unit 7 Flashcards
1
Q
what is ratio analysis
A
the comparison of financial data to gain insights into business performance
2
Q
what does ratio analysis help to answer
A
why one business is 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.
3
Q
where does the information for ratio analysis come from
A
-income statement
-balance sheet
4
Q
what is included in the income statement
A
revenues
-cost of sales
-gross profit
-operating profit
-net profit
5
Q
what is included in the balance sheet
A
current assets
current liabilities
inventories
trade receivables and payables]
long term liabilities
capital and reserves
6
Q
stages in ratio analysis
A
gather data- calculate ratios- interpret results- take action
7
Q
three main groups of rations
A
-profitability
-liquidity
-Financial efficiency
8
Q
who are the key users of ratios
A
profitability- shareholders, government, competitors, employees.
Liquidity- shareholders, lenders, suppliers
Financial efficiency-shareholders, Lenders, competitors.
9
Q
what is liquidity
A
the ability of a company to change its assets into cash.
10
Q
different between income statement and balance sheet
A
income is within one day whereas balance is within one year
11
Q
what his the difference between Current liabilities and non current liabilities
A
current is something you have to pay in 12 months, non current is more long term like a loan
12
Q
what are net assets
A
non current plus current assets minus liabilities
13
Q
limitations of ratio analysis
A
one data set is not enough
reliability of data
based on the past
comparability
14
Q
why might ratio data not be entirely reliable
A
-financial information involves making subjective judgements
-different business have different accounting policies
-potential for manipulation of accounting information (window dressing) -boosting figures, look carefully on where the data has come from.
15
Q
the importance of effective comparison
A
one ratio is rarely enough- need to compare with competitors- need to analyse over time.
Circumstances change over time
-markets and industries change
-different economic and market conditions.
16
Q
what ratios don’t tell you
A
competitive advantages
quality
ethical reputation
future prospects
changes in the external environment
17
Q
what is the definition of a balance sheet
A
a document describing the financial position of a company at a particular point in time. It compares the items owed by the organisation (assets) with the amount it owes (its liabilities) and shows how the firm has been funded
18
Q
what are non-current assets
A
what the business owns with a lifespan of more than a year.
19
Q
what are current asset
A
assets owned by the business that are likely to be turned into cash within one year.
20
Q
what are current liabilities and what are non-current liabilities
A
current liabilities are short-term, debts of the business , will have to be repaid within one year.
non-current liabilities, are debts that need to be repaid, but not within one year
21
Q
why is a balance sheet beneficial.
A
shows thew 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, e.g stock, premises, debt
22
Q
what are net current assets also known as
A
working capital
23
Q
liquidity
A
a firms ability to pay its short-term liabilities (debts)
24
Q
what needs to be the same on a balance sheet
A
net current assets and total equity.
25
what are assets
26
what are tangible assets
27
what are intangible assets
reputation, good will.
28
what are inventories
29
what are receivables
debts owed to a business by their customers
30
what is total equity
31
what is the calculation for net current assets
current assets-current liabilities
32
what is the calculation for net assets
total assets- total liabilities
33
what is the equation for capital employed
total equity + non- current assets
34
what does an income statement describe
the income and expenditure of a business over a period of time, usually a year.
-shows the profit or loss made by a business
-also known as the profit and loss account.
35
what are exceptional items
money from selling or buying that only happens once- selling machinery
36
what're finance income
any interest paid to the company on money lent or saved
37
what are finance expenses
any payments of interest on loans held
38
what type of business is needed to post their income statement
plc
and
39
why are public and private limited companies charged corporation tax on profits
they have gone through the legal incorporation process
40
what is the earnings per share formula
profit for the period/number of shares
41
what does earnings per share tell you
an indication of the amount of money per share but assumes all profit will be returned as dividends.
-firm decides what percentage of profit will be paid back.
42
purposes of income statement
-measures company performance and impacts pf strategies.
-owners can assess their return on investment
-to abide by legislation as part of being a limited company.
43
what is profit quality
whether a source of profit is sustainable in the long term.
44
types of profit quality
high profit quality- source of profit that is likely to continue, e.g a successful well-established product such as Heinz ketchup
low profit quality- a result of actions that are unlikely to occur again (exceptional items), e.g selling an asset such as a building.g HSBC a sale and leaseback deal for their headquarters in Canary Wharf London
45
what is profit utilisation
the way in which a businesses chooses to use its profit. common in two ways.
-dividends to pat shareholders
-retained profit- reinvest profit into the business to maintain its liquidity.
