Unit 7 Flashcards
Give two benefits of mission statements
-sense of cohesion
-Starting point of strategic planning
-helps investors know where £££ is going
-customer understanding
What is short-termism
seeking short-term financial rewards = little opportunity for long term growth
What do some businesses seek short term reward
typically done to appease / pressured by shareholders
Define strategy
the medium to long-term plans to attain objs
(Strategy is about ‘what’ an org is going to do)
Define tactics
the means by which a strategy is carried out; a range of diff tactics may be used as part of a single strategy
(tactics is about ‘how’ it’s going to do it)
Give me 2 characteristics of a strategy
-established at a senior level (board of directors) but have an impact at functional levels
-often involves major commitment of resources e.g. staff, finances
-corp strategies involve decisions about broad issues such as what precise market the org is in implemented over sevral yrs
Give me 2 characteristics of tactics
-tend to be decided by functional heads of departments / junior managers
-decisions less critical & easier to reverse
-fewer resources needed
-enables an org to reach milestones / interim targets
define strategic decision making
concerns over the general direction a overall policy of an org. They have signifiant long-term effects a require detailed consideration
TRUE or FALSE tactics can be high risk bc outcomes are unknown and will remain so for some time
FALSE - that refers to strategies
What does SWOT stand for
strengths, weaknesses, opportunities & threats
What is a SWOT analysis
a technique that allows an org to assess its position and it forms part of an orgs strategic planning process
What are the 4 stages of a SWOT analysis
- internal analysis
- external analysis
- prepare SWOT
- generate strategic plan
Give me 2 advantages of a SWOT analysis
-provides structured approach to assessing internal & external influences on org’s performance
-Linking the present position & future potential of an org to the market & the competitive firms helps inform decisions about the strategy.
-encourages outwards-looking approach
-comparing SWOT analysis with that of a major competitor can help Identify true strengths
Give me 2 disadvantages of a SWOT analysis
-time consuming; business envronment constanty changing = analysis
may be outdated by time of use
-only as good as the person who made it - could be bias
-oversimplification
-highlight areas of concern but doesn’t provide specific solutions/ strategies to address them
-identifies various factors but doesn’t prioritise them = difficult to determine which issues most critical to address first
-should be used alongside other methods of analysis - not useful on its own e.g. decision trees
Give me 2 people that would want to use company accounts and why they would use them
managers:
-to record financial activity & control use of resources
-analyse & evaluate effectiveness of actions /decisions in financial terms
investors:
want to compare financial benefits of their investment w/ alternatives e.g. shares in a diff company or saving in a bank.
Government:
wants to know orgs are fufilling legal requirements & has paid certain level of taxes
Customers:
business customers want to establish whether its advisable for them to draw up long-term supply contracts w/ this company.
Give 2 features of an income statement
-based on historical data
-helps managers review progress
-allows sharehoders to assess if investment is beneficial
-enables ppl to see if profit is utilised in sensible way
-legal requirement (companies Act)
What does expenses in an income statement show
Expenses shows efficiency of a firm in controlling spending
What does a high gross profit show in an income statement
cost of sales kept low / org is achieving a high value added
What does finance income/costs indicate in an income statement
how much the org borrows / lends money & efficiency with which it handles these financial operations
Define profit quality
How sustainable a source of profit is in the long-term
Give 2 uses of a balance sheet
-helps SH to assess the financial strength of a business
-helps gain understanding of nature of the business
-used to identify a orgs liquidity position
-shows sources of capital
Explain one accounting scandal
FTE NetworKs (2021)
company inflated its revenues by as much as 108%
former CEO & CFO misappropriated millions or dollars for personal use
Tesco (2014)
overstated profits by £250 mill which later grew to £326 mill
SFO launched criminai investigation & fined Tesco £129 mill & 3 executive were prosecuted but later acquitted
What are the 4 types of comparisons you can make with company accounts
-inter-firm comparisons (with other orgs)
-over time (trend analysis)
-Intra-firm comparisons (within the org)
-to a standard
Give 3 users of ratios and their uses
investors - value of dividends, repaying debts, compare value of investments
suppliers - liquid funds (to pay debts), to know payment terms offered to others.
competitors - benchmark
employees - profitability for job security & possible pay rises
customers (B2B) - how long they have to pay.
