3.5 assessing competitiveness

Question 1

what is the statement of comprehensive income?

Answer 1

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

Question 2

how do you work out gross profit ?

Answer 2

revenue - cost of sales

Question 3

how do you work out operating profit ?

Answer 3

gross profit - expenses

Question 4

which stakeholders are interested in the account and why ?

Answer 4

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

Question 5

what is liquidity ?

Answer 5

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

Question 6

what is the total funding known as?

Answer 6

capital employed

Question 7

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

Answer 7

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

Question 8

why are shareholders interested in the balance sheet?

Answer 8

• 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

Question 9

why are managers interested in the balance sheet?

Answer 9

• 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

Question 10

why are suppliers and creditors interested in the balance sheet?

Answer 10

• See the risk with trade credit

Question 11

why are employees interested in the balance sheet ?

Answer 11

• job security
• stability

Question 12

why is ratio analysis important?

Answer 12

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

Question 13

what is the gearing ratio ?

Answer 13

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

Question 14

how do you calculate gearing ratio?

Answer 14

non current liabilities/capital employed x 100

Question 15

how do you work out capital employed?

Answer 15

current liabilities - total assets

Question 16

what is return on capital employed ?

Answer 16

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

Question 17

how do you work out roce?

Answer 17

operating profit / capital employed x 100

Question 18

what is a highly geared business?

Answer 18

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

Question 19

what is the impact of having a highly geared business?

Answer 19

• 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

Question 20

how can you reduce gearing?

Answer 20

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

Question 21

what is a low geared business?

Answer 21

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

Question 22

what is the impact of a low geared business?

Answer 22

• 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

Question 23

how to increase low gearing?

Answer 23

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

Question 24

why should the roce be higher ?

Answer 24

indicates that the business is profitable and using its capital efficiently

Question 25

what are the limitations of ratio analysis?

Answer 25

- 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

Question 26

what is labour productivity ?

Answer 26

measure of output per employee

Question 27

how do you work out labour productivity?

Answer 27

total output / av. number of employees

Question 28

what is labour turnover ?

Answer 28

proportion of employees leaving a business during a specific time period

Question 29

how do you work out labour turnover?

Answer 29

number of staff leaving / average number of staff x 100

Question 30

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

Answer 30

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

Question 31

what are the opportunities with high labour turnover?

Answer 31

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

Question 32

what is labour retention?

Answer 32

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

Question 33

how do you work out labour retention?

Answer 33

number of staff remaining / average number of staff x100

Question 34

what is absenteeism?

Answer 34

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)

Question 35

how do you work out the absenteeism rate ?

Answer 35

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

Question 36

what are the issues with high levels of absenteeism?

Answer 36

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

Question 37

how can you improve employee performance?

Answer 37

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