46
how do shareholders have authority in the businesses actions with profit
some shareholders have a short-term interest looking for predictable and regular dividend payments
-other shareholders, such as those of companies still run by their initial founders or family-owned private limited companies, may have more of a long term perspective and be happy to retain profit to fund expansion.
47
problem with income statement
its based on historical data, CEO must convince shareholders that the current year will be better.
48
what are the six financial ratios
current ratios
gearing ratio
ROCE (return on capital employed)
payables days
receivables days
inventory turnover
49
liquidity
a firms ability to pay a firms short term debts. They do so with their current assets, using a balance sheet shows how easily a firm is able to pay their short-term debts and how solvent they are.
50
what is the current ratio
helps to understand if the firm is able to meet its short-term debts
51
current ratio
current assets/current liabilities :1
52
what is the recommended ratio
2:1 or 1.5:1
53
what does 2:1 tell you
for every pound owed you have 2 pounds to pay it off
54
why is a ratio of 8:1 seen as a bad ratio
the firm has a lot of money sitting in banks which should be reinvested into non-current assets.
55
why might a low current ratio not be bad
for Land Rover and other manufacturing industries the turnover is very high
56
current ratios for Sony,apple and Tescos
sony-0.69:1, apple- 1.07:1, Tescos: 7.37:1
57
evaluating current ratio
firms have different requirements depending on their size.
How does the current ratio compare with competitors
how is it doing, trend-
58
what does gearing do
measures the proportion of the businesses capital provided by debt.
59
equation for gearing
non-current liabilities/ total equity +liabilities x100
60
why is gearing useful
shows stakeholders the capital structure of the business
61
why would high gearing be good
50% or more if the interest rates are low- opportunity to borrow money to invest, less need to raise finance through share capital when bank loans are used
62
why would low gearing be good
if the interest rates are low below 25%, will have lower interest and loan repayments positively impacting its liquidity.
makes a business more attractive for investment to potential stakeholders.
-less vulnerable for changes in interest rates
-easier to liquidate the business
63
what is profitability
a firms profit in relation to its size
64
what is ROCE
return on capital employed
65
what does ROCE show
the operating profit (a measure of the firms success compared with the total capital employed
66
ROCE equation
operating profit/total equity+non-current liabilities x100
67
what is the best ROCE
the bigger is the better
68
benefits of ROCE
lets the owners or potential investors understand how efficient then business is at producing profit based on capital invested in the business.
69
what is inventory turnover
measures how often each year a business sells and replaces its inventory
70
what are the three types of inventory
-raw materials and components
-work in progress
-finished goods
71
what is the inventory turnover equation
cost of sales/average inventories held
72
how can inventory turnover be increased
sell-off or dispose of slow-moving or obsolete inventory
introduce lean production techniques
73
factors influencing inventory turnover
74
what are payables days
the average length of time taken by a business to pay amounts it owes
75
what are receivables days
the average length of time by customers to pay amounts owed
76
equation for receivables days
trade receivables/revenue x365
77
what are trade receivables
amounts owed to a business by customers
78
what are trade payables
amounts owed by a business to suppliers
79
what should be a business aim for their receivables days
a short period to maintain the best cash flow possible.
80
equation for payables days
trade payables/cost of sales x 365
81
what should be a businesses payables days aims
firms that receive long credit periods will have high figures; those that pay in cash will have low figures
82
comparing receivables and payables
83
what are objectives
statements of specific outcomes that are to be achieved
84
what are business objectives
specific intended outcomes of business strategy
85
what is the hierarchy of business objectives
-mission
-corporate/strategic (whole company)
-functional
-team
-individual
gets increasingly detailed as it goes down
further up the more strategic
86
what are the four functions of a business
finance.
operations.
HR
Marketing
87
examples of hierarchy of objectives
corporate objective- 12% market share
functional objective- sakes per customer of £45
unit objective-shop sales of £500,000
88
what are corporate objectives
those that relate to the business as a whole
89
purposes of corporate objectives
provide strategic focus
-measure performance of a firm as a whole
-inform decision making
-set the scene for more detailed functional objectives
90
key areas for corporate objectives
market
innovation
productivity
physical and financial resources
profitability
management
employees
public responsibility
91
what is offshoring
manufacturing abroad where the labour costs are cheaper.
92
example of a corporate objective
start bucks- 'the most recognised and respected brands in the world'.- however they lost respect due to tax evasion.
costa and premiering,'reach 85,000 uk hotel rooms and 2.5 billion system sales in Costa by 2020
93
what are functional objectives
set for each key business function and are designed to ensure that the corporate objectives are achieved.