What type of ratio is ROCE and how do you calculate it
Profitability ratio
(operating profit or profit before tax = capital empioyed) X 100
What is ROCE
help to understand how well a company is generating profits from its capital as it is put to use
What’s the effect of a low value of ROCE
a low value could harm confidence in current management & might result in a falling share value = org vulnerable to takeover
Give two ways to improve ROCE
-reduce capital employed e.g. repayment of debt
-raise operating profit e.g. reduce supplier costs
Give 2 reasons for a low ROCE
-capital investment
-economic downturn = lower level of sales
revenue
-expensive advertising campaigns
What does liquidity ratios measure
A firm’s cash position
How do you calculate the current ratio
current assets ÷ current liabilities
(Expressed as x:1)
What’s the issue of having a really high figure for your current ratio
the opportunity cost of holding too many current assets is the lost opportunity to purchase NCA e.g machinery (not making efficient use of resources)
Give 2 possible reasons for having a high level of current assets
-Too much cash in bank
-firm allows debtors to increase & many of there debtors could fail to pay = bad debt
-inventory levels rise = cost of storage & security & rise of inventory perishing
What does gearing examine
the capital structure of a firm & its likely impact on the firm’s ability to stay solvent in the long run.
What’s considering a low, average & high gearing
Low = 25%
Average = 25-50%
High = 50%
Give 2 benefits of high gearing
-relatively few shareholders = easier for existing shareholders to keep
control
-can benefit from cheap source of finance when interest rates low
-in times of high profit, interest payment = lower than dividend payments
Give a benefit of low gearing
-most capital is permanent share capital = less risk of payables forcing firm
into liquidation
-avoid paying high interest on borrowed capital when interest rates high
The best gearing percentage depends on what
The circumstances of the firm
What are the 3 financial efficiency ratios
Payable days
Receivable days
Inventory turnover
What is payable days and how do you calculate it
the number of days it takes to pay back any payables owed by an org
payable days = (payables ÷ cost of sales) x 365
What is receivable days and how do you calculate it
the number of days it takes to convert recievables into cash (ideally want low value)
recievable days = (receivables ÷ revenue) x 365
What is inventory days and how do you calculate it (2 equations)
How quickly inventory is converted into actual sales
cost of sales ÷ average inventory
(average inventory ÷ cost of sales) x 365
Give 2 factors that influence the rate of inventory turnover
-nature of product
-the importance of holding inventory
-length of product life cycle
-the variety of products
Give 3 limitations of financial ratios
firms have many diff aims/objs so financial performance isn’t only measure of success
ratio value on their own = meaningless - need to be compared
only as good as the data they’re based on (may be unreliable)
some figures e.g. asset valuation, are subjective to some extent
account show what happened, rather than why - only serve to point out problems
different accounting methods may be employed
company performance VERY dependent on external factors e.g. inflation
Give 2 limitations of financial performance indicators
backward looking - describes what has happened, rather than what’s likely
to happen in the future
limited focus
short-term
internal perspective - success of org depends on is anticipation of external
factors
Give a reason why benchmarking is beneficial for businesses
enables org to identify key strengths/weaknesses of rivals
data can be compared w/ previous yrs to assess improvement /deterioration in system/running of org
Give 2 difficulties in using non-financial methods of measuring performance
There’s no standardisation of measure to use
where there is use of standardisation e.g. labour turnover, there’s not always widespread agreement on what considered a desirable level
non-financial = qualitative = subjective opinion of a senior management
non-financial measures often interdependent = achievement of one
measure automatically measures achievement of another
reflect what happened rather than what will happen.
