3.5 Assessing Competitiveness

Question 1

Financial Statements

Answer 1

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

Question 2

What is a profit and loss account?

Answer 2

A financial document showing the company revenue or income over the year and their costs and expenditure

Question 3

Reasons for creating a Profit and Loss account

Answer 3

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

Question 4

Operating/ Net Profit

Answer 4

Profit for the financial year, after all expenses and taxes have been taken off

Question 5

Gross Profit

Answer 5

Sales - Cost of Sales

Question 6

2 Main ways to improve profitability

Answer 6

Increase Revenue
Reduce costs

Question 7

Why Shareholders are interested in the P&L account

Answer 7

Want to know the final profit figure that the dividends will be paid out on

Question 8

Why investors are interested in the P&L account

Answer 8

Want to know the profitability of the business- is it worth investing or will it be a risk

Question 9

Why employees and managers are interested in the P&L account

Answer 9

May wish to know the expenses of the business

Question 10

Balance Sheet

Answer 10

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

Question 11

Why is it called a balance sheet

Answer 11

Capital employed is measure of the value of assets minus current liabilities
It must equal net assets
THEY MUST ALWAYS BALANCE

Question 12

Non Current Assets

Answer 12

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

Question 13

Current Assets

Answer 13

Short term assets expected to be sold within the next year
Inventories are stocks of raw materials

Question 14

Non Current Liabilities

Answer 14

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

Question 15

Current Liabilities

Answer 15

Debts which are expected to be paid off within the next year of trading
E.g. Borrowings, Current tax liabilities

Question 16

Uses of a balance sheet

Answer 16

Evaluate performance of the business
Evaluate potential of a business to an investor
Summary valuation of the business

Question 17

Limitations of a balance sheet

Answer 17

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

Question 18

Ratio Analysis

Answer 18

A form of financial statement analysis that is used to obtain a quick indication of a firm’s financial performance in several key areas

Question 19

Acid Test Ratio

Answer 19

Method to gauge whether a firm has sufficient short-term assets to cover its immediate liabilities

Current Assets- Stock / Current Liabilities

Question 20

Gearing Ratio

Answer 20

How reliant a business is on borrowed money
The higher the gearing, the higher interest payments

GR= Non Current Liabilities/ Capital Employed x100

Question 21

Gearing Explained

Answer 21

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

Question 22

Return on Capital Employed

Answer 22

Operating Profit/ Capital Employed x100
Capital Employed = Fixed assets + Current Assets- Current Liabilities

Question 23

ROCE Explained

Answer 23

The measure of the profitability of the business
The higher the ROCE figure the better

Question 24

Factors that effect contribution made by employees

Answer 24

Training and Skills
Empowerment
Leadership

Question 25

Reasons for poor Workforce motivation

Answer 25

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

Question 26

Labour Productivity

Answer 26

Output per time period/ Average no. employees

Question 27

Absenteeism Rate

Answer 27

No. working days lost to absence/ Total no. working days available x100

Question 28

Understanding Labour Turnover

Answer 28

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

Question 29

Labour Turnover

Answer 29

No. employees leaving/ Avg. no. employees x100

Question 30

Understanding Absenteeism

Answer 30

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.