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Business A-Level > Topic 7 Analysing Strategic Position > Flashcards

Topic 7 Analysing Strategic Position Flashcards

1
Q

What is SWOT analysis?

A

strengths, weaknesses, opportunities, threats

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2
Q

Value of SWOT

A
  • inform if business has competitive advantage or disadvantage
  • useful for developing strategy
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3
Q

Formula for payback

A

(outlay outstanding/ cash inflow in year of payback) x 12

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4
Q

Steps to ARR

A
  • average rate of return
    1. total profit
    2. average annual profit
    3. ( average annual return/ investment) x 100
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5
Q

Steps to NPV

A
  • net present value
    1. net cash flow column x discount factor column = NPV column
    2. add NPV column
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6
Q

Purpose of payback

A
  • tells you how quickly investment cost is covered
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7
Q

Pros of payback

A
  • easy to calculate and understand
  • higher accuracy because it is short term BUT long term because inaccurate
  • good for cash flow problems
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8
Q

Cons of payback

A
  • assumes no change in future and external factors

- no insight into profitability and relevance to profit/ cost

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9
Q

Other than quantitative factors

A
  • company objectives
  • company finances
  • confidence in data: bias
  • social responsibilities: ethical considerations eg. job losses when moving abroad
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10
Q

Purpose of ARR

A
  • compares two or more projects to find out which has the best return in relation to investment
  • compares whether an investment return is better than bank return
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11
Q

Purpose of NPV

A
  • shows the value of money in the future (the value of money decreases over time) by taking into account interest rates
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12
Q

Pros of NPV

A
  • creates opportunity cost of investing elsewhere eg. bank

- repeat calculations for different interest rates: optimistic VS pessimistic

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13
Q

Cons of NPV

A
  • difficult to choose a discount rate
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14
Q

What do businesses think about when investing?

A
  1. interest rate
  2. profit level
  3. alternative investments
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15
Q

2 Main risks and uncertainties of investment decisions

A
  1. costs higher than expected

2. sales lower than expected

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16
Q

The issues with forecasting future sales

A
  1. timescales: future is uncertain
  2. new markets: less past information/ data
  3. competitors
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17
Q

Solving the issue of costs being higher than forecast

A
  1. negotiate prices with suppliers: fixed or variable
  2. create what-if scenarios
  3. ensuring sufficient financial assets are available
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18
Q

APPLICATION TO EXAM

A
  • think about the type of manager:
    1. inexperienced = too-optimistic
    2. experienced = pessimistic
  • think about the industry:
    1. fast growth, subject to rapid change = risky, volatile
    2. highly predictable, stable = safe, secure, reliable
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19
Q

What is Sensitivity Analysis?

A

comparing pessimistic, expected, and optimistic figures and seeing the difference between pessimistic and optimistic: larger the difference, larger the risk

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20
Q

What does a balance sheet show?

A
  • current assets and liabilities
  • non-current assets and liabilities
  • equity/ capital
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21
Q

What does an income statement show?

A
  • revenues
  • cost of goods
  • gross profit
  • overhead costs
  • operating profit
  • taxes
  • profit for the year
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22
Q

What time period does a balance sheet show?

A

one day

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23
Q

What time period does an income statement show?

A

one year

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24
Q

Who looks at income statements?

A
  • shareholders: to assess the profitability
  • government: corporation tax and investment
  • suppliers: reliability, stability
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25
Q

Uses of income statements

A
  • measure success compared to previous years
  • assess actual performance against expectations
  • help obtain loans or other credit
  • enables owners to plan future investment
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26
Q

What happens to profit after taxation?

A
  • dividends

- retained

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27
Q

What is the liquidity ratio and its formula?

A

current ratio

= current assets/ current liabilities : 1

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28
Q

How to get working capital?

A

current assets - current liabilities

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29
Q

What does the current ratio show?

A
  • short-term health

- ability to survive day-to-day without running out of cash

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30
Q

Current ratio interpretations

A
  • less than 1: inability to pay debts

- more than 1: the ability to pay debts BUT opportunity cost - not making most efficient use of resources

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31
Q

To improve the current ratio

A
  • sell under-used fixed assets
  • raise more share capital
  • increase long-term borrowing
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32
Q

Issues with current ratio

A

ratio suggests you receive all receivables and sell all stock

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33
Q

The formula for gearing ratio

A

(non-current liabilities/ capital employed) x 100

34
Q

The formula for capital employed

A

total equity + non-current liabilities

35
Q

The mark for highly geared business

A

50% and above

36
Q

What does the gearing ratio show?

A
  • long-term health
  • how much long-term borrowing a firm has
  • how vulnerable and susceptible a firm is to interest changes
37
Q

Gearing ratio interpretations

A
  • over 50% mark significantly: riskier to invest, fewer investments by banks and investors
  • less than 50% mark: less risk, secure, stable firm to invest into
  • too small: a firm that does not take risks, investors less likely to invest as return may be small
38
Q

Altering gearing ratio

A

to increase:

  • buyback shares
  • obtain more loans

to decrease:

  • sell (issue) more shares
  • retain more profits
  • repay loans
39
Q

Why would a firm want to increase its gearing ratio?

A
  • to invest and grow

- opportunity cost

40
Q

What are the 3 types of profitability ratios?

A
  • ROCE: return on capital employed
  • gross profit margins
  • net profit margins
41
Q

The formula for gross/ net profit margins

A

[(gross profit/ net profit)/ revenue] x 100

42
Q

Formula for ROCE

A

(operating profit/ capital employed) x 100

43
Q

How does the type of industry effects profitability ratios?