the desire for objectivity may encourage firms to use quantitative measures when qualitative may be more useful, albeit harder to measure
Define core competence
the unique abilities of a business in the market that enables it to achieve a competitive advantage
Name 2 features of core competencies
not easy to copy e.g. patented design
provides benefits to end-consumer
provides access to wide range of markets
able to deliver superior product/services
Give an advantage of having a core competency
provides clear means of acquiring a competitive advantage
helps firm add value to goods & services
Give an example of a business with a core competency, what is it and an impact
Apple: ability to design
Impacts:
-led to considerable level of brand loyalty
-design skills have been applied across a wide range of products & provided access into new markets
-able to prevent replication through patents & copyright laws
Give a criticism of core competencies
outsourcing non-core competences = loss of control
core competencies liable to change (holding same one long-term = outdated)
some companies find it difficult to maintain quality of a core competence
What is an action of businesses that indicate short-termism
- large scale job losses
- lack of investment in research
- focus on shareholder return
What is a cause of short-termism
- fear of a takeover
- financial performance measures
- Uk managers often come from accounting record
What are some long-term concepts businesses can follow (name 2)
-research and development
-high quality sources of profit
-customer satisfaction
-sustainability
Explain Elkington’s tripe bottom line
a way to measure performance in a balanced way by considering 3 diff factors: financial returns (profit), social responsibility (people) and environmental values (planet)
TRUE or FALSE elkington’s TBL doesn’t measure the full cost to society of business activity
FALSE - it does
What is greenwashing
a deceptive business practice where a company makes false or misleading claims about its environmental impact
What is a problem with Elkington’s TBL
How can a firm put an accurate cost upon everything they do?
orgs have become more data driven = tendency for orgs to focus on profit
Give an example of a business that follows Elkington’s TBL
Ben and Jerry’s:
Profit:
Source ingredients from fair trade suppliers - farmers & workers paid fair
People:
known for its progressive employee policies - generous benefits a promoting positive work environment
Planet:
support farmers that use environmentally friendly practices
Who is legislation and regulations intended to protect
Those with weaker bargaining power
Law causes a less ordered and uncertain business environment
TRUE OR FALSE
FALSE - law ensures a more ordered & predictable environment
What are the main aims of government in terms of their principle economic aims
- low & stable inflation
- low levels of unemployment
- economic growth (GDP)
Give 3 benefits of economic stability
- job creation
- business confidence
- high tax revenues
- higher consumer spending
- economic growth
What are the UK laws that relate to competition (2)
Competition Act 1998
Enterprise Act 2002
Competition law prohibits 3 main types of behaviours
What are they?
- anti-competitive behaviour
- abuse of dominant market position
- merger control
Who is responsible for enforcing the competition law
CMA (competition markets authority)
What is the aim of competition
encourage greater investment & improve levels of efficiency
What is individual and collective labour law
individual labour law - the rights & obligations of individual employees
collective labour law - the activities of trade unions & industrial relations
Give 2 benefits of promoting equality for employers and 2 benefits of promoting equality for employees
Employers:
can recruit top talent if applications open to all
increased creativity
employee turnover reduced (ppI feel comfortable & valued)
Employees:
feel empowered
more motivation = higher levels of productivity
more engaged & value their time with the org
Give 2 laws that relate to individual labour law
- equalities act 2010
- employment act 2010
- national minimum wage act 1998
- working time directive 1998
What is the aim of the national minimum wage act
lift low earners out of poverty & eliminate exploitation
What is an impact of the national minimum wage act on employers
pressure to maintain wage difference adding to costs
Increased costs = less price competitive
What is an impact of the national minimum wage act on employees
greater incentive for unemployed to find work
helped raise some of poorest out of poverty
What does the health and safety act outline
employers legal obligation to provide safe working environment and potential safety hazards and risks that could cause accidents/fatalities
Name a regulation outlined in Trade Union & Labour Relations (consolidation) Act 1992
- TU must hold secret ballot before calling a strike
- employers can apply for work notice requiring a minimum level service during strike action
- employers required to inform employees of right to join TU & engage in collective bargaining
What is green taxation and give and an example
taxes to encourage firms to adopt more environmentally friendly approaches e.g. landfill tax, plastic packaging tax
What are subsidies
sum of money granted by gov to help an industry/org keep costs & prices
low = encourages consumption
Give a benefit and a drawback of subsidies
benefits:
-increased supply to market at lower cost = lower price
-financial support can promote sustainable practices that conserve water, soil (natural resources)
drawbacks:
-gov has to be strict - subsidies might be allocated to projects that aren’t the most efficient /effective in achieving environmental goals
-orgs may become reliant; hinders innovation & self-sufficiency
What are the 2 legislations linking to the environment
- climate change act 2008
- environment act 2021
What is the purpose of the climate change act and the environmental act
Climate change act - reduce greenhouse gas emissions
Environmental act - improve air & water quality, tackle waste, increase recycling
etc.
