3.5 Assessing Competitiveness Flashcards
what is ROCE?
it compares the profit made by a business to the amount of capital invested in the business - measures how effectively businesses use the capital invested to generate profit.
- it is a key performance indicator
what is the formula for capital employed?
non current liabilities + total equity
what is the ROCE formula?
(operating profit / capital employed) x100
advantages of ROCE?
- evaluates the performance of the business
- provide a target for individual projects
- compare performance with competitors
evaluations of ROCE?
- varies between industries
- based on a small part of the balanced sheet
- more profit doesn’t mean profitability
advantages of ratio analysis in general?
- look into business performance
- identify financial strengths and weaknesses
- used to make decisions - gearing ratio to know how to finance growth, lenders can decide if its risky or safe
- attract potential shareholders
- useful to compare ratios with other firms
disadvantages of ratio analysis in general?
- only based on a snapshot of a businesses assets and liabilities and capital at a specific point - may be unreliable for the future
- internal strengths such as quality of staff don’t appear
- external factors such as the economic climate aren’t reflected in the figures
- future changes such as technological advancements aren’t regarded (market dependant)
what is the gearing ratio formula?
(non-current liabilities / capital employed) x100
what is gearing ratio?
shows the proportion of a firms capital employed thats from non current liabilities (debt) - shows how reliant a business is upon borrowed money
what is a highly geared business?
- gearing of over 50% shows that over half of the firms capital employed is long term debt
- the long term funds are in the form of borrowing
- requires high interest
- firm is willing to take risks
why might a firm be high geared?
- to fund growth or to maintain full control of the business so they prefer to borrow instead of sell shares
what is a low geared business?
- gearing of less than 50% means that less than half of its finance comes from long term debt
- long term funds are in the form of shareholders or reserves
- risk averse (less return on investments)
- can withstand a fall in profit more than high gearing as less interest is payed - dividends can always be reduced
what are the rewards for a high gearing business?
- extra funds for expansion - new tech etc increases profit
- keep control as less capital is required by shareholders
- easy to pay back if profits are strong
what are the risks for a high gearing business?
- high interest eats into profits. may not be able to repay
- interest rates aren’t stable
what are the risks to INVESTORS of a high gearing business?
- high interest repayments affect profits and therefore dividends for shareholders
why is the gearing ratio useful?
- measure of the financial health of a business
- focuses on the level of debt in the financial structure of the business
- high geared can mean high business risk
benefits of a low gearing business?
- less risk of defaulting on debts
- shareholders rather than debt providers
- business has capacity to add debt if required
what is a statement of comprehensive income (profit and loss account)?
shows a firms revenue, costs and profit. indicates if a business is profitable
why are shareholders interested in a profit and loss account?
- to look at a businesses profitability for higher dividends
- trends in net profit over time shows how risky investments are
- proportion of profit given as dividends
- may look at relative changes in revenue and costs to see those that can increase rev without increasing costs
why are managers interested in a profit and loss account?
- made for each departments to compare departments and know where to cut costs
- compare with competitors to assess performance - if rev declines against comp firm may advertise to attract customers
- useful tool of decision making
why are loan providers interested in a profit and loss account?
- interested in operating profit in order to repay loans
- may deem a business with a low operating profit as too risky to loan to
why are suppliers interested in a profit and loss account?
- check revenue to make sure thy will be paid back on time
why are employees interested in a profit and loss account?
- check profitability to make sure the business is likely to continue trading and have job security
- look at net profit to see if they can get a pay rise or bonus
what is a statement of financial position(balance sheet)?
shows the assts and liabilities of a business at a particular point in time
why are shareholders interested in balance sheets?
- check if they are investing in growth strategies (investment in non current assets)
- high reserves may = high dividends
- high gearing = risky as interest payments may cause them to receive lower dividends
why are stakeholders interested in balance sheets?
