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Business A level > Unit 7 - Economy > Flashcards

Unit 7 - Economy Flashcards

1
Q

7.1| What are corporate objectives?

A

Those that relate to the business as a whole.

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2
Q

7.1| What is the purpose of corporate objectives?

A

— 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

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3
Q

7.1| What are the key areas for corporate objectives?

A

> 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

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4
Q

7.1| What are functional objectives?

A

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

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5
Q

7.1| How might functional objectives support corporate objectives?

A

(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)

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6
Q

7.1| What does SMART stand for?

A

S - specific
M - measurable
A - achievable
R - relevant
T - time bound

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7
Q

7.1| What are the key internal influences on corporate objectives & decisions?

A

+ Stakeholder influence
+ Business ownership
+ Attitude to profit
+ Ethical stance
+ Leadership
+ Strategic position & resources

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8
Q

7.1| What are the key external influences on corporate objectives and decisions?

A

+ 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

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9
Q

7.1| What is the mission statement?

A

The overriding purpose of the business
— A reason for the firms existence
— A strategic perspective
— Supports the stated “vision” for the future

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10
Q

7.1| Who are the key audiences for a mission statement?

A
  1. Employees
  2. Customers
  3. Investors
  4. Society
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11
Q

7.1| What makes an effective mission statement?

A

— 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

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12
Q

7.1| What are the common criticisms of a mission statement?

A

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”

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13
Q

7.1| What are the key influences on the mission of a business?

A
  1. Personal beliefs, values and objectives of the leaders/ founders
  2. Nature of the industry
  3. Degree of competition
  4. Values and relative power of stakeholders
  5. Business ownership
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14
Q

7.1| What is SWOT analysis?

A

SWOT Analysis helps a business assess its competitive strength and the nature of its external environment.

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15
Q

7.1| What does SWOT stand for?

A

S - strengths
W - weaknesses
O - opportunities
T - threats

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16
Q

7.1| What is likely evidence of strengths and weaknesses?

A

— Market share (%)
— Profitability (operating profit)
— Efficiency (unit costs)
— Brand recognition & loyalty
— Reputation for quality

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17
Q

7.1| How could you evaluate strengths and weaknesses?

A

+ Is the judgement made reliable?
+ How sustainable are the strengths?
+ Can weakness be overcome? How?

18
Q

7.1| How can you assess opportunities and threats?

A

— How to take advantage of opportunities
— How to protect against threats
— Role of risk management & contingency planning

19
Q

7.1| Benefits and Drawbacks of SWOT Analysis.

A

> BENEFITS:
— Logical structure
— Focuses on strategic issues
— Encourage analysis of external environment

> DRAWBACKS
— Often lacks focus
— Can quickly become out-of-date

20
Q

7.2| What information can you find on the Income Statement?

A

— Revenues
— Cost of sales
— Gross profit
— Operating profit
— Net profit (profit of the year)

21
Q

7.2| What information can you find on the Balance Sheet?

A

— Current assets
— Current liabilities
— Inventories
— Trade receivables & payables
— Long-term liabilities
— Capital & reserves

22
Q

7.2| What is Ratio Analysis?

A

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

23
Q

7.2| What are the main groups of ratio?

A
  1. Profitability ratios
    + Gross profit margin
    + Operating profit margin
    + ROCE
  2. Liquidity ratios
    + Current ratio
    + Acid-test ratio
  3. Efficiency ratios
    + Payables Days
    + Receivables Days
    + Inventory Turnover
    + Gearing
24
Q

7.2| Who are the key users of ratios?

A

> Profitability:
— Shareholders
— Government
— Competitors
— Employees

> Liquidity
— Shareholders
— Lenders
— Suppliers

> Efficiency
— Shareholders
— Lenders
— Competitors

25
Q

7.2| What is the importance of effective comparison?

A

> 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

26
Q

7.2| Overall summary of ratios.

A

+ Very useful analytical tool
+ Widely used and understood
+ Identify issues - but don’t solve problems
+ Part of range of indicators of business performance

27
Q

7.2| What is the formula for ROCE?

A

(Operating profit / total equity + non-current liabilities) x 100

28
Q

7.2| How is ROCE a useful ratio?

A

> Helps evaluate the overall performance of the business
Provides a target return for individual projects
Benchmarks performance with competitors

29
Q

7.2| Evaluation of ROCE.

A

+ 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

30
Q

7.2| What are liquidity Ratios?

A

Assess whether a business has sufficient cash or equivalent current asset to be able to pay its debts as they fall due.

31
Q

7.2| What is the formula for current ratio?

A

current assets / current liabilities

32
Q

7.2| Evaluation of Current Ratios.

A

+ 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

33
Q

7.2| What is Gearing?

A

“Gearing” measures the proportion of a business’ capital (finance) provided by debt.

34
Q

7.2| What are the two ways of measuring gearing?

A
  1. Debt/Equity Ratio
  2. Gearing Ratio
35
Q

7.2| What is Equity?

A

Amounts invested by the owners of the business.
— Share capital
— Retained profits

36
Q

7.2| What is Debt?

A

Finance provided to the business by external parties.
— Bank loans
— Other long-term debt

37
Q

7.2|What is the Debt / Equity Ratio formula?

A

Debt / Equity

38
Q

7.2| What are the reasons why a business would choose to have high equity or high debt?

A

> 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

39
Q

7.2| What is the formula for Gearing?

A

(Non-current liabilities / total equity + non-current liabilities) x 100

40
Q

7.2| Evaluation for Gearing %

A

+ 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

41
Q

7.2| What are the benefits of HIGH gearing?

A

— 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

Business A level (2 decks)

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