Why is competitive pressure good
It forces existing firms to increase their efficiency to stay in the market. These efficiency gains can be passed to consumers through lower prices & greater choice
Give 2 roles of regulators
- monitor & regulate prices
- ensure companies maintain high standards of customer service
- encourage competition by removing barriers to entry to their sector
What is a drawback of regulators from a business perspective
- prevent firms from maximising profits
- can generate negative publicity if a firm is publicly named & shamed for unacceptable business practices
Give 2 examples of regulators
- FCA (financial services)
- Ofcom (telecomm & broadcasting)
- Ofgem (general energy markets)
- CMA (competition)
How does infrastructure spending have a positive effect on economic growth
increased productivity, attracts investment & provides short-term boosts to employment in construction
The uk has yet to make significant investments in renewable energy
TRUE or FALSE
TRUE - the uk has made significant investments in renewable energy
What countries does the UK lag behind in terms of infrastructure investments
China and USA
What are two significant UK infrastructure examples
- crossrail (Elizabeth line)
- high speed rail 2 (HS2)
What were issues with the crossrail and high speed rail 2
construction raised concerns about its impact on wildlife, countryside & local communities
Give 2 reasons for international trade
- provides opp to lift living standards through lower prices as a result of specialisation
- nations tend to specialise in goods they can manufacture more efficiently & import what else they need
- It provides firms a opp for growth & entry into new, profitable markets
What is an incentive for UK organisations to trade internationally
- export grants
- tax incentives
- DCTS; a trading scheme that reduce import costs for uk orgs & consumers
What is GDP and GDP per capita
GDP - the total value of a country’s total output of goods/services over a period of time
GDP per capita - a country’s GDP divided by its total population. This provides a basic measure of the value of output per person
What are the four stages of the business cycle
Boom
Recession/ downturn
Slump
Recovery/ upturn
Give two features of an economy in the boom stage of the business cycle
- high consumer demand thats greater than supply = excess demand = higher prices (inflation)
- Very high demand & prices = very high profits, dividends & retained profit
- high levels of investment asset & growth
- firms working at full capacity = expansion to meet demand
- very high employment levels but possibly shortage of skilled staff
- high costs (bc of shortage of resources) e.g. paying for skilled staff = may result in higher prices
Give two features of an economy in the recession/downturn stage of the business cycle
- Low demand = firms holding excess stock & reducing prices
- Low output bc of low demand = low profits
- rationalisation & delayering to cut costs
- Low incomes = inferior good sales higher (consumers more price sensitive)
- Spare capacity
- increase in bad debt
- firms will need good liquidity, low gearing & increased efficiency to survive
Give two features of an economy in the slump stage of the business cycle
- very low investment & consumer demand
- very low demand = factories & stores likely to close
- increasingly high unemployment & business failure
- deflation may occur
- low prices to increase demand
Give two features of an economy in the recovery/upturn stage of the business cycle
- slowly rising demand
- investment confidence increasing
- pay levels higher
- low unemployment
- new business start ups
- Spare capacity used to meet new demand
- firms borrow to fund expansion
- demand rising = profits rising
Give 2 actions to take in a recession
- create a contingency fund
- review pricing strategies
- build partnerships /mergers
- redundancies
- diversification into new markets
- delayering & rationalisation
Who sets inflation targets and who do they do it
chancellor of exchequer sets inflation targets for the UK to control prices & to aid economic growth
What are the two types of inflation
- cost-push inflation
- demand-pull inflation
What is cost-push inflation
The cost of production increases so orgs raise prices to maintain profit margins
