unit 7 Flashcards
1
Q
whats ratio analysis
A
involves the comparison of financial data to gain insights into business performance
2
Q
ratio analysis help to answer questions such as
A
- why is one business more profitable than another
- what returns are being earned in investment in a business
- is a business able to stay solvent
- how effectively is a business using its assets
3
Q
what are the key stages in ratio analysis
A
- gather data
- calculate ratios
- interpret results
- take actions
4
Q
where does the information for ratio analysis come from
A
income statement
balance sheet
5
Q
whats does income statement involve
A
- revenue
- costs of sales
- gross profit
- operating profit
- net profit (profit for the year)
6
Q
whats does balance sheet involve
A
- current assets
- current liabilities
- inventories
- trade receivables and payables
- long term liabilities
- capital and reserves
7
Q
what are the main groups of ratios
A
- profitability (gross profit margin, operating profit margin, return on capital employed)
- liquidity (current ratio, acid test ratio)
- financial efficiency (payables days, receivables days, inventory turnover, gearing)
8
Q
key users of ratios (profitability)
A
- shareholders
- governments
- competitors
- employees
9
Q
key users of ratios (liquidity)
A
- shareholders
- lenders
- suppliers
10
Q
key users of ratios (financial efficiency)
A
- shareholders
- lenders
- competitors
11
Q
what are the limitations of ratio analysis
A
- one data set is not enough
- reliability of data
- based on past
- comparability
12
Q
why might ratio data not be entirely reliable
A
- financial info involves making subjective judgements
- different businesses have different accounting polices
- potential for manipulation of accounting info (eg window cleaning)
13
Q
whats the importance of effective comparison
A
one ratio is rarely enough
- need to compare with competitors
- need to analyse over time (trends)
circumstances change over time
- markets and industries change
- different economic and market conditions
14
Q
what ratios don’t tell you
A
- competitive advantage eg brand strength
- quality
- ethical reputation
- future prospects
-changes in the external environment
15
Q
what is window dressing
A
a short-term strategy used by companies and funds to make their financial reports and portfolios look more appealing to clients, consumers, and investors
16
Q
why are ratios useful
A
- very useful analytic tools
- widely used and understood
- identify issues, don’t solve problems though
- part of a range of indicators of business performance
17
Q
definition of balance sheets
A
a financial snapshot of the business at a moment of time
18
Q
what does a balance sheet show
A
shows the source of all capital invested in the business for it to be able to operate, and in what form that money currently is in within the firm, eg stock, premises, debt etc
19
Q
whats a liability
A
A liability is something a person or company owes, usually a sum of money
20
Q
what are non current assets
A
what the business owns with a lifespan of more than a year. they are used repeatedly as part of the firms operations and will not regularly be sold
21
Q
what are current assets
A
assets owned by the business that are likely to be turned into cash within one year. these assets constantly change form
22
Q
what are current liabilities
A
short term debt of the business, will not have to be repaid within a year
23
Q
what are non current liabilities
A
debts that need to be rapid, but not within one year. also known as creditors falling due after a year
24
Q
what do capital and reserves show on a balance sheet
A
shows how the assets and business have been financed
25
what are net current assets also known as
working capital
26
whats liquidity
a firms ability to pay its short term liabilities (debts)
27
what are assets
items that the business owns
28
whats inventories
stock, worked in progress, finished goods
29
whats total equity (capital)
funds provided by shareholders to set up the business, fund expansion and purchase non current assets
30
whats the formula for net current assets
current assets - current liabilities
31
whats the formula for net assets
total assets - total liabilities
32
whats the formula for capital employed
total equity + non current liabilities
33
what are receivables (debtors)
money owned to the company by its customers mostly from sales on credit
34
what does income statement show
shows the profit or loss made by a business
35
whats gross profit
revenue minus cost of sales
36
whats finance income
any interest paid to the company on money lent or saved
37
whats finance expenses
any payment of interests on loans held
38
profit before tax
operating profit minus finance expenses plus any finance income
39
whats profit for the year
profit before tax minus taxation
40
what are exceptional items
items that have a one off affect on profits.
41
earnings per share formula
profit for the period/number of shares
42
purses of the income statement
- to measure company performance and the impact of strategies
- owners can assess their return on investment
- to abide by legislation as part of being a limited company
- gives an idea of the profit quality
- to see how profit is being utilised
- used to compare with other firms and past trends
43
whats profit quality
whether a source of profit is sustainable in the long term
44
whats high quality profit
a source of profit which is likely to continue
45
whats low quality profit
a result of actions that are unlikely to occur again
46
whats a leaseback
an arrangement in which the company that sells an asset can lease back that same asset from the purchaser
47
who are stakeholders
someone with an interest in the business
48
what are the 6 ratios
- current ratio
- gearing ratio
- return on capital employment
- payables days
- receivable days
- inventory turnover
49
whats liquidity
- is a firms ability to pay short term debts (liabilities)
- firms pay their short term debts (called liabilities) with their current asset of cash. their other current assets inventories (stock) and receivables (debtors)
50
what does insolvent mean
the company is unable to pay its debts
51
whats current ratio
although profit is the main measure of success if its important to understand if the firm is able to meet its short term debts to continue trading
52
liquidity formula
current assets
--------------------- : 1
current liabilities
53
what does a 2:1 current ratio mean
for every £1 you owe you have £2
54
problems with a high ratio
the money is sitting around and could be spent on investing
55
whats Tescos current ratio
7.39:1
56
whats gearing
gearing measures the proportion of a business's capital (finance) provided by debt
57
why is gearing useful
greeting shows what proportion of the capital invested in a business has come from bank loans.
58
the gearing ratio
non current liabilities
------------------------------------ x100
total equity + non current liabilities
59
whats a high gearing as a %
a value higher than 50%
60
whats a low gearing as a %
usually below 25%
61
benefits of high gearing
- bank loans can be a cheap source of finance when interest rates are low
- less dividend payments will be required as share capital will not be needed
- it may imply the business is heavily investing in growth to drive the company forward and take advantage of opportunities to stay ahead of the competition.