94
examples of how functional objectives might support corporate objectives
increase sales- successfully launch five new products in the next two years
reduce costs- increase factory productivity by 10%
95
key influence on corporate objectives
business ownership
attitude to profit
ethical stance
organisational culture
leadership
strategic position
stakeholder infleunce
96
external influences on corporate objectives
short-termism
economic environment
political/legal environment
competitors
social and technological change
97
what is short terms
when a business prioritises short term rather than long term performance
98
what is the problem with short terms
thinking about short terms could cost you in the long term e.g reputation- use in evaluation
might damage:
market share
-quality
-innovation- BT vs Land Rover Jaguar
Land Rover jaguar decided to keep their apprentaships running with high costs in recession. After recession they came out on top. Caused BT to have natural wastage.
-brand reputation
-employee skills and experience
-social responsibility- funding a local football team
99
why might a business be concerned with short term performance
stock market focus on latest financial performance
-reliance on bonuses based on short term performance
-frequent change of leadership and stratergy
100
possible indicators of short terms
bonuses based on short term objectives
low investment in research and development
high dividend payments rather than reinvesting profits
overuse of takeovers rather than internal growth
might help a company to be sold
101
what is synergy
two companies companies coming together to form a better income
102
what is the difference between a statergy and a tactic.
tactics- short term, normally to address a problem- buy one get one free to real competitors
-strategy- long term- how a business intends to achieve its objectives e.g equal up the work place, positive discrimination- hiring types of people you don't have.
103
an example of leaders being increasingly critical of short-termism
Since Polman took over as CEO in 2009 of Unilever he stopped updating stock market every quarter, which influenced short terms
104
examples of strategic decisions
external growth via takeover
enter international market
rebrand the business
-adopt cost minimisation stratergy
105
examples of tactical decisions
relocate staff from takeover HQ chose locations in new market
launch rebranding campaign
106
what is LAMB RIPPERS
a way of remembering the business strategies
107
what is lean production
aimed to reduce waste in the form of overproduction, excessive lead time, product defects in order to make a business more efficient and more competitive.- cost minimisation
108
what strategies does lean production comprise off
just-in-time, zero-defects, Kaizen, Benchmarking, team-working, quality circles
109
what is m
marketing- 7ps
110
what is b
business restructuring- people, process, technology, structure
111
what is retrenchment
getting smaller as a business- beneficial in recession.
112
how does process help as a business strategy
the reducing need for physical stores, banking switching to online.
113
how does structure help with business strategy
centralised and decentralised decision making
114
why might a business want to relocate
-need to be nearer to a supplier, or workforce- helps lean production/ just in time
-raise costs
-increase brand perception
-expansion
115
examples of relocation
post Brexit- Dyson moving HQ to Singapore
-panasonic is moving its European HQ from the UK to Amsterdam
116
what is re-shoring
bringing manufacturers back to the original business
117
what is internationalisation
or globalisation is when you sell your goods or services into foreign markets
118
what is p
product innovation- new idea to the market
marking the same product in a better different way
119
example of products which failed to innovate
Hitachi
120
what is the second p
partnerships
121
why are partnerships important in strategic strategies
joint ventures- two companies voluntarily come together to work as one.
e.g airbus consortium- made up of several aircraft companies that could not compete against Boeing.
122
another example of partnerships
Starbucks, both west airlines
123
what is e
employee relations
124
what are employee/employer relationships
good relationships can boost productivity.
use employees strengths
125
what does re-shoring do
bringing back parts manufacturers back to UK
e.g reshoring clarks bringing desert boots home to Somerset from Asia.
126
what does s mean
scale of production
127
what does sale of production mean
increasing the scale of production can help firms reduce average costs. when firms expand, costs are likely to rise but average costs can fall.
small business/handmade find it hard to upscale.
128
what is swot analysis
analysing the strategic position of a business
-helps a business assess its competitive strength and external environment
129
what does swot stand for
strength( internal)
weaknesses (internal)
opportunities (external)
threats (external)
130
what are examples of strengths
technological skills
leading brand
distribution channels
customer loyalty
production quality
scale
management
131
examples of weaknesses
absence of important skills
weak brands
poor access to distribution
low customer retention
unreliable product
sub-scale
management
132
examples of external opportunities
changing customer tastes
technological advances
changes in government politics
lower personal taxes
changes in population age
new distribution channels.
133
examples of external threats
-changing customer base
-closing of geographic markets
-technological advances
-changes in government politics
-tax increases
-changes in population age
-new distribution channels
134
why asses strengths and weaknesses
-competitive advantages
-key performance indicators
-roles for benchmarking
135
evaluating strengths+ weaknesses
-reliability
-how sustainable are the strengths
-can the weaknesses be overcome (do we need to go abroad?)
