7 - Analysing Strategic Positions 📍 Flashcards
Define balance sheets
Provide a snapshot of the assets and liabilities of a business
What are assets?
What a business owns
What are liabilities?
What the business owes
Give examples of current assets
- cash in the till
- stock
- debtors
Gives examples of non-current assets
- machinary
- van
- warehouse
Give examples of current liabilities
- tax bill
- overdraft
- creditor
Give examples of non-current liabilities
- bank loan
- mortgage
Define working capital
The amount of money available day to day
How do you calculate net assets?
NC assets + C assets - C liabilities - NCL
What is capital employed equal to?
Net assets = capital employed
How do you calculate gross profit?
Sales revenue - cost of sales
How do you calculate operating profits?
gross profit - expenses
How do you calculate net profit?
Revenue - all costs
(Same as profit for the year)
Define an income statement
A financial statement showing revenue costs and profits
Formula for current ratio
Current assets / current liabilities
What should current ratio always be higher than?
1:1
What does a current ratio below 1.5:1 suggest?
A liquidity problem
Define liquidity
A firms ability to pay their short term debts (liabilities)
What does a ratio of above 2:1 suggest?
Poor management of resources with capital tied up elsewhere
Define gearing
Investigating a firm’s reliance on borrowing and what proportion of capital invested has come from bank loans
What is gearing measured in?
%
Formula for gearing
NCL / capital employed X 100
How do you calculate capital employed?
Total equity + NCL
What is a high gearing value?
above 50%
What is a low gearing value?
Less than 25%
What does a low hearing value suggest?
A firm has raised most of its capital through alternative sources of finance (retained profits/selling shares)
What is the negative effect of a low gearing figure?
Company may miss out on potential opportunities and may not be investing in growth
Benefit of high or low gearing?
Implies business is heavily investing in growth
High
Benefit of high or low gearing?
Lower interest and loan repayments, positively impacting liquidity
Low
Benefit of high or low gearing?
Less need to raise finance through share capital, so less shareholders, so more control
High
Benefit of high or low gearing?
Makes the business a more attractive investment
Low
Benefit of high or low gearing?
Less dividend payments will be required as share capital isn’t needed
High
Benefit of high or low gearing?
Bank loans are a cheap source of finance when interest rates are low
High
Benefit of high or low gearing?
If shares are sold as an alternative, share capital doesn’t need to be repaid
Low
What does return in capital employed show?
Shows investor how efficient the business is at producing profit based on the capital invested
Formula for ROCE
Operating profit / capital employer X100
What is a good figure for ROCE
the higher the % the better
What does ROCE give an idea of?
How successful management is at running the business and controlling costs
Define a debtor
Someone owes you money
Define a creditor
Money you owe
Formula for inventory turnover
Cost of goods sold / average inventory held
What is inventory turn over measured in?
How many times
Define inventory turnover
The number of times the average stock held is sold
What factors could influence inventory turnover?
- popularity
- type of product
- type of business
- change in trends
- quality of research
- product portfolio
What figure is wanted for inventory turnover and why?
The higher the figure the better as it implies they’re selling goods and shifting stock fast
Formula for receivables days
Receivables / revenue X 365
What is receivable / payables days measured in?
Days
What causes high receivables days?
Offering long credit periods
What causes lower receivable days figures?
Dealing mainly in cash, or not offering credit sales
Formula for payable days
Payables / cost of sales X 365
What will cause lower payable days figures?
Businesses paying in cash
Why will a firm want a higher payable days figure than a receivable days?
So they aren’t paying their debts too quickly, and not before they receive revenue
What factors affect the mission statement?
- business size
- nature of business
- external factors
- competitors
- stakeholders
What are internal influences on corporate objectives?
- ownership
- power of stakeholders
- ethics
- culture
- resource constraints
What are external influences on corporate objectives?
- PESTLE
- pressure for short-termism
Define strategy
long term plan of action to achieve objectives
Define tactics
Short term plan involving day to day activities
What does SWOT stand for?
Strengths weaknesses opportunities threats
Which of SWOT is internal?
S W
Which of SWOT is external?
O T
Pros to SWOT analysis
- supports decision making
- can counter threats
- build a competitive advantage
Cons to SWOT analysis
- time consuming
- based on opinion
- external factors can change rapidly
Why is high staff turnover a problem?
- increases recruitment costs
- bad publicity
- worsens customer service
- disruption to production
Non-financial data to analyse marketing
- market capitalisation
- market growth
- market share
- sales growth
- portfolio analysis
Non-financial data to analyse operations
- capacity utilisation
- output per period
- FC + VC
- unit costs
Non-financial data to analyse HR
- absenteeism
- labour productivity
- employee costs
- labour turnover
Define core competences
The unique strengths of a business that can’t be easily replicated by a competitor
What are difficulties of non-financial data?
- can’t predict trends
- usually quantitative
- difficult to judge
Core competences of Apple
- branding
- aesthetics
- iOS software
- adaptability of product
What does short-termism focus on?
focuses on share price, revenue growth, unit costs, ROCE, productivity
What does short-termism ignore?
Staff, quality, sustainability, innovation, brand reputation
What does long-termism focus on?
Quality, innovation, staff, market share, core competences, social responsibility
What is long-termism good for?
Focusing on long-term gains
Elkington’s Triple Bottom Line
What are the 3 focuses?
Profit, people and planet
Elkington’s Triple Bottom Line
What three dimensions of performance does it account for?
Social, environmental and financial
Elkington’s Triple Bottom Line
What is a problem with the model?