62
benefits of low gearing
- the company will have lower interest and loan payments positively impacting its liquidity
- it makes the business a more attractive investment to potential shareholders
- the firm will not be as vulnerable to cost impacts of interest rate changes
- there is reduced risks as the business has less debt and fewer creditors who could put the business into liquidation if these debts go unpaid
- if shares are sold as an alternative, share capital is permanent capital so doesn't need to be repaid unlike loans
63
whats ROCE stand for
return on capital employed
64
what is return on capital employed
the profitability ratios help to show a firms efficiency in achieving this objective and producing a profit. they relate the profit made by the firm to its size.
65
ROCE formula
operating profit(before tax)
--------------------------------------- x100
total equity + non current liabilities
66
what is profitability
a firms profit in relation to its size
67
whats inventory turnover
inventory turnover measures how often each year a business sells and replaces its inventory
68
what are the financial efficiency ratios
- inventory (stock) turnover
- receivables (debtors) days
- payables (creditors) days
69
what do the financial efficiency ratios measure
how efficiently the business manages its current assets and liabilities, which will also impact a firms liquidity
70
what are the 3 main types of inventory
- raw materials and components
- work in progress
- finished goods
71
inventory turnover formula
cost of sales
------------------
average inventories held
72
how is inventory valued
cost price not selling price
73
industries with typically low inventory turnover
- construction
- engineering
- industrial distribution
74
industries with typically high inventory turnover
- supermarket retail
- fast food
- motor vehicle production
75
how can inventory turnover be increased
- sell of or dispose of slow moving or obsolete inventory
- introduce lean production techniques to reduce amounts of inventory held
- rationalise the product range made or sold
- negotiate sale or return arrangements with suppliers - so inventory can be returned if doesn't sell
76
factors influencing inventory turnover
- popularity
- type op product
- type of business/industry
- changes in consumer tastes and fashions
- quality of research
- product portfolio
77
what are trade receivables (debtors)
amounts owed to a business by customers
78
what are trade payables (creditors)
amounts owed by a business to suppliers and others
79
what are receivables days
the average length of time taken by customers to pay amounts owned
80
what are payables days
the average length of time taken by a business to pay amounts it owes
81
receivables (debtors) days formula
trade receivables
------------------------- x 365
revenue (sales)
82
issues to consider with ratio analysis
- is the data reliable
- were the accounts produced accurately
- some firms may not pursue profit maximisation but other objectives eg social enterprise
- it may be hard to access the accounts of rivals to make comparisons
- economic factors may have impacted the company's performance.
83
whats inter firm comparisons
comparisons between different companies
84
whats intra firm comparisons
comparisons within the company
85
what are business objectives
the specific intended outcome of business strategy
86
the hierarchy of business objectives
TOP TO BOTTOM
mission
corporate/strategic
functional
team
individual
87
what are objectives
statements of specific outcomes that are to be achieved
88
4 operations of business
- operations
- finance
- HR
- marketing
89
what are corporate objectives
objectives that relate to the business as a whole
90
purposes of corporate objectives
- provide strategic focus
- measure performance
- inform decision making
- set the scene for more detailed functional objectives
91
key areas for corporate objectives
- market
- innovation
- productivity
- physical + financial resources
- profitability
- management
- employees
- public responsibility
92
what are functional objectives
set for each key business function and are designed to ensure that the corporate objectives are achieved
93
examples of how functional objectives might support corporate objectives
- increase sales
- reduce costs
- increase cash flow
- improve customer satisfaction
94
key internal influences on corporate objectives and decisions
- business ownership
- attitude to profit
- ethical stance
- organisational culture
- leadership
- strategic position and resources
- stakeholder influence
95
key external influences on corporate objectives and decisions
- short termism
- economic environment
- political / legal environment
- competitors
- social and technological change
96
what is short-termism
is where a business priorities short-term rather than long-term performance
97
why might businesses be concerned with short term performance
- stock market (investors) focus on latest financial performance
- reliance on bonuses based on short term performance
- frequent changes in leadership and strategy
98
possible indicators of short termism
- bonuses based on short term objectives
- low investment in R+D
- high dividend payments rather than reinvesting profits
- overuse of takeovers rather than internal growth.