136
assessing opportunities and threats
how to make threats opportunities
137
what are porters five forces
new entrants
substitutes
Buyer power
supplier power
rivalry
138
what does porter describe
the competitiveness of a market as determined by its key external factors
139
what in non financial data
140
limitations of financial data in assessing business performance
finance ratios tend to look backwards- at historical 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.
141
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
job satisfaction
Marketing: market share, sales per employee
sales growth
customer retention rate
142
making connection between financial and non financial methods of performance
e.g improving operating profit margin compared with key competitors might indicate one or more of these non-financial measures. e.g higher market share, economies of scale, increased customer retention and more.
143
core competencies
something unique that a business has, or can do strategically well.
e.g dyson- innovation
144
where in swot analysis does core competencies link to
strengths- competitive advantage
145
examples of 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
146
how has Netflix stuck to its core competence
'spare us the trip to a video rental store'.
147
how do you know if it provides a core competencies
does it provide consumer benefits.
is it easy for competitors to imitate
can it be leveraged widely to many products and markets.
148
what prahalad and Hamel suggest businesses do
outsource non core activities.
however over zealous outsourcing has damaged business competitiveness
149
other criticism of core competencies
difficult to identify core competencies that are genuinely unique
-possible for business to become complacent about its core competencies.
e.g codec camera
150
what is short terms
prioritises short term rather than long term performance.
151
what might increasing share price in short term stop a business from doing
not investing in marketing, and research and development
152
what might increasing gross profit or operating profit stop a business form doing
decrease quality- using cheaper raw material.
153
what are the long term expenses of short terms
market share
quality
innovation
brand rep
employee skills and experience
social responsibility and sustainability
154
what is mittlestand companies
group of 1,000 companies, contribute to 52% of the countries economic output
155
what is unique about mittlestand
they invest in long termism- invest in workforce (also family run)- been flexible with workforce, lean production, focus on innovation and customer service.
156
what is Elkington's triple bottom line
a way of assessing business performance based on three important areas. Profit, people and planet.
what the purple for a business organisation are
share holder concept- purpose of a business is to reward its shareholder.
stakeholder concept- business have a moral obligation to act in a socially .responsible manor
157
what is profit in tbl
focus on financial measures such as ROCE, gearing and shareholder returns.
158
what is people in tbl
focus on shareholders through employee welfare, customer satisfaction, supply chain management and community projects.
159
what is planet in tbl
measuring the impact that the organisation has on the environment and taking steps to limit Any negative impacts.
160
what are business legislations
set of rules or regulations at which a businesses has to comply with.
161
examples of business that changed before a legaslation
mark and Spencer's plan a- switched to paper bags
Coca Cola- Coke Zero avoiding sugar tax
162
how does legaslation effect investors
prevents lying about balance sheet and financial statement
163
key areas to consider for legaslation
employment
consumers
environment
competition
health and safety
164
example of unequal pay
BBC presenters gap between men and women
165
what is the basic rule fright to equality
man and women are entitled to equal pay for work of equal value
166
what has changed in the legaslation
workers have the right to go to employer and asked for pay If they think its unequal.
if its unequal they can take the employer to an employment tribunal.
167
what is an employment tribunal
an unbiased tribunal not based on money case for both employer and employee
168
what are other types of employment legislation
discrimination- it is illegal for an employer to discriminate against an employee on the basis of sex, age, race, disability, sexual orientation, religion/belief
169
key areas in which discrimination laws apply
employing staff
recruitment
employee contract
promotions and transfers
providing training
fringe benefits
employee dismissal
170
what is an employment right
something to which an employee is entitled which is protected by law
171
examples of employment rights
right to have 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
172
what are work councils
not trade union- independent body in organisation in EU- strict an powerful- every single person is a member of it
173
what must a business ensure in consumer legeslation
goods must fit their description, businesses must avoid inaccurate claims
-must be of satisfactory quality- has to be tested, must work and have no blemishes
-goods are fit for the purpose specified, take care when explain what the product is used for.
174
what are the main customer laws
distance selling regulations- gives consumers protection when they buy goods or services by mail order, phone or online
-Requires goods to be as described, fit for their purpose and of satisfactory quality. If they are not, the customer can reject them.
-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
175
aims of competition law
wider consumer choice in markets for goods and services
-technological innovation which promotes gains in dynamic efficiency
-effective price competition between suppliers
-investigating allegations of anti-competitive behaviour.
