Analysing the strategic position of a business Flashcards
What are strategies?
The long term goals made by senior managers.
What is a mission?
The overall reason for the business’ existence.
Therefore, determines the business’ strategic position.
What is a mission statement?
Provides a common focus for everyone within an organisation and hence a common sense of direction.
What are the influences on the mission of a business?
Personal beliefs, values and objectives of the leaders/founders.
Business ownership e.g. sole trader or company.
Values and relative power of shareholders.
Degree of competition.
What are corporate objectives?
Medium to long term quantifiable targets to fulfil the mission statement.
What is short termism?
Pressure to achieve these objectives within 2 years.
Will not be thinking about the long term growth e.g. if profits are used to issue dividends rather than reinvest in the business to fund growth.
What are the internal influences on corporate objectives?
Mission statement
Leaders’ personal objectives and values.
Performance
Organisational cultural
Internal shareholders
How does business ownership influence corporate objectives and decisions?
Objectives of a company will be heavily influenced by the
objectives of the shareholders.
However this may vary depending upon whether it is a Plc or Ltd.
A sole traders’ objectives will be predominantly influenced
by the individuals’ objectives.
What are external influences on corporate objectives?
External environment (PESTEL)
Investors’ objectives
Competitive environment
Global markets
External stakeholders
What is functional decision-making?
Decisions made within a business by managers of a specific functional area i.e. a department responsible for one aspect.
How do strategic decisions impact functional decisions?
Marketing- research into new markets, product development.
Finance- raising finance to support growth, proportion of long term funding that in debt.
Operations- relocating production abroad, outsourcing.
HR- delayering.
What is a SWOT analysis?
A diagnostic tool used to identify the internal strengths, weaknesses, external opportunities, and threats to a business.
What are the values of a SWOT analysis?
Structured approach to analysing a business.
Considers both internal and external issues.
What are strengths?
Characteristics that gives the business a competitive edge. In each functional area e.g. strong brand image, skilled workers, good financial positions and cash flow, strong supply chain.
What are weaknesses?
Limitations of the business e.g. not maximising profits.
What are opportunities?
Chances to improve business performance.
What are threats?
External factors affecting the business.
What does the income statement show?
Profits and losses
What does the balance sheet show?
Assets (what is owned) and liabilities (what is owed)
What are non-current assets?
Used to generate revenue
Kept by the business for more than a year.
e.g. vehicles, machinery, building
What are current assets?
The business doesn’t plan to keep it for a long time.
Likely to be turned into cash within a year.
e.g. inventories (cost of storage, can become out of date / absolute), receivables (e.g. owe the business buy now, pay later), cash.
What are current liabilities?
Payables (suppliers you owe), overdrafts.
Debts which must be paid within a year.
What are non-current liabilities?
Debts the business has more than a year to pay e.g. bank loans, mortgages.
What can be used to assess the liquidity position of a business?
Current liabilities and non-current liabilities
How is working capital calculated?
Current assets - current liabilities
focuses on cash flow
How is the current ratio calculated?
Current assets / Current liabilities
e.g. 07:1 for every 70p the company has in current assets, they owe £1 in current liabilities.
What is the benchmark for the current ratio?
2:1
What is the formula for the acid test?
Current assets - stock (can become out of date) / current liabilities
e.g. 0.4:1
less able to over their short-term debts.
Evaluating by looking at receivables
What is the benchmark for the acid test?
1.5:1
What are the liquidity ratios?
Current ratio
Acid test
Focusing on cash flow - the business’s ability to cover their short term debts.
What is return on capital employed (ROCE)?
A measure of how efficiently a business uses capital to generate profits.
Profitability ratio - business’s ability to make a profit.
How is capital employed calculated?
Total equity (amount you invest into the business) + non-current liabilities (amount you borrow to invest)
How is ROCE calculated and what are the implications?
Operating profit / Total equity + Non-current liabilities x100
To determine if it’s good or bad depends on the industry, goals and competitors.
The lower it is, the less efficient the business is using capital therefore if the business is in a competitive industry, ROCE will be lower.
e.g. 27% for every £1 of capital employed in the business 27p is generated in operating profit.
What is liquidity?
The business’s ability to meet short-term debts and day-to-day expenses.
If a business can not meet current liabilities from current assets then it is at risk of failure if creditors demand immediate payment of debts.
How can liquidity be improved?
Increase current assets and/or reduce current liabilities:
-sell assets that are no longer being used i.e. turn them from a non-current asset to a current asset (cash).
-move cash balances from current accounts to high interest-bearing accounts so their value increases more rapidly.
-switch to long-term sources of finance.
-monitor debtors to avoid bad debts.
What is gearing (%)?
Measures what proportion of a business’s capital is funded through long-term loans. (shown in non-current liabilities).
How can gearing be calculated?
Non-current liabilities / Total equity + Non-current liabilities x100
If gearing is above 50%, the business’s risk increases.
What are efficiency ratios?
Assess the internal management of a business i.e. how efficient are managers in controlling the current assets.
Look at the management of cash and inventory:
Payable days (current liabilities)
Receivable days
Inventory turnover
How can payable days be calculated?
Payable days (creditors- people that the business owes) = Payables / Cost of sales x365
How can receivable days be calculated?
Receivable days (people who owe the business) = Receivables / Sales revenue x365
What is inventory turnover?
Measures how frequently a business turns over its inventory in a year (how quickly do they sell their stock).
Will vary depending upon the nature of the firm e.g. fashion retailer at least each season.
How can inventory turnover be calculated?
Cost of sales / average inventory held (opening stock + closing stock / 2)
What is the value of financial ratios when assessing performance?
Provides a tool for the interpretation of accounts.
Structure from which comparisons can be made (overtime or with other businesses).
Aids decision-making (internally or externally by investors).
What are the limitations of financial ratios when assessing performance?
Possibility that account have been window dressed (there is a suspicion or risk that the company’s financial statements have been deliberately altered or presented in a misleading way to give a more favourable impression to investors, stakeholders, or regulators).
Need to consider reasons behind ratios e.g. is ROCE lower than previous years because of an investment programme.
Quantitative information only.
Why may a business try to have a longer payable days ratio?
To ease cash flow problems
What may a short payable days result in?
Discounts from suppliers