99
short termism may damage other measures of long term performance for example
- market share
- quality
- innovation
- brand reputation
- employee skills and experience
- social responsibility+sustainability
100
case study of short termism
BT stopped graduate apprentice, saved money short term, lost long term, skill shortage
Land Rover Jaguar, kept it going, short term money loss, long term saved money
all in pandemic
101
whats strategy
- how the business intends to achieve its objectives
- usually long term
- made by senior management
102
whats tactics
- support achievements of specific targets
- usually routine and short term
- often delegate to junior management
103
whats synergy
the combined power of a group of things when they are working together that is greater than the total power achieved by each working separately
104
strategic decions
- external growth
- enter international market
- rebrand the business
105
tactical decisions
- relocate staff from takeover HQ
- choose locations in new market
- launch rebranding campaign
106
what is lamb rippers
a way to remember business strategy
107
whats in LAMB RIPPERS
Lean production
Acquesition
Marketing
Business restructuring
Relocation
Internationalisation
Product innovation
Partnerships
Employee/ employer relations
Re-shoring
Scale of production
108
whats matrix structure
when people from all different sectors go and work together
109
whats lean production
methodology aimed at reducing waste in the form of over production, excessive lead time or product defects in order to make a business more effective and more competitive
110
lean production strategies
- JIT
- zero defects
- Kaizen
- Benchmarking
- Team working
- Quality circles
111
whats acquisition
taking over another from so two become one
112
what are the 2 types of acquisition
hostile (when the company being brought doesn't want to be brought) or friendly (when one business is happy to be brought)
113
what are companies that have lots of business in different markers
conglomerates
114
advantages of acquisition
- larger revenues
- economies of scale
synergy, 2+2=5
115
Whats marketing (lamb rippers)
- 7 p's
- marketing mix
116
whats business (lamb rippers)
- business restructuring (people, process, technology, structure)
117
whats relocation (lamb rippers)
moving the business can help:
- reduce cost or raise revenue
- increase brand perception
- help extract the right talent
- expansion
118
whats internnationalisation (lamb rippers)
business seeks more to sell more to foreign markets
119
whats product innovation (lamb rippers)
product innovation is bringing a new idea to market
120
whats process innovation
making the same product in a better different way
121
what are partnerships (lamb rippers)
- joint ventures, strategic alliances and good relations with suppliers can all boost profits
- legal and general have a strategic alliance with Barclays providing buildings and contents insurance for Barclays customers Starbucks have a strategic alliance southwest airlines providing coffee during flights
122
what is employee/ employer relation (lamb rippers)
good employee/employer relationship boost productivity
bad employee/employer relationship harm productivity
123
whats re shoring (lamb ripper)
brining manufacture or production back to the Uk. this may be because more expensive abroad or quality or time delays make it better to manufacture here
124
whats scale of production (lamb rippers)
increasing the scale of production can help firms reduce average costs. When firms expand total cost is likely to rise but average cost can fall
125
whats swot analysis
- strengths
- weaknesses
- opportunities
- threats
126
what are porters 5 forces
- rivalry of the market
- threat of substitute products/services
- bargaining power of market buyers
- threat of new entrants to the market
- bargaining power of market suppliers
127
what is new entrants (porter 5 forces)
firms that already exist within the market need their goods to be at the right quality and price
128
whats substitutes (porter 5 forces)
these are alternative products/services that a consumer might want to buy instead of what the business offers
129
whats buyer power (porter 5 forces)
if a market has many producers but only a few consumers the buyers have a lot of power
130
whats supplier power (porter 5 forces)
when there are many suppliers to the market, the power that each one has over the market is minimal
131
limitations of financial data in assessing business performance
- financial ratios tend to look backwards, at historical financial performance
- financial ratios focus on measures that are possibly most important to shareholders than business management
- financial data is not the best way of understanding how a business is performing in terms of key competitive performance
132
key non financial measures of performance
- Operations (efficiency, labour productivity, capacity utilisation, break even output, quality)
- HRM (labour turnover, labour productivity, unit labour costs, absenteeism rate, revenue per employee, staff retention rate, job satisfaction)
- Marketing (market share, sales per employee, sales growth, customer retention rate, brand rep and awareness)
133
other relevant non financial measures
- environmental performance
- compliance regualtion
- health and safety record
- social media reach
134
what is core competencies
a core competence is something unique that a business has, or can do, strategically well
135
what are core competencies
- collective learning within the business
- ability to integrate skills and technologies
- ability to deliver superior products and services
- ways a business is differentiated to be competitive
136
what are the three conditions to core competence
- does it provide consumer benefits
- is it easy for competitors to imitate
- can it be leveraged widely to many products and markets
137
what do Prahalad and Hamel suggest businesses do
- focus on core competencies
- outsource non core activities
138
criticism of core competencies approach
- over - zealous outsourcing has damaged business competitiveness
- difficult to identify core competencies that are genuinely unique
- possible for a business to become complacent about its core competencies
139
what is meant by short termism
where a business prioritises short term rather than long term performance
140
what performance measures does short termism emphasis
- share price
- revenue growth
- gross and operating profit
- unit costs and productivity
- return on capital employed
141
what are the possibilities of the expense of long term measures
- market share
- quality
- innovation
- brand reputation
- employee skills and experience
- social responsibility and sustainability
142
what is the Mittelstand in Germany
germany has more than 1,000 companies that have been in the same family for generations but can compete with the worlds best
these companies and over 99% of all German companies are part of the 'Mittelstand' contributing to nearly 52% of the country's economic output and employing more than 15 million people.
143
key features of Mittelstand companies
- family and ownership or family like corporate culture
- generational continuity
- long term investment focus and focus on RandD
- fiercely independent
- flexibility
- lean organisations hierarchies
- focus on innovation and customer service
- take corporate social responsibility seriously
144
what is Elkington's triple bottom line
a way of assessing business performance based on three important areas: profit, people and planet
145
what does the triple bottom line suggest
it aims to measure the financial, social and environmental performance of a business over a period of time
146
what does the planet in triple bottom line mean
measures impact of business on environment
more tangible, eg emissions, use of sustainable inputs
147
what does the profit in triple bottom line mean
familiar to managers identified from income statement
audited = reliable figure
148
benefits of triple bottom line
- encourages businesses to think beyond narrow measure of performance (profit)
- encourages CSR reporting
- supports measurement of environmental impact and extent of sustainability
149
what does the people in triple bottom line mean
measures extent to which business is socially responsible hard to calculate and report reliability and consistently
150
drawbacks of the triple bottom line
- not very useful as an overall measure of business performance
- hard to reliably and consistently measure people and planet bottom lines
- no legal requirement to report it, so take up has been poor
151
what is business legislation
- a set of rules and regulations with which a business has to comply
- a constraint on action or a threat
- an opportunity
152
main roles of business legislation
- regulate the rights and duties of people carrying out business
- protect customers from harmful business activity
- ensure employees are treated fairly and not discriminated against
- provide protection to investors and creditors
- deter and prevent unfair competition
153
key areas to consider about business legislation
- employment
- consumers
- environment
- competition
- health and safety
154
what are the two main Labour market areas of focus
- individual employment
- industrial relations
155
what is the basic rule on pay - right to equality
- men and women are entitled to equal pay for work of equal value
- 'pay' includes everything in the employment contract, bonuses and pension contributions as well as basic wagers or salary
- workers have the right to ask their employer for information to check equality
- if they believe their pay is unequal, they can take the employer to an employment tribunal
156
whats minimum wage legislation
- employers required by law to ensure they pay their workers at least the national minimum wage (NMW)
- in the Uk for workers over 25 a top up is applied to create the national living wage (NLW)
- it makes no difference when a worker is paid (monthly, weekly, daily, hourly). The NMW still applies
157
whats employment legislation and discrimination
'it is illegal for an employer to discriminate against an employee on the basis of:
- sex
- race
- disability
- religion
- ....