176
main elements of competition policy
anti-trust and cartels- elimination of agreements that restrict competition including price fixing by firms who hold a dominion market position. gas and oil
market liberalisation: Introducing competition in previously monopolistic sectors such as energy supply, retail banking, postal services, air transport. ROYAL MAIL
state aid control: Policy analysis state aid measures such as airline subsidies to ensure that such measures do not distort competition in one market
Merger control-
Investigation of mergers and takeovers between firms which could result in their dominating the market ALDI & SAINSBURY
177
examples of anti competitive behaviour
price fixing and market sharing
-predatory pricing and limit pricing
-charging excessively high prices
-refusal to deal
-patent misuse
-protectionist policies limiting overseas trade
178
examples of prohibited agreements
limit or control production, markets, technical development
179
what is the competition act 1998
aims to prevent companies from acting in ways to distort, restrict or prevent competition, aims to take action against firms that use restrictive practices such as collusion, price fixing
180
what is the competition and market authority (CMA)
prosecutes such firms who engage in these events, and can levy fines of 10% of their revenue for every year in which a violation has taken up to a maximum of 3 years.
181
what is a dominant position
with 50% or more of the market share
-does not itself breach competition law
182
example software abuses of dominant position
imposing unfair trading terms, such as exclusivity
-tying
-refusal to supply or provide access to essential facilities.
183
penalties for getting caught
disqualification as directors
civil action by those affected.
184
examples of regulators
CMA
OFWAT-water monopolies
OFGEM
185
key areas where businesses must comply
emissions into the air
storage, disposal,recovery of business waste
packaging
waterwaste
186
health and safety regulation
preventing people from being harmed at work or becoming ill, by taking the right precaution and providing a satisfactory working environment.
mclaren prams- button that closed pram, but was faulty and people got fingers caught.
nissan rtr- accelerator kept getting stuck.
187
examples of h and s industry issues
food processing- hygiene
hotels- guest safety, hygiene
chemical production- waste disposal
air travel- passenger and crew safety
tour operators
188
what is gdp
gross domestic product
189
what is the business cycle
the level of demand in most markets that is influenced by the rate of economic growth
190
how does gdp effected by economy
the gap growth will vary depending on the state of the economic cycle
191
what happened in 2020 on the business cycle
massive fall to -9.92%
192
what is GDP
a measure of the value of output in the economy, value use to access changes in economic growth
193
what is demand
how much of a good or service a consumer wants or is able to afford, for a business demand turns into revenue
194
what is the business cycle also known as
the economic cycle
195
what is in a business cycle
sequence of slump, recovery boom and recession, measured by changes in GDP from one quarter to the next.
196
main causes of the cycle
changes in the level of a business and consumer confidence
-alternating periods of stocking and de stocking
-changes in the value of a consumer spending and business investment
-changes in government policy which can induce change in the economy
197
how can businesses benefit of a recession
lower interest rates.
198
Discuss the view that a recession can only be viewed as a threat for all UK businesses. (16 marks)
re.cessions can cause declines in sales- less consumer confidence.
damage small businesses. Means UK businesses will have two cut costs- high operating costs in UK
199
what are exchange rates
the price of one currency expressed in terms of another currency
200
example of a currency that devalued due to war
Russian ruble after Ukrainian war.
201
what concepts do exchange rates link to
pricing
competitiveness-costs more fro imports
PED- oil
business costs- increase due to exchange rates
international trade
202
ways exchange rates impact business activity
-price of exports in international markets
-cost of goods brought from overseas
-revenues and profits earned overseas
-converting cash receipts from customers overseas
203
what might cause an increase in exchange rates
increasing demand for exports- higher demand for the currency
-lower demand for imports- lower demand for the currency
-speculation- traders may bet 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
204
factors affecting the significance of exchange rates on businesses
impact how much they export to other economies
wether domestic businesses face strong competition from overseas firms in their market
205
what does SPICED
strong pound imports cheaper exports dearer( more expensive)
206
what is inflation
a sustained increase in the average price level of an economy
207
how is inflation measured
measured by the annual percentage change in the level of prices as measured by the consumer price index.
208
what is a sustained fall in the price level called
deflation
209
concept links
PED
Selling prices
business costs
exchange rates
gross profit margins
210
what is the government target for inflation
2%
low and stable
211
what is low inflation also known as
price stability
212
effects of inflation
afford few goods and services
-higher wage demand- higher prices
213
link to PED
if a product is elastic- reduction in customers- lower profit margins.
214
how do governments measure inflation
CPI basket of goods- 744 items looked at and prices are logged.
215
when did the UK inflation rate rise
2022- covid or Ukraine
216
why was the UK inflation rate so low before pandemic
falling global commodity prices including oil
-slow wage growth in the labour market
-falling food prices
-sustained price deflation in technology products
-slower real economic growth- towards 2 percent
-still some spare capacity on the supply-side of the economy.