- Hard to measure planet and people
- make cause conflict as shareholders want a focus on profit only
Kaplan and Norton’s Balanced Scorecard
What is in the middle of the model?
Vision and strategy
Kaplan and Norton’s Balanced Scorecard
What are the 4 indicators?
Customer
Financial
Learning and growth
Internal business processes
Kaplan and Norton’s Balanced Scorecard
What is each indicator measured by?
KPI’s =
Objectives
Measures
Targets
Initiatives
Kaplan and Norton’s Balanced Scorecard
What does the model not include?
Sustainability
Why are core competences so important?
Add value to a business based on internal success
Porter’s 5 Forces
What are the 5 forces?
Barriers to entry
Buyer power
Supplier power
Rivalry
Substitute threat
Legal changes can cause what opportunities to arise for a business?
- attracts environmental customers
- improves reputation
- retains employees
Legal changes can cause what threats to arise for a business?
- increase prices to cover increasing costs
- competitors may meet laws better/faster
What is the political environment?
The govt actions that impact on the strategic and functional decisions made by businesses
What does competition stop businesses from doing?
- agree prices with competitors
- limit production to reduce competition
- partition markets between each business
How is competition policy achieved?
- preventing monopoly power
- restricting mergers
- driving innovation and productivity
What does competition policy mean?
Improving competitive nature to alleviate market failure
What are the benefits of competition policy?
- lower price
- improved quality
- increased choice
- innovation
- competitive advantage
What is the environmental protection act?
Businesses must improve the control of pollution
What is the environment act?
A business must clean up any contaminated sites it owns
What are the 4 factors of production in enterprise?
- land
- labour
- capital
- entrepreneurial skills
What is de-regulation?
Opening up of markets to new competition through the removal of rules and regulation that created barriers to entry
What does a pollution permit allow?
Allows businesses to produce a legal level of pollution every year
How are pollution permits a financial incentive for a business to reduce pollution?
Permits are tradable on the market, so if a business doesn’t use them all, they can sell them
What is GDP?
Measures the value of all goods and services produced in an economy over a period of time
What are some positives of economic growth?
- higher revenues
- economies of scale
- sustained growth
What are negatives of economic growth?
- shortages of raw materials
- shortages of skilled workers
- can lead to a recession if growth is too rapid
What should GDP grow per year?
2.4%
What determines UK exchange rates?
Supply and demand
What must a business consider when moving in/out of countries?
- ethics
- morals
- laws
- culture
- investment
What strategies might a business take if they are uncertain of exchange rates?
- have less business confidence
- consider outsourcing
- leave countries
What is fiscal policy?
Use of govt spending, borrowing and direct/indirect taxation to impact the economy
What are the two parts to fiscal policy?
- taxation
- govt spending
What are the three main areas of govt spending?
Transfer payments, current payments, capital payments
What is monetary policy?
The use of interest rates and changes to the monetary supply to achieve relevant economic objectives
What has been the main objective of monetary policy?
Keeping inflation low and stable
What factors have contributed to greater globalisation?
- containerisation and easier shipment
- economies of scale
- technological advancements
- less protectionism
Define investment appraisal
Analysing whether investment projects are worthwhile to minimise risk
What are some risks of investment?
- market may change
- fixed assets may be faulty
- higher opportunity cost than thought
- technology may develop faster than expected
Payback period
What is payback period?
The time it takes for a business to pay back it’s initial investment
Payback period
How do you calculate the year of payback?
Identify the net cash flow for each period and keep a running total in a table
Payback period
What are the advantages?
- easy to understand
- focuses on cash flow
- easy to compare
Payback period
What are some disadvantages?
- monetary value may be less in 3 years than today
- encourages short-term thinking
Payback period
How do you calculate the specific month it is paid back?
Divide cumulative cash flow from last no year by net cash flow of first yes year. Then times by 12
Net Present Value
What does NPV mean?
The net return on an investment when all revenues and costs are converted to present value
Net Present Value
How do you calculate?
Multiply all NCF by discount factors, then add then all up and minus year 0
Average Rate of Return
Determines the profitability of an investment
Average Rate of Return
What is the method for ARR?
- Add up all positive cash flows
- Subtract cost of investment
- Divide by lifespan of investment
- Calculate the % this is of initial investment
What should firms do to account for risks and uncertainties?
- make contingencies and allowances
- calculate alternative results
- set more demanding targets
What does it mean if GDP rises?
more goods and services produced = economy is growing
What is CSR?
Companies achieving success whilst at the same time respecting and positively impacting its stakeholders, the environment and society in general
Give some examples of good CSR and ethical behaviour
- free healthcare
- fair trade suppliers
- health and safety
- charitable
Give some examples of poor CSR and unethical behaviour
- child labour
- high emissions
- avoiding corporation tax
Carroll’s CSR pyramid
What are the 4 layers from top to bottom?
Philanthropic responsibilities
Ethical responsibilites
Legal responsibilities
Economic responsibilities
Carroll’s CSR pyramid
What does economic responsibilities involve?
Being profitable
Carroll’s CSR pyramid
What does legal responsibilities involve?
Obeying legislation
Carroll’s CSR pyramid
What does ethical responsibilities mean?
Going beyond what is required
Carroll’s CSR pyramid
What does philanthropic responsibilities involve?
Being a good corporate citizen
What are the pros of CSR?
- brand reputation
- loyalty
- staff impact
What are the cons of CSR?
- higher costs
- stakeholder conflict
- supply chain management
What are some different social changes?
- global population changes
- population movements
- urbanisation
- growth of e-commerce
- changers in consumer lifestyle
