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business > unit 7 > Flashcards

unit 7 Flashcards

1
Q

what is ratio analysis

A

involves the comparison of financial data to gain insights into business performance

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2
Q

ratio analysis help too answer questions such as…

A
  • why is one business more profitable
    than the other
  • 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
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3
Q

where does the information for ratio analysis come from

A
  • income statement
  • balance sheet
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4
Q

what are included in an income statement

A
  • revenues
  • cost of sales
  • gross profit
  • operating profit
  • profit for the year
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5
Q

what are included in a balance sheet

A
  • current assets
  • current liabilities
  • inventions
  • trade receivables & payables
  • long-term liabilities
  • capital & reserves
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6
Q

main groups of ratios

A
  • profitability
  • liquidity
  • financial efficiency
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7
Q

what are the key users of profitability ratios

A
  • shareholders
  • government
  • competitors
  • employees
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8
Q

what are the key users of liquidity ratios

A
  • shareholders
  • lenders
  • suppliers
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9
Q

what are the key users of financial efficiency ratios

A
  • shareholders
  • lenders
  • competitors
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10
Q

how long does it take for a current asset to become a non-current asset

A

12 months

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11
Q

limitations of ratio analysis

A
  • one data set isn’t enough
  • reliability of data
  • based on the past
  • comparability
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12
Q

why might ratio data not be entirely reliable

A
  • financial information involves making
    subjective judgements
  • different businesses have different
    accounting policies
  • potential for manipulation of
    accounting information (window-
    dressing
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13
Q

importance of effective comparison

A
  • one ratio is rarely enough (needs to
    compare with competitors, analyse
    trends)
  • circus stances change over time
    (markets/industries change, different
    economic/market conditions)
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14
Q

what don’t ratios tell you

A
  • competitive advantages (brand
    strength)
  • quality
  • ethical reputation
  • future prospects
  • changes in the external environment
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15
Q

why are ratios good

A
  • very useful analytical tools
  • widely used and understood
  • identify issues (don’t solve problems)
  • range of indicators of firm
    performance
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16
Q

definition of balance sheet

A

a financial snapshot of the business at a moment of time

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17
Q

what does a balance sheet show

A

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 (stock, debt)

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18
Q

purpose and users of company accounts

A
  • shows the value and size of the
    business
  • gives an indication of a firms liquidity
  • helps bank to identify collateral for
    loan requests
  • shows current borrowing levels
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19
Q

what is a non-current asset

A

what the business owns with a lifespan of then a year. They are used repeatedly as part of the firms operations and won’t regularly be sold

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20
Q

what is a current asset

A

assets owned by the business that are likely to be turned into cash within one year. These assets constantly change form

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21
Q

what are current liabilities

A

short-term debts of the business, will have to be repaid within one year

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22
Q

what or non-current liabilities

A

debts that need to be repaid, but not within one year. also known as: creditors falling due after a year

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23
Q

what do capital and reserves show on a balance sheet

A

how the assets and business have been financed

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24
Q

other name for net current assets

A

working capital

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25
Q

what is liquidity

A

firms ability to pay its hot-term liabilities (debts. Suppliers, baks and other creditors will be confident that they will be paid on time

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26
Q

what are tangible assets

A

non-current assets that exits physically

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27
Q

what are intangible assets

A

non-current assets that don’t have a physical presence but still has value

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28
Q

formula for net current assets

A

current assets - current liabilities

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29
Q

formula for net assets

A

total assets - total liabilities

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30
Q

formula for capital employed

A

total equity - non-current liabilities

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31
Q

what does liquidity mean

A

a firms ability to pay their short-term debts with their current assets

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32
Q

liquidity ratio

A

current assets
———————— : 1
current liabilities

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33
Q

what is an ideal ratio

A

1.5-2:1

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34
Q

what is gearing

A

measures the proportion of a business’ capital provided by debt

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35
Q

why is gearing useful

A
  • shows what proportion of the capital
    invested in the firm is loans
  • stakeholder view capital structure
  • measure of financial health
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36
Q

is high gearing good or bad

A

bad

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37
Q

gearing ratio

A

non-current liabilities
——————————————- X 100
total equity + non-current liabilities

