3.5 Assessing Competitiveness Flashcards
Financial Statements
It’s standard practice to present financial data in statements for ease of analysis and quick viewing. Some types of businesses are legally required to produce them annually
What is a profit and loss account?
A financial document showing the company revenue or income over the year and their costs and expenditure
Reasons for creating a Profit and Loss account
Legally required
Sums up the performance of a business to its stakeholders
Can be compared with previous years performance
Investors and lenders need to see one before making deals
It can help to forecast future profits and helps with planning
Operating/ Net Profit
Profit for the financial year, after all expenses and taxes have been taken off
Gross Profit
Sales - Cost of Sales
2 Main ways to improve profitability
Increase Revenue
Reduce costs
Why Shareholders are interested in the P&L account
Want to know the final profit figure that the dividends will be paid out on
Why investors are interested in the P&L account
Want to know the profitability of the business- is it worth investing or will it be a risk
Why employees and managers are interested in the P&L account
May wish to know the expenses of the business
Balance Sheet
Shows how much a business is worth
Shows the business’ assets, its liabilities and how it is financed
Snapshot of a business in a particular period of time
Shows the source of funds and uses
Shows financial position
Why is it called a balance sheet
Capital employed is measure of the value of assets minus current liabilities
It must equal net assets
THEY MUST ALWAYS BALANCE
Non Current Assets
Long term assets which are not expected to be sold within a year
Intangible assets e.g. Copyright, Patents, Trademarks, Goodwill
Tangible assets e.g. property, plant and equipment
Current Assets
Short term assets expected to be sold within the next year
Inventories are stocks of raw materials
Non Current Liabilities
These are debts which are not expected to be paid off within the next year of trading
E.g. Borrowings, Retirement benefit obligations, Provision for liabilities
Current Liabilities
Debts which are expected to be paid off within the next year of trading
E.g. Borrowings, Current tax liabilities
Uses of a balance sheet
Evaluate performance of the business
Evaluate potential of a business to an investor
Summary valuation of the business
Limitations of a balance sheet
Value of assets stated may not be the same amount they sell them for
Intangible goods may be hard to put a value on
A balance sheet is a static snapshot of one day in a business and the next day the picture may change
Ratio Analysis
A form of financial statement analysis that is used to obtain a quick indication of a firm’s financial performance in several key areas
Acid Test Ratio
Method to gauge whether a firm has sufficient short-term assets to cover its immediate liabilities
Current Assets- Stock / Current Liabilities
Gearing Ratio
How reliant a business is on borrowed money
The higher the gearing, the higher interest payments
GR= Non Current Liabilities/ Capital Employed x100
Gearing Explained
Looks at the long term finance of the business and where it comes from
A result of over 50% means the business is highly geared- most money is borrowed
Return on Capital Employed
Operating Profit/ Capital Employed x100
Capital Employed = Fixed assets + Current Assets- Current Liabilities
ROCE Explained
The measure of the profitability of the business
The higher the ROCE figure the better
Factors that effect contribution made by employees
Training and Skills
Empowerment
Leadership
Reasons for poor Workforce motivation
Employees feel the job or workplace is not what they expected
Mismatch between job and person
Little coaching and feedback
Few growth and advancement opportunities
Employees feel devalued and unrecognised
Employees feel stress from overwork and imbalance
Loss of trust and confidence in senior leaders
Labour Productivity
Output per time period/ Average no. employees
Absenteeism Rate
No. working days lost to absence/ Total no. working days available x100
Understanding Labour Turnover
Measure of performance
Some departments have naturally high turnover so context is important
Turnover is measured against historical figures
High labour turnover may be due to poor recruitment, weak induction, lack of challenge in the job and low pay rates
Labour Turnover
No. employees leaving/ Avg. no. employees x100
Understanding Absenteeism
Shows if theres low motivation or job satisfaction
Caused by poor management, stress, overload
Some absenteeism is obvious but too much and it could cost the business in terms of lost orders etc
Can be improved through job enlargement, rotation, incentive schemes etc.
