Theme 3 - Assessing competitiveness Flashcards
(60 cards)
1
Q
Statement of comprehensive income (profit and loss account)
A
Shows if a business has made a profit or a loss during the year showing a firms revenue, costs and profit
* Part of the legal documents that must be published each year by LTD or PLC companies
* Indicates if a firm is profitable, profitable firms have a positive net profit
2
Q
Key information on SOCI
A
- Sales revenue = QS x SP
- Money into the business through ordinary training
- Cost of sales = the total expenses a business incurs to manufacture the products it sells
- Gross Profit = revenue - cost of sales
- Used by managers to judge which products or services are most profitable
- Expenses = costs to the business that has noting to do with stock or production process
- Operating profit = a true measure of how much profit/loss the business has made
- OP= GP - Other operating costs
- Used by investors to see how hard their money would work if it was invested into the business
3
Q
Shareholders interest in SOCI
A
- Want to see how profitable the business is, higher profitability the higher the dividends
- Look at final profit figure
- Trends in net profit overtime show how risky their investments are - how much is spent on dividends
- Good firms increase revenue without increasing costs too much
4
Q
Investors interests in SOCI
A
- Show how profitable the business is
- Is it worth investing
5
Q
Employees and managers
Interest in soci
A
- Interested in the revenue and expenses of the firm overtime to see if theyre changing - need to work out why there are changes
- SOCI for each department so managers compare between departments to help identify costs to be reduced
- Compare soci with competitors see where it is performing
- Employees are interested in the profitability
6
Q
Loan providers SOCI
interest in soci
A
- Operating profit where interest on loans is paid
- Unwilling to loan with a low op as business wont pay interest
7
Q
Suppliers SOCI
interest in soci
A
- Revenue in past is it enough to pay suppliers on time
8
Q
Statement of financial position ( balance sheet)
A
Shows the assets and liabilities of a firm on a particular day of the year
* Needs to be published by ltd and plc
* Comparing from same date allows firms to pick out trends and evaluate financial performance
* Shows how much a firm is worth
9
Q
Key information
A
- Current assets = items that the business owns that will pay the business in under 1 year
*E.g. stock sold and turned into cash within a year, Debtors those who owe the business pay within a year - Non current assets = items that the business owns that will pay the business back after 1 year
- Current liabilities = items business own that need to be paid by the business within a year e.g. trade payables
- Long-term liabilities = items that the business needs to pay but not due for more than 1 year e.g. a loan, mortgage
10
Q
Liqiuidity
A
the ability of a business to turn assets into cash
11
Q
Solvency
A
businesses ability to pay its debts (current assets larger than liabilities)
12
Q
Managers and owners interest in soci
A
Managers and owners look at firms solvency and liquidity to see if its going bankrupt and make changes to this happening
13
Q
Suppliers interest in soci
A
Suppliers look to see how liquid firms assets are as well as solvency better paying bills on time and whethet to offer credit
14
Q
Loan providers interest in soci
A
Loan providers will want to know firms ability to pay back loans and and interest and firms with assets larger than liabilities is less of a risk
15
Q
Governments interest in soci
A
Governments use sofp to calculate amount of tax (VAT or Corporation tax) that a company has to pay
16
Q
Shareholder interest in SOCI
A
Shareholders will analyse the accounts and decide whether their investment is being used effectively
17
Q
Potential investors interest in soci
A
Potential investors will analysie accounts to determine whether the company will make a good investment
18
Q
Creditors interest in soci
A
Creditors will use accounts to check companys ability to pay their bills
19
Q
More info on soci
A
- A= L+C
- A=ASSETS, L= LIABILITIES, C= CAPITAL
- Two sides must balance as money hasnt dissolved
- Comparing from same date allows stakeholders to pick out trends in a firms finance and evacuate its financial position
- Stakeholders can use sofp as indicator of whether firms profit is likley to increase or decrease
- Increase in reserves suggests an increase in profit
20
Q
Cost of Sales
SOCI
A
The total expenses a business incurs to manufacture the products it sells
The accumulated total of all costs used to create a product/service that has sold
21
Q
Gross profit
SOCI
A
GP =Revenue - Cos
Used by managers of business to judge which products or services are the most profitable
22
Q
Expenses
SOCI
A
Costs to the business that have nothing to do with stock or the making of the product
E.g. administration, advertisting, petrol and insurance
23
Q
Operating profit
SOCI
A
OP = GP-EXPENSES
A true measure of how much profit/loss the business has made iver the year before tax is deducted
Used by investors of the business to see how hard their money would work if it was invested into the business
24
Q
Non current fixed assets
A
Items that a business owns that will pay the business back after 1 year e.g. machinery, vechiles, property
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Current liabilities
Items a business owes that need to be paid by the business within 1 year
e.g. trade payables - payment to suppliers
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Long term liabilities
Items that business needs to pay but is not due for 1 year
Loan e.g. 10 year payments
