Unit 3.7 Flashcards
Balance sheets AKA the statement of financial position
snapshot of financial position of a business - only on ONE day and NOT over the year
Looks at Assets (things owned) and Liabilities ( things owed)
Non current assets
e.g.
- Property
- vehicle
- equipment
Current assets
e.g.
- Cash in the bank
- Stock
- Trade receivables
Less current liabilities
e.g.
- overdraft
- trade payable’s
Non current liabilities
e.g.
- Bank loan
- Mortgage
Influences on the mission of the business - Internal
- Finances
- Ownership
- Shareholders
- HR
- Technology
Example = Amazon which treats staff poorly
Influences on the mission of the business - External
- Market conditions
- Competitors
- What customers want (stakeholders)
- PESTLE
Mission statement
overall purpose of the business
Short-termism
Business focused on achieving short term results e.g. maximising profits in one year - may mean job cuts to reduce costs
Strategy
long term, competitive actions which feed into objectives
Tactics
Short-term actions which feed into your overall objectives
SWOT - Strengths
advantages that he business has in the market - internal to the business so may relate to the owner etc - could be a product or a USP etc
- Examples = Google has 7% stake in Uber and Uber has lower prices compared to normal taxi firms
SWOT - Weaknesses
also internal and may be about the owner or the product - owner may lack experience in the industry etc.
- Examples = low profit margin for Uber drivers and high operating costs
SWOT - Opportunities
external to the business an d may be where gap in the market has been spotted. - R&D department may have also come up with a new product or service
- Examples = very little competition for Uber and Uber is also expanding from 22 to 37 cities worldwide
SWOT - Threats
External to the business and can be any of the PESTLE factors
- Examples = self driving cars being developed by Tesla and problems with local authorities can lead to fines for the company etc. ( all for Uber)
SWOT and strategic decisions
- used as a tool to formulate a strategy of growth and attack to use the businesses strength’s to maximise opportunities in the market.
- can also be used to minimise market threats
- can be used to produce new products
Return on capital employed (ROCE)
how much profit the business returns as a percentage of every £1 of capital invested into the business
Useful to show investors and venture capitalists etc in order to raise capital.
Can also be compared against the industry average to bench mark against competitors
Finally can also be compared against the interest rate so investors can see whether they will make more from investing into the business or creating a savings account.
Can be improved by increasing revenue and reducing costs and non-current liabilities
the higher the figure the better
Current ratio - Pros
- IF stock can be sold then it will be more accurate than an Acid test
- shows short term obligations - can they be met?
- shows whether the company is using the capital efficiently
- shows how much working capital is available to pay off revenue expenditure
Current ratio - Cons
- Inventory included however may not be able to sell all the inventory quickly = inaccurate results
- Doesn’t state where current assets are - could be all in receivables
- snapshot of each day = inaccurate quickly
Acid test / Liquid capital - Pros
- not dependent on all inventory being sold = more accurate
- Shows if businesses can meet short term financial expenditures without selling stocks.
Acid test / Liquid capital - Cons
- reliant on being able to receive receivables
- snap shot of each day = out-of-date quickly
Efficiency ratios
value - dependent on bargaining powers of business and size of business
- want to receive receivables as quickly as possible and put off payables for as long as possible BUT don’t want to damage relations between suppliers and consumers
Trade receivables
current asset on balance sheet
Trade payables
Current liabilities on our balance sheet
Receivable days
shows AVG. time customers take to pay - each industry will have a norm - look out for significant changes
Current ratio AKA the working capital ratio
- ideal is 1.5:1 to 2:1
- below 1.5:1 and the business might not have enough working capital to cover all their bills
- above 2:1 and the money in the business is tied up and not being used efficiently.
Gearing ratio explained
looks at the long term finance of the business and where it comes from - lots of borrowing = high gearing ratio
result over 50% means the business is highly geared - currently businesses don’t want to be highly geared due to the high interest rates.
lowly geared = up to 24%
moderately geared = 25%-50% - most businesses want to be moderately geared
Ltd gearing
long term wins = want to be lowly geared
Plc gearing
short term wins = want to be highly geared - don’t want retained profits
Inventory turnover
shows how many times a company has sold and replaced their inventory over a financial year - lower figure is better than a higher one as companies don’t want stock sitting around
Core competence
what gives the business a competitive advantage
Elkington’s triple bottom line
enables the business to examine performance based on the 3 criteria
- People
- Planet
- Profit
e.g. Patagonia which repairs products for customers = sustainable for the environment - also donates 1% of revenue to environmental causes annually
Operations data
important as it gives the business an idea of capacity utilisation and productivity - some of the highest costs in manufacturing is the business processes so very important
HRM data
help the department to monitor productivity and ensure that the business has the right staff in the right job roles and to also set HRM objectives for the following year.
