Internal analysis

Question 1

Balance sheets

Answer 1

• snapshot of the businesses financial position at any given time period
• shows all liabilities and assets within the business
• Working capital = current assets - current liabilities

Question 2

net realisable value

Answer 2

the amount the business could get by selling stock right now in its current state- rather than after its been used to make a finished product

Question 3

Current ratio

Answer 3

current assets/ current liabilities

Question 4

ROCE

Answer 4

operating profit/ (total equity+ non current liabilities) x 100

Question 5

Current ratio analysis

Answer 5

For every £1 of liabilities the business would have £X amount of assets.
Businesses would aim to achieve a current ratio of 1.5 - 2
A value of lower than 1 suggests high liquidity issues

Question 6

How to improve current ratio

Answer 6

• decreasing stock levels
• speeding up debt collection
• slowing down payments to creditors

Question 7

How to improve ROCE

Answer 7

paying off debt to reduce non- current liabilities

• improving efficiency to increase operating profit
• ROCE shows how much money the business has made by comparing it to how much money was put into the business

Question 8

inventory turnover formula

Answer 8

cost of sales/ cost of average stock held

Question 9

Inventory turnover evaluation

Answer 9

Tells you how many times within a year a business has sold all its stock.
the ideal turnover is dependant upon the business= are they able to cover demand without have excess stock?
Aged stock analysis allows managers to make sure old stock gets sold before it become obsolete or unsaleable

Question 10

Payable days ratio formula

Answer 10

payables/ cost of sales x 365

Question 11

Payables days analysis

Answer 11

Show the number of days the firm takes to pay for goods it buys on credit from suppliers
This ratio can be used to maximise cash flow - if they have leeway to pay their suppliers later so they can receive cash owed from debtors first

Question 12

Receivables days formula

Answer 12

Receivables/ sales revenue x 365

Question 13

Receivables day analysis

Answer 13

the number of days the business has to wait to be paid for goods it sold on credit.
BEST to have a low receivables days (HOWEVER DEPENDANT ON INDUSTRY) as it can help with cash flow and working capital
An upward trend in receivables can show they are offering longer credit to perhaps attract customers however if it isn’t managed can lead to cash flow issues

Question 14

Gearing ratio formula

Answer 14

Non-current liabilities/ (total equity + non-current liabilities) x 100

Question 15

Gearing ratio analysis

Answer 15

Gearing ratio of below 50% = low geared
- most longterm funding comes from shareholders
-firm can easily avoid loss of profits as it is easy not to pay as high dividends however you cannot negotiate on bank interest rates
above 50% = highly geared
- most long term funding comes from borrowing
- willing to take risks
- highly geared perhaps to fund growth

Question 16

High gearing analysis

Answer 16

Risks:
- may not make a profit due to increase in interest rates
- risky as the cost of borrowing increases
Rewards:
- extra funds for expansion funding profits maximisations
- when interest rates are low high gearing is less risky

Question 17

Values and limitations of ratio analysis

Answer 17

ADV:
- analyse performance over given period
- spot trends
- identify financial strengths and weaknesses
- helps with decision making = low payables may want to increase credit period = improve cash flow
- ratios can be used to analyse whether investors want to invest
- comparison to competitors
DISADV:
- no consideration of non-numerical factors
- the internal strengths of business aren’t considered (quality, efficiency_
- external factors = economic and market environment = competitive market or slump it is ok for the ratios to be lower
future changes such as tech advancements aren’t considered
- past and present data= not good for startups

Question 18

What are the factors involved when analysing overall performance if a business

Answer 18

• marketing
• HR
• operations

Question 19

Competitors comparison (overall performance)

Answer 19

• comparison can put business data into context
• ## benchmarking= taking ideas from rivals and implementing them into your own business

Question 20

Core competencies

Answer 20

The capabilites of the business THAT ONLY THIS BUSINESS CAN DO that give them a competitive advantage
- tech
- specialist staff training
- innovative production process etc.
Core competencies should be developed to meet demand for the market.

Question 21

Kaplan and Norton’s balanced score card

Answer 21

A WAY OF ASSESSING PERFORMANCE

• Financial perspective = ‘how do we generate value for shareholders’
• Internal business process perspective = ‘how can we improve our process’
• The customer perspective = what do our customers value
• The learning and growth perspective = how can we continue to grow and improve

Question 22

Financial perspective (K+N scorecard)

Answer 22

objectives:
- increase profitability
- measured through ROCE, sales growth
- targets - increase ROCE
- initiative - promotional campaigns, increase efficiency of production

Question 23

The internal business process perspective (K+N)

Answer 23

objectives = improve efficiency 
measures= capacity utilisation, unit cost, productivity 
initiatives= different production methods, new tech

Question 24

Learning and Growth perspective

Answer 24

objectives = increase employee development

• measures = labour retention, amount of staff development
• initiatives = increase staff training and development, changing organisational design

Question 25

The customer perspective (K+N)

Answer 25

objectives - improve customer loyalty, attract new customers
measures= market share, number of new customers, brand loyalty
Initiative= speed up delivery times, improve quality of products

Question 26

Elkington’s triple bottom line- measure of performance

Answer 26

PEOPLE, PROFIT, PLANT