158
key areas where discrimination laws apply
- discrimination laws apply in many areas of employing staff
- recruitment
- employee contract, terms and conditions
- promotions and transfers
- providing training
- deciding what fringe benefits employees receive
- employee dismissal
159
what is an employment right
something to which an employee is entitled which is protected by law
160
examples of employment rights in Uk
Laws produced of "rights" for employees including:
- reasonable notice before dismissal
- right to redundancy
- right to a written employment contract
- right to request flexible working
- right to be paid national minimum wage
- right to take time off for parenting
161
what are industrial relations
- protection from unfair dismissal
- employers must recognise union is >50% of staff are members
- regulation of procedures for industrial actions (eg ballots)
- role/powers of employment tribunals
- EU, works councils requirements
162
what must a business ensure they do to work with consumer legislation
- goods fit with description (eg organic wine must be organic)
- must be satisfactory quality (test according to a 'reasonable person', must work and have no major blemishes)
- goods are fit for the purpose specified (businesses should take care when explaining what a product can be used for)
163
what are some other ways that consumers are protected
- businesses may not use unfair commercial practices (misleading ads)
- customers have the right of return and full refund if goods/services do not comply with the law
- services must be done at a reasonable price and by the time stated
- customers can request that unsatisfactory work be repaired or carried out again at no cost
164
main consumer laws
- distance selling regulations
- the sale of goods act
- supply of goods and services act
- trade description act
165
whats distance of selling regulations
gives consumers protection when they buy goods or services by mail order, phone or online
166
whats the sale of goods act
requires good to be as described, fir for their purpose and of satisfactory quality. if they are not, the customer can reject them
167
whats the supply of goods and services act
customers are entitled to work that's carried out with reasonable skill, in a reasonable time, at a reasonable price
168
whats the trade description act
required any descriptions of goods and services given to be accurate and not misleading
169
aims of competition policy
- wider consumer choice in markets for goods and services
- technological innovation which promotes gains in dynamic efficiency
- effect price competition between suppliers
- investing allegations of anti competitive behaviour within markets which might have a negative effect on consumers
170
why do business need to be aware of competition laws
- to ensure it does not breach competition law
- to protect its position where competition law is breached by a competitor
171
main elements of competition policy
- Anti-trust and cartels
- market liberalisation
- state aid control
- merger control
172
what are anti-trust and cartels in the competition policy
elimination of agreements that restrict competition including price fixing by firms who hold a dominant market position
173
what is market liberalisation In the competition policy
introducing competition in previously monopolistic sectors such as energy supply, retail banking, postal services, mobile telecommunications and air transport
174
whats state aid control in the competition policy
policy analyses state aid measures such as airline subsidies to ensure that such measures do not distort competition in the single market
175
whats merger control in the competition policy
investigation of mergers and take overs between firms which could result in them dominating the market
176
examples of anti competitive behaviour
- price fixing and market sharing
- predatory pricing and limit pricing
- charing excessively high prices
- refusal to deal/discrimination
- patent misuse
- protectionist policies limiting overseas trade
177
examples of prohibited agreements
- agreements which directly or indirectly fix purchase or selling prices or any other trading condition (eg discounts or rebates)
- agreements which limit or control production, markets, technical development or investment
178
what the competition act 1998
aims to prevent companies from acting in ways that distort, restrict or prevent competition. it attempts to take action against firms that use restrictive practices such as collusion, price fixing, agreeing to limit supply to drive up prices, sharing info etc
179
whats the enterprise act 2002
This Act establishes the Office of Fair Trading, the Competition Appeal Tribunal, and the Competition Service. It regulates mergers and market practices, amends the functions of the Competition Commission, and introduces penalties for entering into anti-competitive agreements. It allows for the disqualification of company directors involved in such practices, makes provisions for consumer protection, regulates information disclosure under competition and consumer laws, and amends the Insolvency Act 1986, with related measures.
180
what isn't aloud with price fixing
- agree prices with competitors
- share markets or limit production to raise prices
- impose minimum prices on different distributors such as shops
- agree with competitors what purchase price will be offered to suppliers
- cut prices below cost in order to force smaller or weaker competitor out of the market
181
whats abuse of dominant position
- uk competition law prohibit businesses with significant market shares unfairly exploiting their strong market position
- a dominant share is 50% or more
- having a dominant position does not itself breach competition law
- it is the abuse of that position which is prohibited
182
examples of abuses of dominant position
- imposing unfair trading terms, such as exclusivity
- excessive, predatory or discriminatory pricing
- refusal to supply or provide access to essential facilities
183
penalties for getting caught with a dominant position
- up to 10% of annual turnovers
- criminal prosecution
- disqualification as directors
- civil action by those affected
184
examples of regulators in the Uk
- water monopolies
- cma
- telecoms and broadcasting
- financial services
- rail regulator
- general energy market
185
what do competition regulators actually do
- monitors and regulate prices
- ensure standards of customer service
- open up markets
- the 'surrogate competitor'
186
whats the surrogate competitor
regulation can act as a form of surrogate competition, attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets
187
key environmental areas where businesses must comply
- emissions into the air
- storage, disposal and recovery of business waste
- storing and handling hazardous substances
- packaging
- discharges of waste water
188
health and safety responsibilities
- an employer has important responsibilities for health and safety
- it is not just about protecting staff, health and safety applies to many people who come into contact with the business
189
health and safety applies to
- employees working at the business premises, from home, or at another site
- visitors to the premises, eg customers or subcontractors
- members of the public, even if they are outside the business premises
- anyone affected by products and services the business designs, produces or supplies.