Retirement provision e.g. penision fund monthly payments
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Ratio analysis
Extracting information from financial accounts to assess business performance and answer questions including profitability, growth effciency etc
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Key info
Info extracted from the profit and loss account, revenue, cos , gp, op np and baalcne sheet ca cl, inventory, tarde recievables and payables lyl, capital and reserbes
Ratio analysis supports evidence based decision making, as it provides measurable data that can be used to support judgements and compare performance against objectives
SOCI - GPM, OPM, NP M
SOFP - CR, ATR , GR, ROCE
29
Gearing ratio
Shows the long term financial structure of a business, the baalnce of a firms finance that is from non current liabilities (e.g. ling term loans) rather than share capital or resevres equity
Uses lower part of sofp and expressed as a %
Non current liabilities/ capital employed x 100
Capital employed = non current liabilities +equity
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Formula for gearing ratio
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What does it show? GR
A GR above 50% = over 1/2 of firms finance is from long term debt - a highly geared business
GR BELOW 50% = less than half of finance is from long term debt
Can show how vulnerable a business is to interest rate changes
Amount of interest rate is dertermined by interest rates and changes in them
Amount firm can borrow depends on profitablity and value of assets
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Rewards for a business
* Extra funds for expansion by borrowing money, often loan invested projects of technology that increase profits by more than enough to pay off loan repayment
* High gearing attractive during growth phase a firm with ambitions have expansion plans and has growing profits along with strong product portfolio borrow heavily in order to fund expansion and gain a competitive advantage increase a firms gearing
* During times of growth surplus of profit high gearing is good for businessess
* Might not be able to afford repayments not enough profit to repay the loan and interest
* Risky as whhilst ir msy br low at start they can rise need to pay back
* Higher amount borrowed = greater rise in gr
* Firm with higher gearingr atio more lilleu to be affectrd by changes in interest rates than a low geared business
* Borrow for diff reasons risks can vary
* Lenders reward is getting paid interest shareholders reward is a share dividend can sell share as profifit if share price ricses
* Gearing acts as risk assessment that investors use to help them to decide whether to invest if s firm (more borrwoed mroe inyerest may affect profit and return on investment)
* High gearing can lead to high profits shareholders can see large dividends and big increase in share price more likleyt o invest
* Risk of high gearing to share holders is that the business might fail if it cant afford to keep up with repayments - liquedation lenders will get what theyre owed but sh lose most/ all momey imbesyed
* Investors will look at why business has invested
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Risks for a business
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Risk & Reward for investors
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Return on capital employed
Profitability ratio compares the profit made by a business to the amount of capital invested
Measures how effectivelu a business uses the capital invested in the buisness to generate profit
A key performance indicator that can be compared overtime and also with competitors and other potential capital investments
Higher roce - more beneficial
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ROCE formula
ROCE= op/capital employed x 100
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Advantages of ROCE
Ads:
* Useful in looking over a businessess performance over a period of time
* Stakeholders can spot trends indetify financlial strengths and weaknesses of the business
* Needs to take into account of variable factors that change overtime
* Venture capitalists and other investros use ratio analysis to support whether they invest in a business or not
* Banks and insurance providers will use ratios to determine thel level of risk a business presemys amd dery,omes yjr [dpicys oy ,au ne sioyed to
* Used to make business decisions
* Manages how to finance growth (already high geared may be better to raise capital to avoid increasing gearing with more loans
* Shareholders compare the accounting ratios between firms to decide where to buy shares npm higher could include higher dividends compare with other firms
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Disadvantages of ROCE
Ignores any non-numerical factors so they dont provide an absoliye means of assessing a firms financial health e.g. if there is a collapse in competition will lead to a rise in profit and rev increase roc3 without any decisions being made
* Quality of accounts = accounts may have been manipulated to present a particular financial picture, only provide a snapshot of their data on fiancnaes
* Internal strengths of the business wont be in rations such as quality of staffs
* External factors such as economic climate arent relflected in the figures will have to compare with competitors invested in them
* Future changes arent considered tech or interest rates
* Important for businesses to comapre, only signifcany where similarities exis
39
Labour productivity
A measure of ouput per emplooyee ina atimer periods
Measures the effciency of a workforce