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38
Q

what percentage is seen as high and low for gearing

A
  • 50% high
  • 25% low
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39
Q

what does it men if you have high gearing

A

borrowed a lot of money

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40
Q

benefits of high gearing for a firm

A
  • imply firm investing in growth to drive
    company forward to stay ahead of
    competition
  • loans are cheap when interest rates
    are low
  • less need to raise finance through
    share capital when loans are used,
    less shareholder making it easier to
    keep control of the firm and make
    long-term strategic decisions
  • less dividend payments required as
    share capital won’t be needed, when
    firm makes high profit there’s more
    retained profit for reinvestment
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41
Q

benefits of low gearing for a firm

A
  • company will have lower interest and
    loan repayments positively impacting
    liquidity
  • firm more attractive investment to
    potential shareholders
  • firm not as venerable to the cost
    impacts of interest rate chargers
  • reduced risk as business has less debt
    and fewer creditors who can liquidate
    firm if debts not paid back
  • if shares sold as alternative, share
    capital is permanent capital so doesn’t
    need to be repaid unlike loans
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42
Q

what is ROCE

A

return on capital employment

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43
Q

ROCE formula

A

operating profit
—————————————— X 100
total equity + non-current liabilities

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44
Q

what does ROCE show

A
  • firms efficiency in achieving this
    objective and producing profit.
  • relate profit made by the firm to its
    size
  • lets potential investors understand
    how efficient the firm is
  • sides at running the firm and
    controlling costs
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45
Q

what is inventory turnover

A

measures how often each year a business sells and replaces its inventory

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46
Q

what do financial efficiency ratios measure

A

how efficiently the firm manages its current assets and liabilities

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47
Q

what are the 3 main types of inventory

A

raw materials, work in progress, finish goods

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48
Q

how is inventory valued

A

cost price not selling price

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49
Q

types of industries with low inventory turnover

A
  • construction
  • engineering
  • industrial distribution
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50
Q

industries with high inventory turnover

A
  • supermarket retail
  • fast-food
  • motor vehicle production
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51
Q

how can inventory turnover be increased

A
  • sell of or dispose of slow-moving
    inventory
  • lean production
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52
Q

factors influencing inventory turnover

A
  • popularity
  • type of product
  • type of business/industry
  • changes in consumer tastes + fashion
  • quality of research
  • product portfolio
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53
Q

receivables days formula

A

trade receivables
————————- X365
revenue (sales)

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54
Q

payables days formula

A

trade payables
———————- X100
costs of sales

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55
Q

issues to consider with ratio analysis

A
  • is the data reliable
  • wether its historical data
  • performance change regularly,
    accounts may become outdated
  • hard to access accounts of rivals
  • PESTLE (economic*)
  • different companies have different
    views towards risk and borrowing
  • firms may not pursue profit
    maximisation but other objectives
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56
Q

what does inter-firm comparison mean

A

comparisons between different companies

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57
Q

what are objectives

A

Statements pf specific outcomes that are to be achieved

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58
Q

what are business objectives

A
  • specific intended outcomes of
    business strategy
  • targets which the business adopts in
    oder to achieve its aims
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59
Q

the hierarchy of business objectives

A
  • mission
  • corporate/strategic
  • functional
  • team
  • individual
    (lower you are less strategic you are)
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60
Q

4 functions of a business

A
  • operations
  • HR
  • financial
  • marketing
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61
Q

example of a corporate objective

A
  • market share 12%
62
Q

definition of corporate objective

A

objectives that relate to the business as a whole

63
Q

example of functional objective

A

sales per customer of £45

64
Q

example of unit objective

A

shop sales if £500,000

65
Q

purposes of corporate objectives

A
  • provide strategic focus
  • measure performance of firm
  • inform decision-making
  • set the scene for more detailed
    functional objectives
66
Q

key ares for corporate objectives

A
  • market
  • innovation
  • productivity
  • physical & financial resources
  • profitability
  • management
  • employees
  • public responsibility
67
Q

what is offshoring

A

moving your factory production across seas e.g. China

68
Q

example of corporate objective (context)

A
  • Starbucks
  • maintain as standing one of the most
    recognised and respected brands in
    the world
  • Premier Inn + Costa
  • reach 85,000 uk rooms
  • £2.5 billion system sales in Costa
69
Q

what are functional objectives

A

set for each key business function and are designed to ensure that the corporate objectives are achieved