217
how would a government increase demand
increase tax e.g income, VAT
218
what is cost push inflation
when cost of production are increasing, causes are external shocks, depreciation in exchange rates, acceleration of wages
219
what would cost push cause
firms raising prices to protect their profit margin
wages often follow prices
220
what is demand pull inflation
occurs when there is excess aggregate
-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
221
what are the two main causes of inflation
demand pull- when there is excess demand
cost pull- when costs rise
222
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
-rising consumer confidence
-faster rates of economic growth in other countries- boost to UK exports overseas.
223
costs and consequences of inflation
- money loses its value and people lose confidence in money as the value of savings is reduced.
-can get out of control- price increases- increase wage demand, wage-price spiral.
-income falls for businesses
-inflation can favour borrowers
-can disrupt business planning
-cause of higher unemployment, lack of competitiveness
- rising inflation associated with increased exchange rates.
224
consequences of general inflation
sales rev should rise
-workers are more likely to demand higher pay to compensate for consumer price inflation
-labour intensive industries more at risk.
225
consequences of input cost inflation
cost-push inflation will vary from industry to industry
-firms that need to buy significant materials may find profit margins squeezed.
226
two types of government policy
fiscal and monetary
227
what is fiscal policy
involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand , output and jobs
attempt to influence the direction of the economy
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what is monetary policy
the use of the money supply to influence the level of economic activity
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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 is taxation
a government tool to impact economic activity
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types of taxes
direct- directly from a persons income. Income, corporation, national insurance
indirect- on products or spending
vat, road tax, stamp duty, fuel tax
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how can taxes be used as an incentive
to customers to purchase products that benefit society, such as green tech e.g solar panels.
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examples of taxes
VAT- value added tax- however some things don't have vat e.g energy saving materials is only 5%
corporation tax- 20%- pay on profits, government have cut in the past to encourage foreign firms to invest in the business
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what is national insurance
taken automatically from workers who pay and contribute towards state pensions such as pensions.
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what is proportional tax
same percentage of tax for all incomes
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what is progressive tax
tax rate increases as the taxable amount increases
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what is regressive tax
larger proportion of income is taken as the individual earns less e.g 20% VAT is a bigger proportion of someones spending if they are on a low income.
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how does fiscal policy work
expansion and contraction policy
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what is an expansion policy
wants the economy to grow and expand, Gove people and firms more money. More disposable income. Buy more- increased demand in country.
cut incorporation tax, more post tax profit
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what is a contractionary fiscal policy
increasing taxes
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why do we need government spending
to provide low income support
redistributing money
help to decrease crime rates.
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what are the types of poverty
relative and absolute poverty
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I
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relative to the normal person
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what is monetary policy
the use of only supply and interest rates to influence the level of economic activity.
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what are ate key factors influencing the amount of business investment
-actual and expected demand, -expected profits and business taxes
-interest rates and availability of business finance
-expected profits and business taxes
-business confidence
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what happens when interest rates fall
costs of servicing loans is reduced
-increased spending power
-consumer confidence increases
-disposable income rises
-business investment boosted
-housing market effects- more demand and higher property prices
-exchange rate and exports- cheaper currency will increase exports.
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what is money supply
a measure of the value of coins and notes circulating and other equivalents that are easily exchangeable into cash.
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what is quantative easing
last resort for banks after interest rates cannot be reduced more. inject money directly into an economy aims to prevent inflation. central bank rates new money, which is used to buy government bonds, banks sell these bonds and receive cash, increases liquidity, supports increase in lending.
also could drive bond prices higher, higher bond prices cause a fall in interest rates of bonds, makes it cheaper for governments to borrow money, increase government spending.
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what is forward guidance
an advanced warning of forecast expectations for interest rates.
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what is protectionism
is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. Amin aim is to cushion domestic businesses
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what is free trade
trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold economically liberal positions,
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types of protections
- legislation impacting foreign firm
-tariffs
- quotas and licenses
- tax breaks
- subsidies
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what is intellectual property
copyright, patents, logo,
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what are subsidies
amount of money that a government gives to a business to protect them against foreign competition. mostly fledgeling businesses, renewable energy. e.g arms companies
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difference between subsidy and loan/grant
subsidy could happen for a longer duration
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cons of protectionism
consumers have less choice
-free trade creates more jobs than it destroys
-consumers have to pay higher prices.
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the UK's developing countries trading scheme
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notes on handouts
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what is globalisation
trading between nations, either for free or for costs.