A

supermarkets: more price competitive, making profit across a wide range of products
VS
restaurants: more quality competitive, making profit from each product

44
Q

What does ROCE show?

A

the % of the profit generated from the funds invested

45
Q

ROCE interpretations

A

the higher the value the better:

  • resources are being used efficiently
  • good profitability
  • higher dividends for shareholders
  • more investors
  • easier to gain loans
46
Q

ROCE compared to the bank interest rates

A

If ROCE is lower than the % return offered on interest-bearing bank accounts, the firm owner would have been better off keeping the money in the bank, taking little risk

47
Q

Altering ROCE ratio

A
  • increase the level of profit generated by the same amount of capital
  • maintain levels of profit and decrease the amount of capital
48
Q

The 3 types of efficiency ratios

A
  • inventory turnover
  • receivables days
  • payables days
49
Q

The formula for inventory turnover

A

cost of goods sold/ inventories

50
Q

The formula for receivables days

A

(receivables/ annual revenue) x 365

51
Q

The formula for payables days

A

(payables/ cost of sales) x 365

52
Q

How to calculate how many days it takes to re-order inventory?

A

365/ inventory turnover

53
Q

What does inventory turnover measure?

A

the number of times per year a firm sells and replaces its inventories

54
Q

Inventory turnover interpretation

A

depends on the industry:

  • bakery: the higher the better as goods are more perishable
  • second-hand car dealer: lower turnover as it takes longer to sell
55
Q

Altering inventory turnover ratio

A
  • reducing level of inventories held: JIT

- increasing sales without increasing inventory level

56
Q

What does receivables days show?

A

how long on average it takes the firm to collect debts owed by customers

57
Q

What does payables days show?

A

how long on average it takes for a firm to pay its suppliers

58
Q

Interpretation of receivables days

A

depends on the industry

59
Q

Reducing receivables days

A
  • offering early-payment incentives: discount

- debt factoring firms

60
Q

Decreasing payables days

A

paying bills more promptly:

  • but worsens short-term cash and working capital position
  • however, may have long-term benefits if relationships with suppliers improve
61
Q

Comparing receivables and payables

A

ideally, payables should be equal to or longer than receivables which benefits working capital position

62
Q

What is PESTEL?

A

political, economical, social, technological, environmental, and legal

63
Q

Example of political and legal changes

A
  • international trade: taxes and tariffs
  • environmental laws: congestion charges
  • labour market laws: health and safety legislation
  • competition laws: protect consumers from effects of anti-competitive prices
64
Q

Examples of the economic environment

A
  • GDP
  • government economic policy
  • exchange rates
  • inflation
  • unemployment
65
Q

GDP

A
  • gross domestic product: the number of goods and services produced within a country
  • economic growth or decline/ recession
  • impacts unemployment and business demand
66
Q

The Economic Cycle

A

recession, slump, recovery, boom

67
Q

Government economic policy

A

Fiscal:

  • government spending and taxation
  • spending: infrastructure, healthcare, and education
  • taxations: income, VAT, national insurance, and corporation tax

Monetary:
- interest rates set by the Bank of England (MPC) to control inflation and exchange rates

68
Q

Exchange rates SPICED

A

stronger pound imports cheaper, exports dearer

69
Q

Exchange rates impact on businesses

A
  • increase or decrease revenue

- increase or decrease quantities sold: rise or fall in sales

70
Q

Inflation

A
  • a general increase in price levels over a period of time
  • measured by CPI index
  • target of 2%
  • low = price stability
71
Q

2 types or Causes of inflation

A
  • demand-pull inflation: demand increase = price increase

- cost-push inflation: cost increase = price increase

72
Q

Advantages of inflation

A
  • assets worth more eg. value of property

- borrowings repayments decrease

73
Q

Disadvantages of inflation

A
  • sales lost to foreign competition as imports become cheaper
  • decrease spending = decrease profitability
74
Q

Definition of unemployment

A

number of people able, available, and willing to find work and are actively seeking work but are not employed

75
Q

Types of unemployment

A

seasonal: tourist areas
structural: mismatch skillset
frictional: transition from one job to another
cyclical: caused by demand

76
Q

Business impacts from rising unemployment

A
  • lower spending
  • demand for inferior goods increase
  • greater supply of labour force so recruitment is easier
  • decreases staff morale: feel insecure and worried about their job
77
Q

Business impacts of low unemployment

A
  • staff feel secure = higher morale and motivation
  • demand increases
  • harder to recruit and gain new skills = possibly having to increase salaries to attract new staff
78
Q

How long can a change in interest rate take its full effect?

A

up to 2 years

79
Q

Impact of an increase in inflation

A
  1. Bank of England increases the base rate
  2. High St. Banks increase their interest rates eg. savings, mortgages, loans, and overdrafts
  3. direct impact on businesses:
    - existing loans: variable rates = costs increase
    - new loans: decrease investments = growth, R&D, technology spending decreases
    - overdrafts: costs increase -> highly geared businesses at most risk
  4. indirect impact to consumers/ households:
    - incentive to save increases = spending decreases
    - variable-rate mortgages increase = decreases disposable income
  5. demand falls = prices fall = inflation decreases
80
Q

Interest rates and exchange rates

A

UK interest rates increase = reward on savings increase = other countries attracted to the UK to save their money in UK banks = need to buy pounds = demand for pounds increase = price of pounds increase = exchange rate increases

Business A-Level (4 decks)

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