70
Q

examples of how functional objectives might support corporate objectives

A
  • increases sales
  • reduce costs
  • increase cash flow
  • improve customer satisfaction
71
Q

key internal influences on corporate objectives & decisions

A
  • firm ownership
  • attitude to profit
  • ethical stance
  • organisations culture
  • leadership
  • strategic position & resources
  • stakeholder influence
72
Q

key external influences on corporate objectives & decisions

A
  • short-termism
  • economic environment
  • political/legal environment
  • competitors
  • social & technological change
73
Q

definition of short-termism

A

where a business prioritises short-term rather than long term performance

74
Q

why might businesses be concerned with short-term performance

A
  • stock market
  • reliance on bonuses on performance
  • frequent changes in leadership +
    strategy
75
Q

possible indictors of short-termsim

A
  • bonuses based on short-term
    objective
  • low investment in R&D
  • high divined payments rather than
    investing profit
  • overuse of takeovers rather than
    internal growth
76
Q

what is synergy

A

two companies coming together and making more money

77
Q

short-termsim may damage other measures of long-term performance

A
  • market share
  • quality
  • innovation
  • brand reputation
  • employee skills + experience
  • social responsibility + sustainability
78
Q

case study of short-termism

A

BT - stopped graduate apprentice, saved money short term, lost long term, skill shortage

Land Rover Jaguar, kept it going, short term lost money, long term saved money

all in the pandemic

79
Q

difference between strategy and tactics

A

strategy - how firm intends to achieve
objectives
- long-term

tactics - support achievement of
specific targets
- short-term

80
Q

LAMB RIPPERS

A

Lean production
Acquisition
Marketing
Business

Relocation
Internationalism
Product innovation
Partnerships
Employee/employee relations
Re-shoring
scale of production

81
Q

what is matrix structure

A

when people from all different sectors go and work together

82
Q

types of lean production strategies (LAMB RIPPERS)

A
  • JIT
  • Zero defects
  • Kaisen
  • Benchmarking
  • Team-working
  • Quality circle
83
Q

what is the difference between profit and profitability

A

profit is the difference between revenue and costs, whereas profitability is how well you can change profit into operating profit

84
Q

what is acquisition (LAMB RIPPERS)

A

firm taking over another for so two become one (synergy)

85
Q

what are companies called that own lots of businesses in different markets

A

conglomerates

86
Q

what are the two types of acquisition

A

hostile (Kraft + cadbury)
friendly (Disney + 20th)

87
Q

what is marketing (LAMB RIPPERS)

A
  • marketing mix 7 PS
88
Q

what is business restructuring (LAMB RIPPERS)

A
  • people
  • process
  • technology
  • structure
89
Q

what is retrenchment

A

restructuring and going back to fix problems

90
Q

what is relocation (LAMB RIPPERS)

A
  • moving location to help your firm
  • reduce costs or raise revenue
  • increased brand perception
  • help attract the right talent
  • expansion
91
Q

what is internationalisation (LAMB RIPPERS)

A
  • selling goods or services into foreign markets
  • good way of increasing revenue
92
Q

what is product innovation (LAMB RIPPERS)

A
  • brining a new idea to market
  • (process innovation) making same product in a.
    better different way
93
Q

what is partnership (LAMB RIPPERS)

A
  • firms join together
  • strategic alliance and good relations with suppliers can all boost profits
94
Q

what is employee/employee relation (LAMB RIPPERS)

A
  • good employee-employer relations boost
    productivity
  • bad employee-employer relations harm
    productivity
95
Q

what is re-shoring (LAMB RIPPERS)

A
  • brining manufacture or production back to the
    UK
  • could be because it has become too expensive
    abroad or quality or time of day
  • Clarks, boots to Somerset from Asia
96
Q

what does SWOT analysis mean

A
  • strength (internal)
  • weakness (internal)
  • opportunities (external)
  • threats (external)
97
Q

limitations of financial date in assessing business performance

A
  • financial ratios tend to look
    backwards - at historical
    financial performance
  • financial ratio 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
98
Q

key non-financial measures of performance

A

Operations:
- quality, break even, efficiency
HRM:
- labour turnover, job satisfaction
Marketing:
- market share, sale per employee

