested in the balance sheet ?

A
  • job security
  • stability
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12
Q

why is ratio analysis important?

A

provides measurable data that can be used to support judgements and compare performance against objectives

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13
Q

what is the gearing ratio ?

A

shows the long-term financial structure of the business by showing the balance of non-current liabilities (e.g. long-term loans) to shareholder capital used to fund a business

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14
Q

how do you calculate gearing ratio?

A

non current liabilities/capital employed x 100

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15
Q

how do you work out capital employed?

A

current liabilities - total assets

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16
Q

what is return on capital employed ?

A

It compares the profit made by a business to the amount of capital invested in the business
It is a measure how how effectively a business uses the capital invested in the business to generate profit

17
Q

how do you work out roce?

A

operating profit / capital employed x 100

18
Q

what is a highly geared business?

A

more than 50 per cent of its capital employed are long-term loans

19
Q

what is the impact of having a highly geared business?

A
  • The level of profit available to pay as dividends to shareholders is reduced
  • Profit available to retain within the business is limited
  • The business is likely to be considered a risk for further investment
  • It is also likely to face difficulties in raising further loan capital
20
Q

how can you reduce gearing?

A

Issuing more ordinary shares to create further share capital

Retaining more profits to avoid
further borrowing

Repaying loans to lower interest costs for the business

21
Q

what is a low geared business?

A

less than 50 per cent of its capital employed as long-term loans

22
Q

what is the impact of a low geared business?

A
  • The business may be missing out on the opportunity to access finance without the need to dilute existing shareholders’ control
  • Lenders such as banks are more likely to approve loan applications from low-geared businesses
23
Q

how to increase low gearing?

A
  • Buying back ordinary shares to reduce share capital in relation to borrowing
  • Issue more preference shares with limited loss of control
  • Obtain more loans
24
Q

why should the roce be higher ?

A

indicates that the business is profitable and using its capital efficiently

25
Q

what are the limitations of ratio analysis?

A
  • Over time the nature of a business can change affecting the desired level of ratio
  • Comparisons between firms are only meaningful where significant similarities exist (e.g. same industry, similar size, comparable products)
  • Accounts may have been legally window dressed (manipulated) to present a particular financial picture.
  • liabilities and capital at a specific point of time the balance sheet may not be representative of its usual circumstances
  • key qualitative factors that affect its performance are ignored
26
Q

what is labour productivity ?

A

measure of output per employee

27
Q

how do you work out labour productivity?

A

total output / av. number of employees

28
Q

what is labour turnover ?

A

proportion of employees leaving a business during a specific time period

29
Q

how do you work out labour turnover?

A

number of staff leaving / average number of staff x 100

30
Q

what are the issues with a rising rate of labour turnover ?

A

Poor management leading to workers losing commitment

A poor recruitment and selection approach leading to staff leaving soon after starting their job

Low wage levels compared to those that could be earned elsewhere

31
Q

what are the opportunities with high labour turnover?

A

Workers with existing skills can be recruited to reduce the need for training

New ideas and creativity introduced to the business

New perspective and approaches to problem-solving can improve business performance

32
Q

what is labour retention?

A

proportion of employees remaining with a business during a specific time period

33
Q

how do you work out labour retention?

A

number of staff remaining / average number of staff x100

34
Q

what is absenteeism?

A

The absenteeism rate is a measure of the proportion of staff were absent from work during a specific period of time (e.g. a day, week or month)

35
Q

how do you work out the absenteeism rate ?

A

no. of staff absent / no. of staff employed x 100

36
Q

what are the issues with high levels of absenteeism?

A

Absence due to illness requires sick pay to be paid

Hiring temporary staff to cover for those absent increases costs

Output is likely to be temporarily reduced if staff are key to production process

Other staff may become demotivated if they have to constantly cover for absent workers

A wider culture of absenteeism may develop

37
Q

how can you improve employee performance?

A
  • financial rewards eg bonuses, loyalty bonuses, commissions
  • offering employees shares in the business
  • consultation
  • empowerement

business- year 2 (11 decks)

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