Unit 7 Flashcards
Analysing the Strategic Position of a business (30 cards)
Objectives
Objectives must be SMART
Specific
Measurable
Achievable
Realistic
Time Frame
Needed Because:
- To provide them with some sort of target to aim for and provide sense of direction
- Business dont solely seek maximal profits but hold other aims such as survival and growth
- Targets help to bring a business and workforce together as a collective work towards the achievement of a goal
Objectives Hierarchy
Mission Statement
|
Corporate Objectives
|
Strategic Decisions
|
Functional Decisions
Functions
Finance - Control money
Operations - product development and production
Human Resources - workforce
Marketing - promotion
Mission Statement
> Overall Purpose of a Business
Guides everyday operations and decision making and helps strategic planning
Influenced by the owners of a business (shareholders own the business)
Influences on the Mission Statement
> The Founders belief and culture
> Legal Structure (Public Sector?, do they have shareholder?)
> The level of competition in the industry
> The relative power of the different stakeholders
Benefits of a Mission Statement
> Helps discover a starting point for the company
> Help ensure everyone is focused upon the purpose and seek to achieve the same goals and objectives
> Allows investors to identify where their money will be spent
> Assists customers with understanding ethics and objectives of a company
Evaluation : Mission Statements
> Provides a sense of cohesion so everyone understands and is working towards the same goal
> Deliberately vague and aspirational to achieve these overtime
> Might not always be achieved and may be considered unrealistic it is better to have an aim than nothing at all
The Main Aims and Objectives of a Business are:
Survival
Growth
Profit Maximisation
Sales Maximisation
Increased Shareholder Value
Corporate social responsibility / ethics / environment
Survival
- 30% of new businesses fail within 2 years
- Initial aim is therefore to keep trading by gaining customers, establishing a positive reputation for the business and managing their finances successfully
- Even large firms can collapse and sometimes need time to reposition themselves in the market to avoid failure
Growth
- Next step after survival as a business aims to become bigger so as to increase market power
- Commonly achieved by reinvesting profits to finance expansion
- Impacts upon shareholder and investor returns in short run but if successful generates higher returns in the long term
- Aim is to attract new customers and to increase market power at the expense of rivals
Profit Maximisation
- One of the main objectives of businesses in the private sector
- Owners seek a profitable return on their investment
- Comparisons are often made against rival firms in the same industry to assess how successful a business is being managed
- Measurements incude ratios such as the gross profit margin and ROCE
- Long - term profit growth will motivate investors and ecourage additional investment as well as helping to secure jobs
Increased Shareholder Value
- Shareholder are keen to measure the amount of dividend that they get paid and any increases in the share price
- The key objective for a business is to try and increase the share stock price on the stock market
- Improve investor confidence and secure management positions and jobs
- Senior managers have bonuses tied to increases in share price as an incentive
- A low or rapidly falling share price, puts risk on the business being taken over by a competitor
Corporate Social Responsibility
- Consider their impact upon society and minimise their negative effects whenever possible
- Can affects profits as firm has to pay more to ensure workers are paid fairly, suppliers dont exploit their labour forces and resources are sustainably sourced
- If not they risk negative publicity and pressure group activity - can harm firms sales and image
Corporate Objectives
Provide specific and measurable targets
Relate to entire business are not necessarily specific to a particular functional area or department.
They are established by the senior management of a business
Functional Objectives
Also known as departmental objectives. These are the objectives of each department necessary to help the business achieve their overall business objectives.
Each Objective is specific to each department. For example, marketing objectives will be applied to the marketing department
E.g.
Operations: Reduce Waste by 20%
Human Resources: Reduce Labour turnover by 5% in the next year
Sales and Marketing: Increase sales by 12% in the next year
Constraints on Objectives
INTERNAL
Availability of resources
Business Culture
A new leader
Size of the business
EXTERNAL
Changing legislation
Economic conditions
Technological change
Demographic change
Tactics
Short term responses to opportunities or threats faced by a business
Less critical decisiosn that are easier to reverse
E.g. change suppliers for certain good or increase spending on marketing to combat competitor actions
SWOT Analysis
Consider the strengths weakness opportunities and threats facing a business
Internal Factors
- Relate to the current position within a firms control
STRENGTHS
E.g.
- Strong Brand Name
- Strong Distribution Network
WEAKNESSES
E.g.
- High levels of unskilled staff
- Increasing labour turnover
External Factors
- Factors expected to occur in the future and outside a firms direct control
OPPORTUNITIES
E.g.
- Expansion into China
- Develop college - business links
THREATS
E.g.