99
Q

what are the other revenant non-financial measures

A
  • environmental performance
  • compliance regulation
  • health & safety record
  • social media reach
100
Q

definition of core competencies

A

something unique that a. business has, or can do, strategically well

101
Q

what are core competency

A
  • 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
102
Q

what are the three key conditions in core competency

A
  • does it provide consumer
    benefits
  • is it easy for competitors to
    imitate
  • can it be leveraged widely to
    many product & markets
103
Q

what is the criticism of core competency

A
  • over-zealous outsourcing has
    damaged business
    competitiveness
  • difficult to identify core
    competencies that are genuinely
    unique
  • possible for. business to
    become complacent about its
    core competntenncies
104
Q

definition of short-termism

A

where a business prioritises short-term rather than long-term performance

105
Q

what performance measures does short-termisim emphasise

A
  • share price
  • revenue growth
  • gross + operating profit
  • unit costs + productivity
  • return on capital employment
106
Q

possibly at the expense of long-term performance measures

A
  • market share
  • quality
  • innovation
  • brand reputation
  • employee skills & experience
  • social responsibility & sustainability
107
Q

what is the Mittelstand in Germany

A

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 if the Midttelstand, contributing nearly 52% of the country’s economic output and employing more than 15 million people

108
Q

key features of Mittlestand companies

A
  • family ownership
  • generational community
  • long-term investment focus
  • fiercely independent
  • investment in workforce
  • flexibility
  • lean organisational hierarchies
  • focus on innovation and customer
    service
  • take corporate social responsibility
    seriously
109
Q

what is the triple bottom line

A

a way of assessing business performance based on three important areas: profit, people, planet

110
Q

what does the triple bottom line suggest

A

it aims to measure the financial, social and environmental performance of a business over a period of time

111
Q

what does profit in the triple both line mean

A
  • familiar to managers
  • identified from income statement
  • audited = reliable figure
112
Q

what does planet in the triple both line mean

A
  • measure impact of business on
    environment
  • more tangible - emissions, sustainable
113
Q

what does people in the triple both line mean

A
  • measures extent to which business is
    socially responsible
  • hard to calculate & report reliably &
    consistently
114
Q

benefits and value pf the triple bottom line

A
  • encourages businesses to think
    beyond marrow measure of
    performance (profit)
  • encourages CSR reporting
  • supports measurement of
    environmental impact & extent of
    sustainability
115
Q

drawbacks & criticisms of the triple bottom line

A
  • not very useful as an overall measure of business performance
  • hard to reliably and consistently
    measure people & planet bottom-lines
  • no legal requirements to report it - so
    take-up has been poor
116
Q

what is business legislation

A
  • a set of rules and regulations with
    which a business has to comply
  • a constraint on action or a threat
  • an opportunity
117
Q

main roles of business legislation

A
  • regulate the rights and duties of
    people carrying out business
  • protect customers from harmful
    business activity
  • sure employees are treated fairly and
    not discriminated against
  • provide protection to investors and
    creditors
  • deter and prevent unfair competition
118
Q

key areas to consider in business legislation

A
  • employment
  • consumer
  • environment
  • competition
  • health and safety
119
Q

what are the two main labour market

A
  • individual employment
  • industril relations
120
Q

what is the basic rule on pay - right to equality

A
  • men and women entitled to equal pay
  • contract, bonuses & pensions
  • worker right to ask employer
    information to check equality
  • if its unequal, they can the employer
    to an employment tribunal
121
Q

what is the minimum wage legalisation

A
  • employers required by law to ensure they pay their workers at least the national minimum wage
  • in the UK, for workers over 25, a top-up is applied to create the national living wage
  • it makes no difference when a worker is paid (monthly, weekly, daily, hourly) the NMW still applies
122
Q

what is employment legislation and discrimination

A

it is illegal for an employer to discriminate against employee on the basis of sex, pregnancy, race, age , religion, fixed-term or part-time

123
Q

what are the key areas where discrimination laws apply

A
  • recruitment
  • employee contract terms & conditions
  • promotions and transfers
  • providing training
  • deciding what fringe benefits
    employees receive employee
    dismissat
124
Q

what is an employment right

A

something to which an employee is entitled which is protected by law

125
Q

what is industrial relations

A
  • protection from unfair dismissal
  • employers must recognise union is
    >50% of staff are members
  • regulation of procedures for industrial
    action
  • role/powers of employment tribunals
  • EU-works councils requirements
126
Q

examples of employment rights in uk

A
  • 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
127
Q

what must a business ensure for consumer legislation

A
  • goods fit tier description
  • must be of satisfactory quality
  • goods are fit for the purpose specific
128
Q

what are types of ways consumers are protected

A
  • not using misleading advertising
  • customers have right of return and
    full refund if goods don’t comply with
    the law
  • services - price - repaired
  • cooling off period
  • distance selling regulations provide
    further protection for consumers
    against online businesses
129
Q