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examples of takeover or mergers as an example of external growth
craft taking over Cadbury
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what is internal growth
or organic growth- opening up factories abroad funded through own reserves.
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what is a joint venture
two or more companies collaborating which is increasingly popular for companies expanding into Asia, EU firms provide cash, machinery skills. example is airbus which was a consortium of businesses.
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what is technical cooperation
allows co-production and joint assembly. could include using distribution channels, especially for smaller companies. this could lead them to be taken advantage off.
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what is licensing and an example
permission to make a product in a certain country granted by the original manufacturer in exchange for a fee. Carlsberg- Coca Cola.
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globalisation
a process in which economies have become increasingly integrated and inter-dependent
is dynamic
not inevitable
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key characteristics of globalisation
greater trade across borders in goods and services
increase in transfers of capital including the expansion of foreign direct investment 51% of the largest economies in the world are corporations.
greater use of outsourcing and offshoring of production. e.g iPhone. part of a complex supply chain
high levels of labour migration.
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what are the facts contribution to globalisation
containerisation: cost of ocean shipping have come down
technological change: reduced the cost of transmitting information
economies of scale: increase in the minimum effect scale
differences in tax systems: lower unit labour costs, to attract FDI
less protectionism: import licensing and foreign exchange controls have been gradually dismantled
growth of MNC: global businesses and brands have invested increasingly in expanding internationally.
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benefits from globalisation
encourages producers and consumers to benefit from economies of scale.
-competitive markets reduce monopoly profits and incentivise businesses to seek cost-reducing innovations
-helped poor countries to experience large economic growth.
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drawbacks of globalisation
inequality
finish off.
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what is an emerging economy
is used to describe an economy in the process of rapid growth and industrialisation
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concept links of emerging markets
market development
globalisation
growth strategy
economic growth
international trade
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common features of emerging markets
economies making a transition
-rapid industrialisation
-have potential to become developed economies
-faster long-term economic growth than most developed economies
-many inhabitants still in poverty
-businesses struggle to access global markets.
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examples of emerging economies
Guyana- fastest growing economy
11 billion barrels
Bangladesh 6.8%- 85% of exports are driven by the textiles industry. Bangladesh has 170 million inhabitants.
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perceived business threats in emerging markets
-increasingly large pool of skilled but ow cost labour
undervalued currencies make their exports cheaper
-inadequate protection of brand and intellectual property
-state subsidy of industries to make them more competitive globally.
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business opportunities in emerging markets
-growing number of educated middle class consumers- growing consumer spending
-cultural shifts, higher demand for personal products, private education and healthcare
-demand for infrastructure and other products and services from developed economies.
source of high skilled but low cost labour
-great potential for joint ventures and acquisitions.
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risks of emerging markets
politically instability
-cultural differences
-variable approaches to financial and legal dealings
-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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what has led to investment into emerging markets
multinationals
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what will emerging markets do
drive economic growth
by 2035 , emerging markets will contribute about 65% of global economic growth.
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arguments for CSR
-the ethical thing to do
-improves the businesses image and rep
-necessary in order to avoid excessive regulation
-socially responsible actions can be profitable
-improved social environment benefits business
-help attract investors
-can increase employee motivation
-correct social problems caused by businesses.
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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
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CSR in the workplace
fair treatment at work
-workplace diversity and equal opportunities
-right to be kept informed
-health and safety
-work life balance
-opportunities for participation in decision-making
-training in new skills
-provision of social facilities.
-working conditions
-attitude to disadvantaged groups
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CSR in community
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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issues with CSR and environment
effects of pollution, noise, waste disposal, congestion
-waste management
-chemical use
-avoiding excessive packaging
-use of energy
-water consumption
-biodiversity
-carbon emissions.
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what did Milton Friedman say about CSR
responsibility of business towards society is the maximisation of profits to the shareholders.
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case against CSR
only social responsibility is to create shareholder wealth
-efficient use of resources will be reduced
-extra costs will be incurred which may be carried on to consumers.
-stifles innovation.
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results of shareholder theory approach
growing competition on price
-short-term performance pressures from shareholders (plc)
-constant restructuring and downsizing
-relocation to low-cost regions.
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types of CSR
cause promotion: increasing awareness an concern for social causes
Cause-related marketing: Contributing to causes based on sales
Corporate social marketing: behaviour change initiatives
corporate philanthropy: Donating directly to causes
Community volunteering: employees donating time and talents in the community
Social responsible business practices: Discretionary practices and investment to support causes
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what is in Carroll's CSR pyramid
Philanthropic
Ethical
Legal
Economic
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basics of CSR pyramid
A simple approach for how businesses should approach CSR
-CSR is built on the foundation of profit- must come first
-then comes the need for a business to ensure it complies with all laws and regulations.