- Entry of new competition
- Uncertainty over brexit
Why Use SWOT
Help in creation of corporate objectives
Build upon identified strengths
Minimise of the business’ weaknesses and threats facing it
Used to help with strategic plan
Balance Sheets (statement of financial position)
This is a financial statement that records all the assets and liabilities of a firm over a particular period
Would be of Interest to
MANAGERS (determine finanicial position and identify suitable method of raising more finance in the future)
EMPLOYEES ( determine if the business has a successful future or if financial trouble may happen)
SHAREHOLDERS ( determine possible returns of a company and if the firm is a potential investment)
SUPPLIERS AND LENDERS ( determine level of debt the firm is in and they will struggle to payback any loans or additional borrowing
Components of a Balance Sheet
Assets - Possesion
Liabilities - Debt
NON CURRENT ASSETS:
Assets owned by the firm that are unlikely to be converted into cash within the next 12 months
Goodwill:
Value above the purchase price of a company bought by the firm
Intangible Assets:
Assets without a physical form such as patents
Property, plant and equipment:
Physical property and capital owned by a firm that they will not sell within the next 12 months
CURRENT ASSETS:
Assets that are most likely to be converted into cash within the next 12 months
Inventories:
Stock the business owns
Trade and other recievables:
Money owed to the firm from customers that will be paid back within the next 12 months
Cash:
Actual cash owned by the firm in the bank
TOTAL ASSETS:
non current assets + current assets
CURRENT LIABILITIES:
Payments or debt the firm must pay back within the next 12 months
Payables:
Money that the firm owes to a supplier from a previous purchase
Dividend:
These are dividends not yet paid shareholders
Current tax liabilities:
this is tax that has to be paid by the firm within the next 12 months
NON - CURRENT LIABILITIES:
Debts that are paid back over a period longer than a year
Borrowings:
long term borrowing or loans taken out by the firm
Provisions:
Money set aside by the firm to cover any future losses made by the firm
Pensions:
Pension contributions paid by the firm over the next 12 months
TOTAL LIABILITIES:
Current Liabilities + Non Current Liabilities
NET ASSETS:
Total Assets - Total Liabilities
Total value of the firm if all liabilities were paid off with the total assets owned by the firm
SHAREHOLDERS EQUITY (AKA EQUITY):
total equity or total wealth of the firm
Share Capital:
Money invested by shareholders into a company
Other Reserves:
Retained earnings after paying taxes but not dividends
Retained Earnings:
Previous earnings or profits earned by the firm after taxation and dividends are paid
TOTAL EQUITY:
the total money invested by shareholders into the firm
In a balance sheet, the net assets and total equity must ALWAYS balance (equal)
Working Capital
Money available to the firm to pay for daily expenses
Current Assets - Current Liabilities
Daily expenses can include bills and wages
Can be shown on a balance sheet as a net current assets
where current assets are higher than current liabilities, meaning the firm has workin capital to pay for costs
If current liabilities are higher than current assets, then the firm has net current liabilities
Means firm does not have working capital to pay off daily costs
Therefore, higher level of working captial held by the firm, the more liquid the firm is, meaning the ability of the firm to convert assets into cash to pay debts
Difficult to determine the optimal level of working captial for a firm:
The firm will need working captial to ensure it can pay off costs
Holding onto too much in terms of cash and other liquid forms, such as recievables has an opportunity cost
Because this money could be put into the business in more profitable ways, such as capital or equipment that could generate a return
Therefore, the firm will need to identify the most suitable level of working capital for its costs and ensure they do not allocate too much in an unprofitable way
Factors that can influence level of working capital needed
1) Volume of Sales
- Higher volumes of sales = more working capital needed (raw materials and supplies)
- If no working captial can not afford these and are unable to produce
- If firm has low volume of sales, need lower amounts of working capital to pay for costs
- Therefore, firm has to identify volume of sales to determine correct amount of working capital necessary to pay for materials
2) Level fo Trade Credit Given by the Firm:
- Amount will determine correct working capital
- Essentially a interest free loan that allows customers to purchase a good now and pay later
- If firm given out high amount of working capital to pay for materials for goods that have not been paid for yet
- If firm gives little or no trade credit amount of working capital required is lower
- Means amount of trade credit given by the firm will influence the amount of working capital necessary
3) Growth of the firm:
- If firm is growing - require more working capital - costs of growth (materials and equipment
- Means amount of working capital needed increases
- If firm is not growing currently, amount of working capital is likely to be lower
- Amount of growth the firm is planning to do will influence the amount of working capital needed
4) Level of operating cycle:
- operating cycle is time between the firm purchasing raw materials for goods and recieving payment from customers
- Longer the operating cycle more working capital needed as firm will need it to pay off costs
- Longer operating cycle = more working capital needed
5) Rate of Inflation:
- Rate of inflation is the general increase in price
- If prices rise considerably - more working capital required to pay off higher costs for materials to continue operations
- If rate of inflation is very low or decreasing (deflation), firm will not need as much working capital as prices will not change considerably
- Therefore, inflation can determine the amount of working capital necessary