what are the main consumer laws

A
  • distance selling regulations
  • the sale of goods act
  • supply of goods and services act
  • trade descirptions act
130
Q

are legal changes always good for a business

A
  • what change is to legislation
131
Q

aims of competition policy

A
  • wider consumer choice in markets for
    good and services
  • technological innovation which
    promotes gains in dynamic efficiency
  • effective price competition between
    suppliers
  • investigating allegations of anti-
    competitive behaviour with markets
    which might have negative effect on
    consumers
132
Q

why do business need to be aware of competition law

A
  • to ensure it doesn’t breach
    competition law
  • to protect its position where
    competition law is breached by a
    competitor
133
Q

main elements of competition policy

A
  • ANTI-TRUST & CARTEL
    • eliminations of agreements that
      restrict competition including price
      fixing by firms who hold a dominant
      market position
  • MARKET LIBERALISATION
    • on trudging competition in
      previously monopolistic sectors such
      as reneger supply, retail banking,,
      postal services, mobile
      telecommunications + air transport
  • STATE AID CONTROL
    • policy analyses state aid measures
      such as airline subsidies to ensure
      that such measures don’t distort
      competition in the single market
  • MERGER CONTROL
    • investigation of mergers and take-
      overs between firms which could
      result in their dominating the market
134
Q

examples of anti-competitive behaviour

A
  • price fixing and market sharing
  • predatory pricing and limit pricing
  • charging excessively high prices
  • refusal to deal/discrimination
  • patent misuse
  • protectionist policies limiting overseas
    trade
135
Q

examples of prohibited agreements

A
  • agreements which directly or
    indirectly fix purchase or selling
    prices, or any other trading condition
  • agreements which limit or control
    production, markets, technical d
    development or investment
  • agreements which share markets or
    sources of supply
136
Q

what is the competition act

A

aims to prevent companies from acting in ways that distort, restrict or privet competition. Attempts to take action against firms that use restrictive practices such as collusion, price fixing, agreeing to limit supply to drive up prices, sharing information

137
Q

what is the completion and markets authority responsible for (CMA)

A

prosecuting such firms who engage in these activities, and can levy fines up to 10% of their annual UK turnover for every year in which a violation has taken place up to a maximum of three years.

138
Q

what isn’t allowed in price fixing

A
  • 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
    a smaller or weaker competitor out of
    the market
139
Q

examples of abuse of dominant position

A
  • imposing unfair trading terms, such as
    exclusivity
  • excessive, predatory or discriminatory
    pricing
  • refusal to supply or provide access to
    essential facilities
  • tying (stipulating that a buyer wishing
    to purchase one product must also
    purchase other products)
140
Q

what is abuse of dominant position

A
  • UK competition law prohibit
    businesses with significant market
    share unfairly exploiting their strong
    market positions
  • a dominant share is 50% or more
  • having a dominant position doesn’t
    itself breach competition law
  • it is the abuse of that position that is
    prohibited
141
Q

what are the penalties for getting caught abuse of dominant position

A
  • up to 10% of annual turnover
  • criminal prosecution
  • disqualification as directors
  • civil action by those affected
142
Q

examples of regulators in the uk

A
  • water monopolies
  • CMA
  • telecoms & broadcasting
  • financial services
  • rail regulator
  • general energy markets
143
Q

what do competition regulators actually do

A
  • monitor and regulate prices
  • standards of customer service
  • open up new markets
  • the ‘surrogate competitor’
144
Q

what is the ‘surrogate competitor

A

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

145
Q

key areas where a business must comply to environmental legislation

A
  • emissions into the air
  • storage, disposal & recovery of
    business waste
  • storing and handling hazardous
    substances
  • packaging
  • discharges wastewater
146
Q

health and safety regulation

A

health and safety is about preventing people from being harmed at work or becoming ill, by taking the right precaution and providing a satisfactory working environment

147
Q

health and safety responsibilities

A
  • an employer has important
    responsibilities for health and
    safety
  • its not just about protecting staff
    health and safety applies to
    many people who come into
    contact with business
148
Q

what does health ad safety apply to

A
  • 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
149
Q

examples of H&S industry issues

A
  • food processing (hygiene)
    -hotels (guest safety,hygiene)
  • chalice production (waste disposal)
  • air travel (passenger and crew safety)
  • tour operators
150
Q
A

business (14 decks)

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