3.7 Analysing the strategic position of a business Flashcards
Define balance sheets
Balance sheets provide a snapshot of the assets and liabilities of a business at a point in time
What are balance sheets also referred to as?
Financial statements
What is an asset?
What the business owns
What are liabilities?
What the business owes
What are non-current assets (fixed assets)?
Assets that provide a benefit for the business in the long term
Give 2 examples of fixed assets (non-current assets)
Buildings and machinery
What is a current asset?
Assets that will be used up or sold in the short term and the cash balances kept in the business
Give 3 examples of current assets
Stocks, Debtors and cash
What are current liabilities?
What the business owes in the short term
Give 2 examples of current liabilities
Creditors and bank overdraft
What are non-current liabilities?
What the business owe in the long term
Give 3 examples of non-current liabilities
Loans, mortgage and car finance
What is working capital?
The money available for the day to day runnings of a business
Working capital formula
Current assets - current liabilities
Net assets formula
Net current assets + non-current assets - long term liabilities
What is capital employed always equal to?
Net assets = capital employed
Capital employed formula
non-current liabilities + total equity
What is a creditor?
An individual or business that has lent funds to a business and is owed money
Define income statement
A financial statement showing a businesses revenues and costs and thus its profit or loss over a period of time
What are the 6 types of financial ratios?
- Current ratio
- Gearing
- ROCE
- Payables days
- Receivables days
- Inventory turnover
What is the current ratio?
Current assets : current liabilities
Gearing formula
[Non current liabilities / (total equity + non current liabilities)] X 100
What does ROCE stand for?
Return on capital employed
ROCE formula
[Operating profit / (total equity + non current liabilities)] X 100
Payback period formula
(Income required / net cash flow from next year) X 12
Average rate of return formula
(Average annual profit / initial cost of investment) X 100
Net present value formula
Sum of (Net cash flow X discount factor) = Net present value
Give three benefits to financial analysis
1) Useful for comparing a business’s current performance to its competitors performance
2) Helps managers make decisions based on the company’s financial strengths and weaknesses
3) Potential investors and lenders can use the analysis to decide if they want to invest or lend to the business
What is the biggest disadvantage to financial analysis?
Financial analysis doesn’t cover anything that is qualitative
What are the two things that gearing shows?
Shows where a business gets its capital from and how vulnerable a business is the changes in interest rates
What are core competences?
Core competences are the capabilities of a business that are unique to that business and give it a competitive advantage over its rivals. They are capabilities that rivals do not have
What are the 2 models that are used to measure overall performance?
- Kaplan and Norton’s Balanced Scorecard
- Elkington triple bottom line
What are the four perspectives of the balanced scorecard?
Financial
Customer
Internal processes
Learning and growth
What does KPI stand for?
Key performance indicator
The balanced scorecard looks at 4 persepctives, what does it measure within in these perspectives? And how are they all linked?
Efficiency and effectiveness is measured within each and they are linked to the overall strategy and vision of the business
For each perspective on the balanced scorecard, what is considered when analysing it?
Objectives
KPIs
Targets
Initiatives are identified that are key to success
How is the balanced scorecard model balanced?
Improvements in one area cannot be made at the expense of improvements in another.
However, improvements in one area often have a positive impact on another area.
What are the 3 p’s in Elkington’s triple bottom line model?
People
Profit
Planet
What is represented by the overlapping area in the centre of the triple bottom line model?
Sustainability
How is sustainability achieved in the triple bottom line model?
Sustainability is achieved when there is an ideal balance between social, environmental and financial performance
What is the mission of a business?
The mission of a business is its overall purpose
What influences the mission of a business?
It’s influenced by what are the owners want the business to achieve, their personal values and beliefs, and what market opportunities there are
What are the four main factors that influence corporate objectives?
- Ownership - the form of the business and whether it’s for profit or nonprofit
- Short termism
- Internal environment – size, culture and resources of the business
- External environment - PESTLE