Marketing data
measures of performance include…
- Costs of any promotional campaigns
- % of repeat business
- Market share %
can be used by the marketing department to monitor performance and outcomes of any marketing activity - helps set marketing objectives for the next year
Core competencies
- the way the business uses it’s resources to achieve a competitive advantage - creates a uniqueness which is distinctive to the organisation.
Value core competencies
understanding these allows the business to grow in 3 ways…
- facilitating strategic development
- encourage innovation
- enforce HRM selection processes
Assessing short term performance
by looking at cash flows actual against forecasted amounts
- short-termism = problem as managers become obsessed with day-to-day issues rather than long-term strategies. - leads to reduction in investment in R&D = less innovation
Assessing long term performance
can use return on capital invested and improvements in profitability levels
Government policy on enterprise
UK government supports small businesses through use of enterprise allowances - encourage more people to become self-employed
Role of regulators
supervise laws and make sure businesses adhere to them. - 90 regulators in the UK which costs GOV £4billion a year, e.g. ofsted and ofcom
Objectives of regulators
correct problems and achieve social, environmental and economic goals in the UK - can also enable innovation
Government policy on infrastructure
government has new infrastructure and projects authority - support successful delivery of infrastructure e.g. schools and railways
Government policy on the environment
department for environment, food and rural affairs - responsible for safeguarding our natural environment and sustaining rural economy
- aided by the environment agency
Government policy on international trade
free and fair trade is important to the UK and world economy.
ensures higher wages and more people being able to access more goods and services at lower costs.
UK’s trade with the world is equivalent to over half the UK’s GDP
Labour market laws - employment rights act
states duties and rights of the employer and employee - e.g. maternity leave
- also includes termination of employment and right to a written contract of employment
Labour market laws - national minimum wage act
sets hourly rates for minimum pay - raises the costs of a business but failure to do so can result in fines.
Labour market laws - national living wage
higher than minimum wage - failure to pay = £20,000 fine
e.g. Wagamama failed to pay £133,212 to 2630 workers
Labour market laws - working time regulations 1998
limit of 48 hours in a working week - also allows for 4 weeks paid leave per year etc.
Labour market laws - pensions act 2008
employers have to pay into an employees pension - businesses fined if not paid
Labour market laws - equality act 2010
protects people from discrimination in the workplace
Environmental legislation
controls pollution in terms of business waste that is disposed of in the air, land and sea
Competition policy
stop collusion (price fixing by businesses agreeing to pay higher prices)
CMA = competition markets authority
Economy
state of a country or region in terms of the production and consumption of goods and services and the supply of money
GDP
value of goods and services produced in the economy - main way of measuring the health of the economy
Taxation and VAT
if the % of VAT goes up then the businesses could pass the extra costs onto the customers. - VAT is now 20%
HRMC
department in the UK that is responsible for collecting tax - tax paid depends on the type of the business and profits.
UK tax for small businesses
- income tax is taken off a business owners salary
- business rates
- National insurance - and by both employee and employer to pay for state pension etc.
- VAT if make over £82,000
UK tax for larger businesses
- Corporation tax = 19%
- VAT at 20%
- business rates
- National insurance contributions
Excise duties
paid by customers on products which have negative effects on society e.g. tobacco and alcohol
Exchange rates
price of one currency in exchange for another
Importance…
- decide price of exports in international markets
- Revenues and profits made overseas
Exchange rates - appreciation
rise in the pound against other currencies - the pound can buy more foreign currency
SPICED
Strong pound imports cheaper exports dearer
WPIDEC
Weak pound imports dearer exports cheaper
Exchange rates - depreciation
a fall in the value of the pound - happened after BREXIT
Inflation
rise in the price of goods in the UK economy
CPI
consumer price index - shows how prices of items has changed over time - expressed as a percentage
Inflation impacts on businesses
higher costs = higher prices for customers
Fiscal policy
relates to government taxation and spending
Fiscal policy aims to stimulate economic growth in a recession
Monetary policy
country’s central bank influences how much money is in the economy
Bank of England uses two tools…
- Bank rate - interest rate that the bank charges
- Quantitative easing - the bank of England can create money digitally
2% inflation is the bank of England’s goal
Trade liberalisation
process by which international trade is made easier through relaxation of tariffs and barriers.