What is demand-pull inflation
Where aggregate demand exceeds productive capacity of economy which puts an upwards pressure on price
Give 2 possible impacts of low inflation
- marketing & administrative costs lower
- interest rates likely to be low = benefits most orgs (exchange rares may also fall)
- more certainty in the economy = orgs able to plan ahead (prices can be predicted more easily)
What is the impact of deflation
consumers & orgs may anticipate prices to continuously fall = will cut back
on present spending & investment as they wait for prices to fall even lower = economy starts to shrink = businesses shrink = unemployment rises (unemployed ppl have less money to spend which cuts deeper into the economy
What is fiscal policy
gov policy that attempts to influence the direction of the economy through changes in gov expenditure or taxes
What the difference between a budget surplus and a budget deficit
budget surplus - taxation is greater than gov spending (demand in economy reduced = fall in economy activity)
budget deficit - gov spending greater than taxation
What is monetary policy
controlling the money supply and the rate of interest to influence the level of spending & demand in the economy
TRUE OR FALSE - exchange rates makes long-term planning & budgeting difficult & causes uncertainty
TRUE
What is the demand for pounds caused by and does this appreciate or depreciate its value
- demand for UK goods/services
- desire to save in UK (high interest)
- more tourism in UK
Value appreciates
The supply for the pound may increase if…and does this appreciate or depreciate its value
- greater demand for foreign goods
- greater desire to save abroad
- more tourism abroad
Value depreciates
Is a strong pound good or bad for importers and exporters
Strong pound BAD for exporters
Strong pound GOOD for importers
Give 2 effects of a strong pound
- PED will determine how much demand falls
- exporters prices = expensive = less
competitive abroad - Inelastic goods = low impact = high
revenue - imported raw materials = cheaper = lower costs (imported foreign goods cheaper than home market produced goods)
Give 2 effects of a weak pound
- importing raw materials = costs rise
- imported foreign goods = more expensive to purchase
- exported price elastic (luxury) goods may benefit (increased sales) from reduced prices
- exports = cheaper abroad = more
competitive = increased sales
How does the pound (£) compare to the EU, US and China recently
EU:
Stabilisation
US:
weakened
China:
£ has strengthened against chinese yuan
Give 2 examples of open trade areas
- EU
- ASEAN
- AFTZ
How does open trade benefit consumers
encourages competition = greater efficiency = lower prices for consumers
What is protectionism
The extent to which a gov uses controls to restrict the amount of imports entering the country
Give 3 different control forms (protectionism)
- tariffs
- quotas
- non-tariff barriers e.g.regulations that favour domestic production
- embargo
What is globalisation
the increased integration & interdependence of natonal economies
Give 2 reasons for greater globalisation of businesses
the growth of free trade areas (EU, NAFTA, ASEAN) = reduced barriers to trade within = individual economies more closely integrated
increased communication & improved transport growth of multinational firms = increased opp for economies of scale = lower prices
increased mobility of labour - ppl more willing to move countries for work
What is an importance of globalisation for businesses
countries good at producing particular product = better off specialising in the
production of those products & export them to countries less efficient at producing them (comparative advantage)
increased competition = improved efficiency = reduced costs & prices and
more consumer choice
Give 2 opportunities there are for businesses in terms of globalisation
- extending your brand
- new market may help extend product life cycles by exporting older models to developing economies
- to keep pace w/ competition & remain competitive
- often, less developed economies have weaker legislation that multinational firms can exploit to minimise costs
Give 3 threats of globalisation
- job losses in more developed economies as firms seek low wage countries to relocate some of their operations