190
examples of the health and safety industry issues
- food processing (hygiene)
- hotels (guest safety)
- chalice production (waste disposal)
- air travel (passenger and crew safety)
- tour operators
191
what is the business (economic) cycle
- the level of demand in most markets is influenced by the rate of economic growth
- economies vary in terms of their 'normal' long term growth. A mature economy like the UK has a long term growth rate of around 2-3%.
- GDP growth will vary depending on the state of the economic cycle
192
what is a net importer
a country or territory whose value of imported goods and services is higher than its exported goods and services over a given period of time.
193
what is GDP
measure of the value of output (activity) in the economy
194
what is demand
- how much of a good or service a consumer wants and is able to pay for
- for a business, demand turns into revenues
195
what are the stages of the business cycle
- the sequence of slump, recovery, boom and recession
196
what are the main causes of the business cycle
- changes in the level of business and consumer confidence
- alternating periods of stocking and de-stocking
- changes in the value of consumer spending and business investment
- changes in government policy which can induce a change in the economy
197
whats boom in the business cycle
high levels of consumer spending, business confidence, profits and investment. Prices and costs also tend to rise faster. Unemployment tends to be low
198
whats recession in the business cycle
falling levels of consumer spending and confidence mean lower profits for businesses - which start to cut back on investment. Space capacity increases + rising unemployment
199
whats slump in the business cycle
very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling
200
whats recovery in the business cycle
things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to invest again; but it takes time for employment to stop growing
201
strategies during a recession
- diversification into new markets
- restructuring and delayering to reduce cost and minimise risks
- greater investment, often when firms cut investment when struggling during a recession larger firms may be able to get ahead by investing eg apple, Dyson
- sales promotions and price cuts
- cutting costs/cost minimisation, reduced R&D, pay freezes, pay cuts, redundancies, different working patterns
- mergers and takeovers, BA & Iberia
202
what is an exchange rate
- an exchange rate is the price of one currency expressed in terms of another currency.
- the exchange rate determines how much of one currency has to be given up in order to buy a specific amount of another currency
203
ways exchange rates impact business activity
- price of exports in international markets
- cost of goods bought from overseas
- revenues and profits earned overseas
- converting cash receipts from customers overseas
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what might cause an increase in the exchange rate
- increasing demand for exports = higher demand for the currency
- lower demand for imports = lower demand for the currency
- speculation, traders may bet that the exchange rate will rise
- an increase In interest rates, making it more attractive to hold the currency
- foreign direct investment into the country, higher demand for the currency
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factors affecting the significance of exchange rates on businesses
- the impact of changes in exchange rates on businesses will depend on:
- how much they export to other economies
- whether domestic businesses face strong competition from overseas firms in their markets
- how much a business relies on importing goods and services from overseas in order to operate
- the price elasticity of demand (PED) for a business' products.
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what does SPICED stand for
strong
pound
imports
cheaper
exports
dearer
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what is inflation
inflation is a sustained increase in the average price level of an economy
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how is inflation measured
- by the annual percentage change in the level of prices as measured by the consumer price index
- a sustained fall in the general price level os called deflation, in this situation the rate of inflation becomes negative
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effects on inflation on consumers
- money loses value and people lose confidence in money as the value of savings is reduced
- inflation can get out of control, price increases lead to higher wage demands as people try to maintain their living standard
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whats consumer price index (CPI)
- the consumer price index is the main measure of inflation for the UK
- the government has set up the Bank of England a target for inflation (using CPI) of 2%
- the aim of this target is to achieve a sustained period of low and stable inflation
- low inflation is also known as price stability
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why was the rate of inflation so low in the uk (until post pandemic)
- falling global commodity prices including oil
- slow wage growth in the labour market
- falling food prices (globally and supermarket price wars)
- sustained price deflation in technology products
- slower real economic growth, falling towards 2%
- still some spare capacity on the supply side of the economy
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why did inflation rise in 2022
- inflation in the Uk peeked at 11.1% in October 2022. interest rates increased in a bid to control the economy.
- higher energy costs, soaring wages as companies struggle to fill vacancies and disruption along supply chains
- external shock - war in Ukraine gas disrupted supply chains of gas, oil and wheat
- current inflation rate is 2.2% (October 2024), fallen from 6.8% (July 2023)
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possible causes of demand pull inflation
- an appreciation of the exchange rate decreases the price of imports
- a reduction in direct or indirect taxation, consumers have more disposable income causing more demand
- rising consumer confidence and an increase in the rate of growth of house prices
- fasters rates of economic growth In other countries, providing a boost to Uk export overseas.
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what are the two types of inflation
- demand pull (when there is excess demand)
- cost push (when costs arise)
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whats demand pull inflation
- occurs when there is excess aggregate demand in the economy or market
- businesses respond to high demand by raising prices to increase their profit margins
- demand pull inflation is associated with the boom phase of the business cycle
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whats cost push inflation
occurs when costs of production are increasing
causes:
- external shocks
- a depreciation in the exchange rate
- acceleration in wages
what happens?
- firms raise prices to protect their profit margins
- 'wages often follow prices'
- a rise in inflation can lead to rising inflationary expectations
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inflation costs and consequences
- money loses its values and people lose confidence in money as the value of savings is reduced
- inflation can get out of control, price increases lead to higher wage demands as people try to maintain their living standards. this is known as a wage price spiral
- consumers and businesses on fixed incomes lose out because their income falls, employees in poor bargaining positions lose out
- inflation can favour borrowers at the expense if savers
- inflation can disrupt businesses planning and lead to lower capital investment
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is inflation always bad for businesses
no some inflation is good for business
- industry wide price rises enable revenues to grow
- growing revenues + constant gross margin = higher gross profit
- makes using debt as a source of finance cheaper in real terms
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whats fiscal policy
the use of government spending, taxation and borrowing to acheive relevant objection
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whats monetary policy
use of interest rates to determine cost of money
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what are the fiscal taxes
- income tax
- corporation tax
- VAT
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what are taxes spent on by the government
- health
- education
- social security
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who manages the monetary policy
Bank of England
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what is budget surplus
where taxation is greater than government spending
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what is budget deficit
government spending is higher than taxation
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what is balanced budget
taxation is equal to government spending
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what are direct taxes
taxes taken directly from a persons income or a firm profit, eg national insurance, income tax, corporation tax
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what are indirect taxes
taxes on products and spending not directly taken from income eg VAT, road tax, stamp duty, fuel tax.