Businesses will seek to increase productivity to reduce the average costs per unit to produce
Can be improved through kaizen, tqm lean production
HR can positivily impacy on labour productivity by making sure all employees feel engages and motiavted and within the right roles
If lab producitivty is increaisng reward employees with bonuses which will keep employees motivated
If lab productiviyty is decreasing offer bigger incentives retrain staff or make redundancies
Need to consult with staff before making a decision
Higher productivity improves firms competitiveness
40
Key info Lab productivity
Labour productivity = output per period/ number of employees
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Labour productivity formula
Output per period/ number of employees
42
Labour turnover
The rate at which employees leave the business in a 1 year period
A high turnover means staff arent happy within the business so they want to leave
A high turnover means higher costs of recruiting and training new staff cost of losing experienced staff
A high labour turnober can be due to poor management leading to workers losing committment
Poor recruitment and selection approach - satff leave
Lower wages
Workers attratced to employment opportunitoes fpr wprlers to seek work around a wider geographical area
Growth of locla firms
Problems:
Increased recruiment selection
Increased induction and training
Lower productivity levels as workers settle into new roles
Opportunities
Hire staff with exisiting skills not training new ideas and creativity into business
New perspectives and approaches to problem solving
Can improve business performance
Reduce labour turnover by delegating, jon enrichemeny, higher wages better training
Measure of perfomance
Some industries habe naturally higher turnober
Some downt want to reduce it new creative staff
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Key info labour turnover
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Labour turnover formula
Number of staff leaving/average number of staff employed x 100
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Reasons for high lab turnover
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Problems and opportunities with high labour turnover
*Problems:
Increased recruiment selection
Increased induction and training
Lower productivity levels as workers settle into new roles
Opportunities
Hire staff with exisiting skills not training new ideas and creativity into business
New perspectives and approaches to problem solving
Can improve business performance
Reduce labour turnover by delegating, jon enrichemeny, higher wages better training
Measure of perfomance
Some industries habe naturally higher turnober
Some downt want to reduce it new creative staff
47
Absenteeism
Absenteeism = the habitutal non prescence of an employee at work
48
Causes of absenteeism
* Job dissatisfaction
* Physical/mental illness
* High levels of stress
* Bullying in workplace
* Using it to increase holidays - bad reputation can lose their job
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Problems with absenteeism
* Costly for business cover sick pay and temporary staff
* Need to consider how to reduce to reduce costs
* Output will be reduced
* Consult with staff
* Compare with competitors
* Some is natural and temporary e.g. catching the flu
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Ways to reduce absenteeism
* Flexible workforce
* Interesting and challenging jobs
* Improving working conditions
* Improving work relationships
* Attendance bonuses
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Formula for absenteeism
Absenteeism = Number of staff absent in time period / No of staff employed x time period X 100
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Labour retention
Labour retention is a measure of a businesses ability to keep employees
53
Key info labour retention
* Higher turnover, lower retention rate - keeps only small proportion fo employees
* Increase retention by improving induction process
* Highlight opportunities avaliable to all employees
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Formula labour retention
Labour retention = number of staff employed at start- number of leavers/ number of staff employed at start X 100
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Stratergies to improve HRA
Financial rewards
Employee share bonus
Consultation stratergies
Empowerment stratergies
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Financial rewards
* Motivate employees to work harder to increase their profitability ubcrease staff retention
* E.g. commision in sales rewards
* Bonuses on salary
* Piece rate pay
* Bonuses for lack of absenteeism
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Employee share bonus
* Reward staff - SAYE schemes, can use sacings to buy company shares
* Reduce staff turnover as they will lose right to obtain shares
* Increases motivation and productivity
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Consultation stratergies
* Involve employees in the decision making process
* Improve morale of staff as they feel more valued - reduce absenteeism and increase lab productivity and retention rates
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Empowerment stratergies
* Empower employees by giving them more control and responsibility
* Giving employees more authority to make decisions and suggest improvements (quality circles)
* Employee recognition of abilities and trustworthiness to motivate them
* Managers who dislike employees will struggle with empowerment
* Can be seen as an excuse to cut costs, delayer and make managers redundant
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