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strengths of Carroll's CSR pyramid
easy to understand
simple message- more than one element
-emphasises importance of profit.
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weaknesses of CSR pyramid
too simplistic
-should ethics be at the top
-businesses do not always do what they claim when it comes to CSR.
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what is tech-lash
back lash against tech.
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what are the marketing opportunities with tech
new markets- generating highly valuable markets
-generate high revenue streams.
-new ways to sell those products
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example of new tech attracting new customers
sky glass- do not have to have a dish
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what is big data
collecting large amounts of data- too much
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for types of crowdfunding
donation model- hundreds of small donations
reward model
debt model
equity model
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types of process innovation
CAD- computer aided design
CAM- computer aided manufacturing
lower unit costs
new methods of production.
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what is disruptive technology
introduction ion new process or product that radically changed
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what has happened due to the rise in tech
redundancies as jobs are not needed e.g Loyds between 2008 and 2015 reduced its workforce by over 50,000
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What is M commerce
use of mobile devices to conduct commercial transactions- 1/3 of all shopping is now done through phones and this grew 40% between 2017 and 2021
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what is S-commerce
shopping via social media.
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what is an omni channel
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 mobile device.
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implications from business strategy to do with tech
price of technology is falling- no longer just for developed nations
breakthrough to mass market is taking a shorter amount of time.
business will have to adapt strategies to embrace the technology
social media
mobile technology
data analytics
cloud computing
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what is porters five forces
a framework for analysing the nature of competition within an industry.
Helps to understand and asses industry profitability and attractiveness
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reasons for competitive rivalry
size
structure
distribution channels
customer needs and wants
profitability
growth
product life cycle
alternatives
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high profit industries
soft drinks
pharmaceuticals
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low profit industries
airlines
cafes
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low industry profits associated with
strong suppliers
strong customers
low entry barriers
many opportunities for substitutes
intense rivalry
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what are porters five forces:
threats of substitute products
-bargaining power of buyers
-threats of new entrants
-bargaining power of suppliers
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investment appraisal
never used in isolation, only as a tool to help to aid decision making.
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what is payback
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what is investment appraisal
the process of analysing whether investment projects are worthwile.
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three main methods of investment appraisal
payback period
average rate of return
discounted cash flow
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what is payback period
the time it takes for a project to repay its initial investment.
Measured in time days and years
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what is average rate of return
looks at the total accounting return for a project to see if it meets the target return. measured in percentage return.
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what is discounted cash flow
net present value calculates the monetary value now of the projects future cash flows. Monetary value.
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How to calculate payback:
When does the running total move from negative outflow to positive inflow. always year zero= investment
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payback formula
no. of full years+amount of investment not recovered/revenue generated in next year
be careful of units
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benefits of using payback period
simple and easy
focuses on cash flow
emphasises speed of return
allows you to compare products
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drawbacks of using payback period
ignores cash flow after payback reached
does not take into account the time value of money
encourages short-termism
ignores qualitative aspects (e.g customer service)
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What is average rate of return
The annual percentage return on an investment project based on average returns earned by the project.
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how to calculate ARR
calculate the average annual profit
-divide the average annual profit by the initial investment
-compare with the target percentage return
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drawbacks of using ARR
Ignores the timing of returns and cash flow, does not adjust for the time-value of money
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what is Net present value
calculates the monetary value now of the project's future cash flow
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what is discounting
the method used to reduce the future value of cash flows to reflect the risk that they may not happen.
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time value of money
better o=to receive cash now rather than in teh future
future cash flows are worth less
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how to calculate the present value of a future cash flow
cash flow x Discount factor = present value
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how to measure cash flow
add together all the future values of cash flow
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benefits of using NPV
considers all future cash flows
-reflects the risks that future cash flows will not be as expected
-different levels of risk can be accounted for by adjusting the discount rate
-creates a straightforward decision- positive NPV suggests project should go ahead.
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drawbacks of using NPV
The most complicated method compared with Payback and ARR
-Choosing the discount rate is hard, particularly for long projects
- Results can be influenced/ manipulated using the discount rate
-maybe does not take into account the qualitative factors.
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factors influencing investment decisions
financial and non financial factors
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what are the financial factors that influence decision making
investment criteria
total returns
alternative investments
financial position (gearing and liquidity)
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what are the non financial factors influencing decision making
-corporate objectives
-organisational culture and attitude risk
-management confidence in the investment appraisal data
business image and rep
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what is criteria
measures by which an investment will be judged.