- liquidity and solvency
what is liquidity?
ability to turn assets into cash
what is solvency?
ability to pay debts
why are mangers affected by solvency and liquidity?
- assess of it will go bankrupt
- make decisions to prevent this eg selling non current assets
why are suppliers affected by solvency and liquidity?
- solvent firm with liquid assets will be better at paying credit given and how much credit to offer
why are loan providers affected by solvency and liquidity?
- ability to pay back loans and interest
- one with assets exceeding liabilities is less of a risk than an insolvent firm
what are the 4 components of HR?
- labour productivity
- labour turnover
- labour retention
- Absenteeism
what is labour productivity?
the amount of output per worker
how do you calculate labour productivity?
output per period/number of emplyees
why does HR look at labour productivity?
- HR can have positive impacts on productivity by motivating and engaging employees
- if labour prod is increasing workers might receive bonuses or pay raises form HR
- if labour prod is decreasing HR may try to retain staff or offer redundancies to replace them skilled labour
- HR has to consult labour before making decisions regarding productivity
- compare with competitors productivity to see if improvements need to be made
what is labour turnover?
measures the percentage of staff who leave
how do you measure labour turnover?
number of staff leaving/average number of staff employed x100
how do you calculate average number of staff employed?
(staff at the start of time period + staff at the end of the time period) /2
what are some factors affecting labour turnover?
- type of business
- pay and reward
- working conditions
- opportunities for promotion
- competitor actions
- standard of recruitment
problems with labour turnover?
- higher costs (recruitment + training)
- increased pressure on remaining staff
- disruption to production/productivity
- harder to maintain required standards of quality and customer services
ways to reduce labour turnover?
- increased delegation
- job enrichment
- higher wages
- better training
- better competitive pay
what is labour retention?
measures a businesses ability to keep its employees
how do you measure labour retention?
(number of staff at start of period - number of leavers) / (number of staff employed at start of period) x100
how to improve labour retention?
- improving the induction process
- highlight opportunities available to all employees
- reinforce values and goals of the business to make employees feel valued and included
what is absenteeism?
the proportion of days missed by employees
how do you calculate absenteeism?
(number of days of staff absence in a time period) / (number of staff employed x time period) x100
limitations with absenteeism calculation?
doesn’t distinguish between different causes of absenteeism such as:
- genuine physical or mental illness
- high stress levels
- low staff morale
- bullying or harassment
- strikes
- dangerous work
why is absenteeism bad?
- costly with temporary staff or sick pay
what are the strategies to improve the human resource figures?
- financial rewards
- employee share ownership
- consultation strategies
- empowerment strategies
how do financial rewards improve the HR figures?
- motivate to work harder and increase prod to gain a financial reward
- increases retention as they are unlikely to get better pay elsewhere
- bonuses paid for long term service or lack of absenteeism
limitations of financial rewards?
- if workers are absent for a genuine reason they may find this system unfair and become more demotivated
how does employee share ownership improve the HR figures?
- firms may reward staff with company shares
- reduce turnover because leaving loses their right to obtain shares.
- increases productivity as they want the business to be profitable in order to receive high dividends
limitations of employee share ownership?
- difficult for employees to see connections between their work and dividends
how do consultation strategies improve the HR figures?
- involve employees in the decision making
- boost morale as employees feel valued
- reduces absenteeism and increases labour retention
limitations of consultation strategies?
- make decision process longer and more costly
- may make mistakes as lots of opinions to consider
how do empowerment strategies improve the HR figures?
- giving more control and responsibility over work
- increased motivation and productivity
- giving decision making power and suggest improvement s eg in quality circles
- giving them the resources and training to do their job well
limitations of empowerment strategies?
- managers who distrust employees or dislike delegation will struggle with empowerment
ways to improve labour productivity?
- staff training
- invest in capital equipment
- improve working conditions
- measure performance and se targets
- performance related pay
- streamline production process = use a CPA to reduce