- underestimating local competition
- language barriers - misunderstandings due to communication problems
- ethics & CSR issues e.g. pollution, workers pay, working conditions
- lack of knowledge of local markets & tastes (insufficient research)
- high level of gov intervention & protectionism
- failure to localise & customise product/services to suit domestic market
Give a successful and failed business example of globalisation
Coca-cola:
- sold virtually in every country (200+)
- dominates soft drink market
- estimated brand value of over $80 billion
- 2023= reported net revenue of aprox $43 billion
Tesco:
- one of largest supermarket chains m UK
- attempted to enter US market
- cultural misunderstandings, global financial crisis of 2008 hit, competition w/ local orgs e.g., Walmart, Kroger,
- problems with/ supply chains & store location
- 2013 = withdrew from US market
Give a re-shoring business example
Hornby: UK toy firm
- concerns about low quality & negative media attention from unethical practices in China
- Improved lead time, greater quality control, supply chain security
What is an emerging market
developing countries that have the potential to grow & develop in terms of productive capacity & market opportunities
What is a benefit of emerging markets
- growing income levels of pop
- planning permission = easier
- grants & lower tax may be available to attract foreign direct investment
- opp to extend produce life cycle
Give 2 drawbacks for businesses entering emerging markets
- political system may be unpredictable & unstable = Increased risk & uncertainty
- may be limited network of suppliers
- may be poor infrastructure e.g. transport, telecomms
- raising finance in these counties can be difficult if their banking systems aren’t developed
How much of the world’s GDP growth over the last 15 years does emerging markets make up
Almost 2/3
What is the main cause of urbanisation and migration
ppl attracted to towns for employment / services available
Why are businesses attracted to towns
the infrastructure, workforce availability & consumer demand opportunities
Give 2 positive aspects of urbanisation
- more job opportunities
- market opportunities
- higher incomes
- better living standards
- more stable economies
Give a negative aspect of urbanisation
- Slums
- crime
- pollution
- global economic downturns = likely to increase the number of job losses among
the urban poor
Name a social change that led to changes in consumer lifestyles & buying behaviour
- greater focus on ethical consumption
- expectation that retailers/other services will be open 24/7 or can be accessed online
- ppls attitude to health & diet, joining fitness clubs
- increased use of tech & social media for entertainment, communication & for business
Give a CSR scandal
BP’s ‘deepwater horizon oil spill’ (2010):
*BP and it’s partners made several cost-cuttings decisions that compromised safety measures
- explosion that caused a massive oil spill into the ocean
- Killed 11 workers
- caused extensive damage to marine & wildle habitats
- one of worst environmental disasters in US history
Give 2 ethical behaviours/practices
- Using renewable energy
- operating an extensive health & safety policy
- giving above min wage
- Suppliers that operate ethically
- sustainable sources of raw materials
- invest in local community
Give 2 unethical behaviours/practices
- exploiting workers
- price gouging/fixing
- putting profit before ppL
- tax avoidance
- bribery & corruption
- animal cruelty
- extensive enuronmental damage
Give 2 advantages of CSR
- unemployment & pollution likely to be reduced
- quality of life likely to be improved
- enhanced brand image/ rep
- increased sales & customer loyalty
- avoid pressure groups & negative media
- improved share price
- reduced operating costs e.g. recycling initiatives = cuts waste disposal costs
Give 2 reasons against CSR
- SH groups = diff objs = difficult to balance diff SH needs
- efficient use of resources = reduced if orgs are restricted in how they can
produce & where they can locate - socially responsible policies = costly to introduce = lower profits/higher prices
- can stifle innovation if funds diverted away from R&D
- reduced competiveness
*is it really businesses problem if they’re complying w/ legislation?
