Unit 7 - Economy Flashcards
7.1| What are corporate objectives?
Those that relate to the business as a whole.
7.1| What is the purpose of corporate objectives?
— Provide strategic focus
— Measure performance of the firm as a whole
— Inform decision-making (which involves strategic choice)
— Set a scene for more detailed functional objectives
7.1| What are the key areas for corporate objectives?
> Market - market share, customer satisfaction, product range
> Innovation - new products, better processes, technology
> Productivity - optimum use of resources, focus on core activities
> Profitability - level of profit, rates of return on investment
> Physical & financial resources - factories, locations, finance and supplies
> Management - structure, promotion & development
> Employees - organisational structure, employee relations
> Public responsibility - compliance with laws, social and ethical behaviour
7.1| What are functional objectives?
Set for each key business function and are designed to ensure that the corporate objectives are achieved.
7.1| How might functional objectives support corporate objectives?
(CO) Increase sales = launch five new products in the next two years (marketing)
(CO) Reduce costs = increase factory productivity by 10% (operations)
(CO) Increase cash flow = reduce the average time taken by customers to pay invoices from 75 to 60 days (finance)
(CO) Improve customer satisfaction = achieve a 95% level of high customer service (people)
7.1| What does SMART stand for?
S - specific
M - measurable
A - achievable
R - relevant
T - time bound
7.1| What are the key internal influences on corporate objectives & decisions?
+ Stakeholder influence
+ Business ownership
+ Attitude to profit
+ Ethical stance
+ Leadership
+ Strategic position & resources
7.1| What are the key external influences on corporate objectives and decisions?
+ Short-termism (external investor pressure to focus on and achieve short-term objectives at the expense of long-term strategy
+ Economic Environment (consumer spending, interest rates)
+ Political / legal environment
+ Competitors
+ Social and technological change
7.1| What is the mission statement?
The overriding purpose of the business
— A reason for the firms existence
— A strategic perspective
— Supports the stated “vision” for the future
7.1| Who are the key audiences for a mission statement?
- Employees
- Customers
- Investors
- Society
7.1| What makes an effective mission statement?
— Differentiates the business from its competitors
— Defines the markets or business in which the business wants to operate
— Is relevant to all major stakeholders (not just shareholders and managers)
— Excites, inspires, motivates & guides
7.1| What are the common criticisms of a mission statement?
X - Not always supported by the actions of the business
X - Often too vague and general
X - Often merely statements of the obvious
X - Just PR?
X - Sometimes regarded cynically by staff
X - To be effective, everyone in the business has to “buy-in”
7.1| What are the key influences on the mission of a business?
- Personal beliefs, values and objectives of the leaders/ founders
- Nature of the industry
- Degree of competition
- Values and relative power of stakeholders
- Business ownership
7.1| What is SWOT analysis?
SWOT Analysis helps a business assess its competitive strength and the nature of its external environment.
7.1| What does SWOT stand for?
S - strengths
W - weaknesses
O - opportunities
T - threats
7.1| What is likely evidence of strengths and weaknesses?
— Market share (%)
— Profitability (operating profit)
— Efficiency (unit costs)
— Brand recognition & loyalty
— Reputation for quality
7.1| How could you evaluate strengths and weaknesses?
+ Is the judgement made reliable?
+ How sustainable are the strengths?
+ Can weakness be overcome? How?
7.1| How can you assess opportunities and threats?
— How to take advantage of opportunities
— How to protect against threats
— Role of risk management & contingency planning
7.1| Benefits and Drawbacks of SWOT Analysis.
> BENEFITS:
— Logical structure
— Focuses on strategic issues
— Encourage analysis of external environment
> DRAWBACKS
— Often lacks focus
— Can quickly become out-of-date
7.2| What information can you find on the Income Statement?
— Revenues
— Cost of sales
— Gross profit
— Operating profit
— Net profit (profit of the year)
7.2| What information can you find on the Balance Sheet?
— Current assets
— Current liabilities
— Inventories
— Trade receivables & payables
— Long-term liabilities
— Capital & reserves
7.2| What is Ratio Analysis?
Ratio Analysis involves the comparison of financial data to gain insights into business performance
7.2| What are the main groups of ratio?
- Profitability ratios
+ Gross profit margin
+ Operating profit margin
+ ROCE - Liquidity ratios
+ Current ratio
+ Acid-test ratio - Efficiency ratios
+ Payables Days
+ Receivables Days
+ Inventory Turnover
+ Gearing
7.2| Who are the key users of ratios?
> Profitability:
— Shareholders
— Government
— Competitors
— Employees
> Liquidity
— Shareholders
— Lenders
— Suppliers
> Efficiency
— Shareholders
— Lenders
— Competitors
7.2| What is the importance of effective comparison?
> One ratio is rarely enough
— Need to compare with competitors
— Need to analyse over time (trends)
> Circumstances change over time
— Markets and industries change
— Different economies and market conditions
7.2| Overall summary of ratios.
+ Very useful analytical tool
+ Widely used and understood
+ Identify issues - but don’t solve problems
+ Part of range of indicators of business performance
7.2| What is the formula for ROCE?
(Operating profit / total equity + non-current liabilities) x 100
7.2| How is ROCE a useful ratio?
> Helps evaluate the overall performance of the business
Provides a target return for individual projects
Benchmarks performance with competitors
7.2| Evaluation of ROCE.
+ ROCE is a widely-used measure of return on investment by businesses
+ Key points to remember:
— ROCE will vary between industries
— It is based on a snapshot of a business’ balance sheet
— Comparisons over time and with key competitors are most useful
7.2| What are liquidity Ratios?
Assess whether a business has sufficient cash or equivalent current asset to be able to pay its debts as they fall due.
7.2| What is the formula for current ratio?
current assets / current liabilities
7.2| Evaluation of Current Ratios.
+ A ratio of 1.5-2.5 would suggest acceptable liquidity & efficient management of working capital
+ Low ratio (eg. well below 1) indicates possible liquidity problems
+ High ratio suggests too much working capital tied up in inventories or debtors.
> The industry or market matters:
— Firms have different requirements for holding inventories, or approaches to trade debt and credit
— How does the current ratio compare with competitors?
> The trend is more important
— A sudden deterioration in current ratio is a good indicator of liquidity problems
7.2| What is Gearing?
“Gearing” measures the proportion of a business’ capital (finance) provided by debt.
7.2| What are the two ways of measuring gearing?
- Debt/Equity Ratio
- Gearing Ratio
7.2| What is Equity?
Amounts invested by the owners of the business.
— Share capital
— Retained profits
7.2| What is Debt?
Finance provided to the business by external parties.
— Bank loans
— Other long-term debt
7.2|What is the Debt / Equity Ratio formula?
Debt / Equity
7.2| What are the reasons why a business would choose to have high equity or high debt?
> Reasons for HIGH EQUITY
— There is greater business risk (eg. start-up)
— Where more flexibility is required (eg. don’t have to pay dividends)
> Reasons for HIGH DEBT
— Interest rates are very low = debt is cheap to finance
— Where profits and cash flow are strong; so debt can be easily repaid
7.2| What is the formula for Gearing?
(Non-current liabilities / total equity + non-current liabilities) x 100
7.2| Evaluation for Gearing %
+ Gearing ratio of 50%+ normally said to be HIGH
+ Gearing of less than 20% normally said to be LOW
— Levels of acceptable gearing depend on business & industry
7.2| What are the benefits of HIGH gearing?
— Less capital required to be invested by shareholders
— Debt can be relatively cheap source of finance compared with dividends
— Easy to pay interest if profits and cash flows are strong