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what can taxes be used for
- impact consumer spending and therefore demand
- to provide and incentive to consumers to purchase products that benefit society eg solar panels
- too dissuade consumers from purchasing those goods that have a negative impact eg alcohol, fuel and cigarettes
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whats corporation tax
a 20% tax rate companies oat on their profits. The current UK government have cut this rate in the past to encourage foreign firms to invest in the uk
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whats income tax
this is paid by all Uk taxpayers earning over a certain amount annually
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whats national insurance payments
national insurance payments are taken automatically from workers pay and contribute towards state benefits, such as pensions
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whats capital gains tax
paid when companies sell or dispose of assets that they may have made a profit on
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whats custom duties
taxes paid on some imported products
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whats excise duty
a tax on the production of certain products in the Uk eg tobacco, petrol, alcohol and gambling.
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whats proportional tax
With a proportional tax, the marginal rate of tax is constant leading to a constant average rate of tax
Eg: National insurance contributions (NICs)
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whats progressive tax
With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn extra income, the rate of tax on each additional pound goes up. This causes a rise in the average rate of tax.
Eg: Income tax (basic and higher rates)
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whats regressive tax
With a regressive tax, the rate of tax paid falls as incomes rise – I.e. the average rate of tax is lower for people on higher incomes
Eg: Excise duties on tobacco and alcohol
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whats transfer payments
welfare payments made to benefit recipients such as the state pension and the jobseekers allowance
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whats current spending
spending on state provided goods and services such as education and health
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whats capital spending
infrastructural spending such as spending on new roads, hospitals, motorways and prisons.
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why does the government tax
- fund projects (NHS)
- fund benefits, distribution of wealth, tax high earners to give to poorer
- Potholes
- Pay public sector workers eg public school teachers, NHS workers.
- Raise Revenue
- Taxes may help correct market failures
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why have government spending
- direct government (public sector) provision of : public goods, merit goods
- provide welfare support for low income households / the unemployed
- government spending is also a means of redistributing income within the society eg to reduce the scale of relative poverty
- government spending can also be used as a tool to manage aggregate demand as part of macroeconomic policy
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whats monetary policy
the use of the money supply and/or the interest rate to influence the level of economic activity, inflation, the balance of payments and exchange rates
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what 4 factors influence business investment
- actual and expected demand
- expected profits and business taxes
- business confidence
- interest rates + availability of business finance
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what happens when interest rates fall
- cost of servicing loans/ debt is reduced
- consumer confidence should increase leading to more spending
- effective disposable income rises
- business investment should be boosted
- housing market effects
- exchange rate and exports
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whats money supply
the narrow money definition of the money supply is a measure of the value coins and notes in circulation and other money equivalents that are easily convertible into cash such as short term deposits in the banking system
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whats quantitive easing
is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity.
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whats forward guidance
is a tool used by a central bank to exercise its power in monetary policy in order to influence, with their own forecasts, market expectations of future levels of interest rates.
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whats free trade
Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
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whats protectionism
the theory of practice of shielding a country's domestic industries from foreign competition by taxing imports.
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whats are quotas
A limit on the amount of a specific product that can be imported into a country.
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what are examples of trade and protectionism
- legislation impacting foreign firms
- tariffs
- quotas and licences
- tax breaks
- biased legal system and a lack of intellectual property protection
- subsides
- loans and grants with favourable repayment conditions
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what are subsidies
payments to domestic firms to encourage them to produce particular products and to help cover costs to enable lower prices to be charged than foreign rivals
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define globalisation
'the geographic dispersion of industrial service and activities, for example research and development, sourcing inputs, production and distribution and the cross border networking of companies, for example through joint ventures and the sharing of assets'
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whats technical cooperation
allows co production and joint assembly
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whats franchising
selling the right to use brands and patents to another firm in exchange for an initial fee and share of future profits.