*is it a PR Stunt (greenwashing)
Give a reason for CSR reporting
- provides info to all SH about extent to which it’s meeting to non-financial objs
- opening activities to public scrutiny, might deter future criticism on firm
What are the layers to Carroll’s CSR pyramid. (Bottom to top)
- economic responsibilities
- legal responsibilities
- ethical responsibilities
- philanthropic responsibilities
Give a benefit of technological change
- improved efficiency & reduced waste (impact on operations & finance)
- better products/ services = consumers benefit from more choice (impact on operations & finance)
- advanced in communication = efficiency increased (impact on all areas)
What is a problem that may occur introducing new technology
- the cost of keeping up to date with/ latest tech
- danger of resistance by workers & lower morale
- as tech changes occur, new skills required = recruitment, training costs
- short-term difficulties caused by changeover e.g. cutback in production
Name an internal source of pressure for CSR
business leaders - change will happen if they’re concerned w/ how to work in the most efficient way and how to minimise the business impact on the environment
Shareholders - they could have a long term view or may prefer a quick profit
employees - If org is dependent on need to recruit talented individuals, much will depend on their view of the importance of CSR
Name an external source of pressure for
CSR
Legislation imposes a minimum standard
industry pressure, including that from orgs focused on promoting CSR
pressure groups - w/ the right publicity could create significant pressure to change a firm’s behaviour
What is the Porter’s five forces model
a model to analyse the competitive environment in which a business operates
What are the 5 forces (porter’s five forces)
- rivalry
- entry threat
- supplier power
- buyer power
- substitute threat
What does the introduction of substitute products lead to in terms of sales and profit
Less sales and less profit
Name 3 barriers to entry into a market
- High capital costs to set up
- patents
- loyalty of customers (brand loyalty)
- economies of scale (new entrants will hare higher costs)
- expertise & reputation
- access to better tech
- gov regulations e.g. license requirements
Suppliers are powerful when…
(Give one example)
- There’s only a few large suppliers
- customer is small & unimportant
- the resource they supply is scarce
- cost of switching to another supplier
Give an example of when suppliers had the most power
Phones 4U:
- traded for 25 yrs & had 700 stores
- turnover of £1bn & profit of £105m in 2013
- suppliers e.g. 02, 3, vodafone, EE decided to disintermediate & sell directy to consumers to improve profit margins
- Phones 4U had reasonable liquidity but w/out suppliers they had no business
What is investment appraisal
a scientific approach to investment decision making which analyses whether investment projects are worthwhile
What is payback period
the time it takes for a project to repay its inital investment
How do you calculate payback period
(remaining initial investment cost to recover ÷ net cash flow of the period it pays back) x 12 = months
Give 2 benefits of payback
- Simple & easy to calculate and understand
- focuses on cash flow - emphasises only the time taken to return the money
- emphasises speed of return; good for markets which change rapidly
- Straightforward to compare competing projects
Give 2 drawbacks of payback
- doesn’t consider the time-value of money
- encourages short-termism
- ignores revenue/costs after payback has been reached - doesn’t consider overall net return of a project
- may lead to an org ignoring the most profitable investment bc it takes slightly longer to achieve that profit
What is average rate of return (ARR)
the annual percentage return based on average returns
Do businesses want a high ARR or a low ARR
High as possible
What is the benchmark percentage for ARR
the interest rate the firm must pay on any money borrowed to finance the investment
How do you calculate ARR
((Net cash flow - initial investment) ÷ initial investment) ÷ no. of yrs X 100
Give 2 benefits of average rate of return
- result can be easily compared w/ the opportunity cost (interest earned from a savings account)
- shows true profitabily of an investment (only method that takes into consideration every item of revenue & expendiure at face value)
- percentages = easy to understand (can be understood by non-accountants)
Give two drawbacks of average rate of return
- more time-consuming than payback method
- focuses on profits rather than cash flows
- doesn’t adjust for time-value of money
What is Net Present Value (NPV)
the net return on an investment when all revenues/costs have been converted to their current value
Why do businesses use NPV to calculate their return
Because the value of money depreciates over time
What does NPV use to bring money to its present value
Discount factors
Give 2 benefits of NPV
- only method that considers time-value of money
- reflects the risks that future cash flows will not be as expected
- diff levels of risk can be accounted for by adjusting the discount rate
- Straightforward:
positive NPV = Investment should be undertaken
negative NPV = project should be rejected
Give 2 drawbacks of NPV
- most complicated & time -consuming method
- results can be influenced/manipulated by choice of discount rate
What other qualitative factors should be considered in investment decisions other than investment appraisal
(Give 3 examples)
- level of risk involved
- state of economy
- actions of rivals
- resistance from workers
- culture of org
- obj of the business
What is investment criteria
the ways in which an org will judge whether an investment shoud be undertaken
Name an action a business should take to allow for risk and uncertainty
- build in contingencies in case probiems occur
- use sensitivity analysis to calculate alternative results
- set more demanding targets e.g. short payback period
Give a benefit of sensitivity analysis (also known as ‘what if?’ analysis)
- calculates alternative results = level of uncertainty can be considered & level of
risk identified - recognises that there’s no such thing as an accurate forecast
- helps prepare for less than favourable scenarios
