3.5 - assessing competitiveness Flashcards
What is a statement of comprehensive income?
The statement of comprehensive income (also called a profit and loss account) shows a firms revenue, costs, and profit.
It indicates if a firm is profitable.
Stakeholders are interested in a firms statement of comprehensive income.
What are the different stakeholders who have an interest in a firms statement of comprehensive income?
- Shareholders - shareholders will look at a firms statement of comprehensive income to see how profitable it is
- Managers - managers will be interested in the revenue and expenses of the firm over time to see if they’re changing
- Loan providers - loan providers that have loaned money to a firm might be interested in its operating profit
- Suppliers - suppliers might check if a firms revenue in the past has been enough to pay its suppliers
- Employees - employees might be interested in the profitability of a business, since it may ensure job security if the businesses profits are high
What is a statement of financial position?
The statement of financial position (balance sheet) shows the assets and liabilities of a firm at a particular point in time.
This shows how much a firm is worth which is useful for stakeholders
What does comparing the statement of financial position allow for stakeholders and shareholders?
Comparing the statement of financial position from the same date in different years allows stakeholders to pick out trends in a firms finances and evaluate its financial performance.
Shareholders can use the atatement of financial position as an indicator of whether a firms profit is likely to increase or decrease.
What else does a statement of financial position show for a business?
Statements of financial position shows a business’s:
- liquidity
- solvency
Liquidity is the ability of a business to turn assets into cash.
Solvency is a business’s ability to pay its debts
What is gearing and a gearing ratio?
Gearing shows where a business gets its capital from.
The gearing ratio shows the proportion of a firms finances and that’s from non current liabilities (long term debt), rather than share capital or reserves (equity).
What is the formula for capital employed?
Capital employed shows the total amount of finance in the business (from loans, reserves, shares)
Capital employed = non current liabilities + total equity
What is the formula for gearing ratio?
Gearing ratio = non current liabilities / capital employed x 100
What does the gearing ratio a business has show?
A gearing above 50% shows that over half of a firms finances and that’s is from long term debt - the business is high geared.
A gearing below 50% shows that a business is low geared, because less than half of the finance comes from long term finance.
What are the benefits of high gearing to a business?
High gearing can be risky, but some businesses are willing to take the risk because of the potential rewards.
One benefit of borrowing money for a business is extra funds for expansion.
High gearing can be attractive during a growth phase since a business will need high amounts of funds to grow.
What are the risks of high gearing?
The risk to the business of borrowing money is that it might not be able to afford the repayments.
Taking loads is risky when the interest rates are low since they could go up later and force the business to pay more.
What is return on capital employed?
Return on capital employed is a profitability ratio, that is considered to be the best way of analysing profitability.
It tells you how much money is made by the firm compared to the amount put into the business.
What is the formula for return on capital employed?
Return on capital employed = operating profit / capital employed x 100
Why is ratio analysis very useful to a business?
Accounting ratios are a really good way of looking at a business’s performance over a period of time.
By interpreting the ratios, stakeholders can spot trends and identify the financial strengths and weaknesses of the business.
Ratio analysis can also be used to make business decisions
What are the limitations of ratio analysis?
- the ratios are only as good as the data they’re based on, so on different days the ratios could be different
- internal strengths don’t appeal in figures so they won’t be in the ratios
- future changes such as technological advances or changes in interest rates can’t be predicted by figures
What are some of the factors that humans resourced (HR) consider when making decisions about recruitment?
- labour productivity
- labour turnover
- labour retention
- absenteeism
What is labour productivity?
Labour productivity tells you the output per employee.
Labour productivity = output per period / number of employees
What is labour turnover?
Labour turnover measures the proportion of staff who leave.
Labour turnover = number of staff leaving / average number of staff employed x 100
What is labour retention?
Labour retention measures a business’s ability to keep its employees.
Labour retention = number of staff employed at start of period - number of leavers / number of staff employees at start of period x 100
What is absenteeism?
Absenteeism is the proportion
of days missed by employees
Absenteeism = number of days of staff absence in a time period / number of staff employed x time period x 100e
What are some of the strategies that firms adopt to improve human resource figures?
- financial rewards
- employee share ownership
- consultation strategies
- empowerment strategies