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whats licensing
permission to make a product in a certain country granted by the original manufacturer in exchange for a fee, eg Carlsberg, coca-cola. useful to pass on many costs such as transportation and manufacture to another firm
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key points of globalisation
- a process in which economies have become increasingly integrated and inter dependent
- globalisation is dynamic rather than an end state
- globalisation is not inevitable - it can reverse, indeed the growth of world trade in goods and services slowed in recent years following the global financial crisis
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key characteristics of globalisation
- greater trade across borders in goods and services
- increase in transfers if capital including the expansion if foreign direct investment 51% of the largest economies in the word are corporations
- high levels of labour migration both within and between countries
- a shift in balance of economic and financial power from developed to emerging economies and markets
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factors contributing to globalisation
- containerisation
- technological change
- economies of scale
- differences in tax systems
- less protectionism
- growth of MNC/Transnational Co's
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whats containerisation
a system of freight transport for use in sea shipping that has reduced the transport costs of moving thousands of different goods across the globe
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benefits to globalisation
- encourages producers and consumers from deeper division of labour and economies of scale
- competitive markets reduce monopoly profits and incentives businesses to seek cost reducing innovations
- enhanced growth has led to higher per capita incomes
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what is an emerging market
is used to describe an economy in the process of rapid growth and industrialisation
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common features of emerging market
- economies making a transition
- rapid industrialisation
- have potential to become developed economies
- faster long term economies growth than most developed economies
- many inhabitants still in poverty though economic growth is taking many out of poverty
- business struggle to access global markets
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what are the four classic original emerging markets (BRICs)
- Brazil
- Russia
- India
- China
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What happened to the BRICs
- research 15 years ago highlighted the prominent rise of the 4 emerging markets
- particularly significant for developed economies, because of their scale and growth rate
- Brazil has since entered a prolonged recession (As Russia did)
- China has now become the worlds largest economy and in many respects is now a developed economy
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examples of current emerging markets
- guyana
- Mozambique
- Rwanda
- Bangladesh
- Ethiopia
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perceived business threats from emerging markets
- increasingly large pool of skilled, but low cost labour
- undervalued currencies make their exports cheaper
- inadequate protection of brand and other intellectual property
- state subsidy of industries to make them more competitive globally
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business opportunities in emerging markets
- growing numbers of educated middle class consumers, = growing consumer spending
- cultural shifts, eg a higher demand for personal products, private education and health care
- demand for infrastructure and other products and services from developed economies
- source of high skilled but low cost labour (outsourcing/offshoring)
- great potential for joint ventures and acquisitions
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key risk and threat of emerging markets
- political instability
- cultural differences / sensitivities
- variable approaches to financial and legal dealings (eg contractual law)
- corruption and bureaucracy still an issue
- emerging markets becoming major exporters
- low cost production makes developed economies uncompetitive in some markets
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why emerging economies are likely to continue to enjoy high growth rates
- urbanisation process continues
- industrialisation, especially in east Asia and SS Africa
- population growth
- per capita income growth, rise of middle classes and consumer society
- workforce will continue to improve skills and be more productive
- technological innovation in many emerging markets (especially in Korea, China, India
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what does CSR stand for
corporate social responsibility
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what else may CSR be called
- corporate citizenship
- corporate responsibility
- corporate sustianability
- sustainable business
- social responsibility
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differnece between ethics and CSR
- ethics concern actions which can be assessed as right or wrong by reference to moral principles
- CSR isd about the organisations obligations to all stakeholders - and not just shareholders
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what is CSR
the extent to which a business addresses the concerns and obligations to its stakeholders
the actions a business takes over and above the minimium required by law in addressing societal needs and wants
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what are the 2 key questions in CSR
- what is the purpiose of a business
- what contribution should businesses make to society
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how can businesses meet society needs and improve them
- better nutrition
- financial security
- protect consumers
- education
- protect the enviornment
- help the ageing
- better health
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whats the stakeholder concept (csr)
- busineseses do not have an unquestioned right to operate in society
- those managing businesses should recognise that they depend on society
- businesses relies on inputs from society and on socially created instituations
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arguments for CSR (stakeholder concept)
- the ethical thing to do
- improves a business' image and rep
- necessary in order to avoid axcessuive regulation
- soically responsible actions can be profitable
- improved social enviornment benefits business
- help attract investors
- can increase employee motivation
- helps to correct the social problems caused by business
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social responsibility to consumers
- value for money
- product quality and safety
- fair and honest advertising
- after sales service
- country/place or origin
- local sourcing
- sustainable products
- product testing
- responsible selling and promotion
- fair handling of complaints
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CSR in workplace - issues
- fair treatment at work
- workforce diversity and equal opportunities
- right to be kept informed
- health and safety
- work life balance/flexible working
- opportunities for participation in decision making
- training in new skills
- provision of soical facilites
- job design and satisfaction
- working conditions
- attitude to disadvantaged groups
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CSR in the community - issues
- minimising noise and other pollution
- consultation about major change
- sourcing from local suppliers
- protecting local employment
- labour rights in the supply chain
- product health and safety
- diversity in the workplace
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CSR and the enviornment - issues
- effects of pollution, noise, waste disposal, congestion
- waste management
- chemical use
- avoiding axcessive packaging
- use of energy
- water consumption
- biodiverstiy
- carbon emissions
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case against CSR (shareholder concept)
- the only social responsibility of business is to create shareholder wealth
- the efficient use of resources will be reduced if businesses are resticted in how they act
- businesses cannot decide what is in societys interest
- extra cost will be incurred which must be passed on to consumers
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whats cause promotion
increasing awarness and concern for social causes
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whats cause related marketing
contributing to causes based on sales
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whats corporate social marketing
behaviour changes initiatives
289
whats corporate philanthropy
donating directly to causes - usually cash
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whats community vouluntering
employees donating time and talents in the community
291
whats socially responsible business practice
discretionary practices and investment to support causes
292
who made the CSR pyramid
Carroll
293
whats on the CSR pyramid
- philanthropic (top)
- ethical
- legal
- econmic (bottom)
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what are the basis of the CSR pyramid
- a simple approach for how businesses should approach CSR
- CSR is built on the foundation of profit, it must come first
- then comes the need for a business to ensure it complies with all laws and regulations
- before a business considers its philanthropic options, it also needs to meet its ethical duties
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what is economic (csr pyramid)
responsibility of business to be profitable, only way to survive and benefit society in long term
296
what is legal (csr pyramid)
responsibility to obey laws and other regulation eg employment, competition, health and safety
297
what is ethical (csr pyramid)
responsibility to act morally and ethically.
go beyond narrow requirements of the law eg treatment of suppliers and employees
298
what is philanthropic (csr pyramid)
responsibility to give back to soicety discretionary but still important eg charitable donations, staff time on projects
299
advanatges of CSR pyramid
- easy to understand
- simple message, CSR has more than one element
- emphasises importance of profit
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disadvantage of CSR pyramid
- too simplisitc maybe
- should ethics be at top
- businesses dont always do what they claim when it comes to CSR
301
what are corporate social reports
a document that communicates a company's social and sustainability performance to stakeholders
302
what may corporate social reports contain
- An introduction that explains the company's CSR philosophy and strategy
- Detailed sections on CSR initiatives and activities
- Data and analysis that shows the impact of these activities
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why are corporate social reports important
they help investors, customers, and employees understand a company's commitment to social and environmental issues
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how is technology creating marketing opportunites
- new markets, create highly valuable markets and generate high revenue streams
- new products
- new ways to sell those products
305
whats process innovation (technology)
- new methods of production
- lower unit costs
- CAD - computer aided design
- CAM - computer aided manufacturing
- 3D computing
- High tech goggles
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whats disruptive technology
is the introduction of a new product or new process that radically changes the competitive advantage of an exisitng market.
307
what is e commerce
is any sales using an electronic device
308
whats m commerce
is the use of mobile devices to conduct commercial transactions
309
whats s commerce
a type of e-commerce that allows customers to buy products and services directly on social media platforms
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whats omnichannel
a multichannel approach to sales that seeks to provide the customer with a seamless shopping experience whether the customer is shopping online from a desktop or mobie device, by telephone of in a bricks and mortar store
311
implications for business stratergy
1. social media, persuade and communicate
2. mobile technology, use of smartphone to change the way they operate
3. data analytics, data handling used to indentify 'big data'
4. cloud computing, use of remote servers to store and analyse information
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what is porters 5 forces model
- a framework for analysing the nature of competition with an industry
- helps understand and assess industry profitbaility and attractivness
313
reasons why competitive rivalry (and profits) vary between industries
- size (revenues, quantity)
- structure
- distribution channels
- customer needs and wants
- profitability
- growth
- product life cycle
- alternatives for the consumer
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why are profits in soft drinks so high
- a 'license to print money'
- customers and suppliers have little power
- high brand awareness and loyalty = less desire for substitutes
- high barriers to entry (economies of scale)
315
what are low industry profits assocaited with
- strong suppliers
- strong customers
- low entry barriers
- many opportunities for substitues
-intense rivalry
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what are high industry profits associated with
- weak suppliers
- weak customers
- high entry barriers
- few opportunities for substitues
- little rivarly
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what is in the middle of porters 5 forces model
'intensity of rivarly within the business' in the middle
318
what is on the outside of porters 5 forces model
- threat of subsitute products
- bargaining power of buyers (customers)
- threat of new entrants
- bargaining power of suppliers
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what are the threats of new entrants
- if new entrants move into an industry they will gain market share and rivarly will intensify
- the posistion of exisiting firms is stronger if there are barriers to entering the market
- if barriers to entry are low then the threat of new entrants will be high, and vice versa
320
examples of barriers to entry
- economies of scale
- vertical integartion
- brand loyalty
- access to the best technologies
- expertise and reputation
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what is investment appraisal
the process of analysing whether investment projects are worthwhile
322
what are the 3 main methods on investment apprasial
- payback period
- average rate of retrun
- discounted cash flow
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what is payback period
the time it takes for a project to repay its initial investment
324
whats average rate of return
look at the totoal accounting return for a project to see it it meets the target return
325
whats discounted cash flow
net present value calculates the monetary value now of the projects cash flows
326
how is payback period measured in
time, days, years
327
how is average rate of return measure
%, return
328
how is average rate of return measured
monetary, value, £
329
how to calculate payback period
- identify the net cash flows for each period (e.g. year)
- keep a running total of the cash flows
- inital investment = an outflow
- when does the running total move from negative (outflow) to positive (inflow)
- when the total net cash flow becomes positive, that is the end of the payback period.
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payback formula
amount of investment not recovered
No. of full years +--------------------------
revenue generated in nexy year
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benefits of using payback period
- simple and easy to calculate + easy to understand the results
- focuses on cash flows
- emphasises speed of return; good for markets which change rapidly
- straightforward to compare competing projects
332
drawbacks of using payback period
- ignores cash flows after payback has been reached
- takes no account of the 'time value money'
- may encourage short term thinking
- ignores qualitative aspects of a decision
- does not actually create a decision for the investment
333
what is annunal average return
the ARR is the annual percenatge return on an invetsment project based on average returns earned by the project
334
how to calculate and interpret ARR
- step 1: calculate the average annual profit from the investment project
- step 2: divide the average annual profit by the inital investment
- step 3 comapre with the taregt percenatge return
335
benefits of using ARR
- simple to understand and easy to calculate
- focuses on the overall profitability of an investment prjoect
- easy to compare ARR with other key target rates or return to hlep make a decision
- uses all the returns generated by a project
336
drawbacks of using ARR
- ignores the timing of returns
- focuses on profits rather than cash flows
- does no adjust for the time value of money
337
whats net present value
net present value (NPV) calculates the monetary value now of a projects cash flows
338
what is discounting
is the method used to reduce the future value of cash flows to reflect the risk that they may not happen
339
what are discount factors
use discount factors to bring cash flows back to their present value
340
whats present value
he current value of a future sum of money or stream of cash flows
341
how to calculate the present value of a future cash flow
cash flow X discount factor = present value
342
what to do if NPV is positive or negative
accept the project if NPV positive, decline if negative
343
benefits of using NPV
- considers all future of cash flows
- refelects the risks that future cash flows will not be as expexted
- different levels of risk can be accounted for by adjusting the discount rate
- creates a straightforward decision, positive NPV suggests project should go ahead
344
drawbacks of using NPV
- the most complicated method compared with payback and ARR
- choosing the discount rate is hard, particualry for long projects
- results can be influenced/manipulated using the discount rate
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key financial factors influencing investment decisions
- investment criteria
- total returns (cash and profit) and sensitivity
- alternative investments (opportunity cost)
- financial position (eg liquidity, gearing) of the business
346
key non-financial factors influencing investment decisions
- corporate objectives
- organisational culture and attitude to risk
- management confidence in the investment appraisal data
- business image and reputation
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the importance of investment criteria
- criterea = the measures by which an investment will be judged
- a target percenatge rate of return is most common in business
- this target return can be comapred with the ARR or used as basis for the discount rate in NPV calcs
- often larget businesses require investments to satisfy more than one critera
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