Unit 7 (not on paper 3) Flashcards
Kaplan + Norton balanced scorecard not on paper 2
assesses non financial and financial performance
financial - KPIs = ROCE, operating profit margin
customer - KPIs = level of returns, service rating
internal processes - KPIs = new product lead time, unit costs
organisational capacity - KPIs = employee retention rate, flow of new ideas
adv of K+N not on paper 2
- broader
- measurement of long term vision
- flexible (KPIs chosen by the business)
disadvantage of K+N not on paper 2
- too many KPIs
- need to have a balance = not easy
- senior management may still be too focused on finance
Elkington triple bottom line not on paper 2
way of assessing business performance on three areas: people, profit + planet
profit = income statement
planet = measures impact on environment - less easy to measure
people = extent to the business is socially responsible - hardest to measure
TBL advs not on paper 2
- encourage businesses to think beyond profit
- encourages CSR reporting
TBL disadvantage not on paper 2
- people and planet hard to measure
- not a legal requirement to report CSR
Carrol’s CSR pyramid (not in paper 1)
philanthropic -> giving back o society
ethical -> to act morally, beyond what law requires
legal -> needs to obey the law
economic -> profitable, only useful if it can make money
need to start with economic and work your way up
Porters 5 forces (not in paper 1)
- threat of new entrants (barriers to entry)
- bargaining powers of suppliers
- bargaining power of customers - pressure to drive down prices
- threat of substitutes product
- degree of competitive rivalry
what are some barriers to entry? (not in paper 1)
- investment cost (high will deter entry)
- economies of scale available to existing firm
- legal restrictions eg patents
- product differentiation
- access to suppliers + distribution channels
what determines supplier power? (not in paper 1)
- uniqueness of input supplied
- greater competition, the supplier will be in a stronger position
- availability of substitutes
what determines customer power? (not in paper 1)
- no. of customers
- volume of their order sizes
- no. of firms supplying the product
GDP
gross domestic product
total market value of goods + services produced within a nation over a period of time
business cycle
- boom (GDP high, production max capacity, shortages, prices increase, wage rises)
- recession (incomes come down, demand goes down, business confidence reduces)
- slump (GDP low, redundancies, unemployment high, bankrupt)
- recovery (production increases, employment increases, people have more money to spend)
what is the disadvantage of substitute products? not on paper 2
they will limit the price that can be charged + will reduce profits
what does the threat of substitutes depend on? (not in paper 1)
- the willingness of customers to switch
- customer loyalty + switching costs
what will determine the intensiveness of rivalry? (not in paper 1)
- no. of competitors in a market
- product differentiation + brand loyalty
- exit barriers -> harder to exit -> more comp, more differentiation
what is payback?(not in paper 1)
the time it takes for an investment to repay its initial cost (days, months, years)
how do you calculate payback?(not in paper 1)
look at net cum cash flow until it goes to positive.
work out years and then months
months = last negative figure/ the year it goes positive net cash flow
what is ARR?(not in paper 1)
the total annual average return of an investment expressed a %
how do you calculate ARR?(not in paper 1)
= net return from the investment (£)/ no. years
/
initial cost x 100
net return = total net cash flow - cost of investment
what is NPV?(not in paper 1)
net present value calculates the monetary value now of a project future cash flow
how do you calculate NPV?(not in paper 1)
net cash flow x discount rate
add all discount net cash flows together then take away year 0
what are core competencies? not on paper 2
unique abilities that a business possesses that provide it with competitive advantage
eg specialist staff training, innovative production process or fast delivery eg amazon
- allow business to take adv of opportunities, enhancing performance + provide comp adv w potential market leadership -> hard for competitors to copy
- gives something that helps to add to its value
exchange rate
the price of one currency expressed as another
why do businesses buy foreign currencies?
- to pay for goods + services bought from overseas
- wish to invest in enterprises overseas
appreciation
depreciation
a rise in the value of a currency
a decline in the value of a currency
how do exchange rates create uncertainty?
- revenue: if agreed a deal they receive more or less due to the change
- quantities likely to be sold: can affect prices + sales in overseas markets
SPICED
strong pound imports cheaper exports dearer
inflation
the persistent rise in the general price level + an associated fall in the value of money
measured by consumer price index which measures the rate of inflation based on the changes in prices of a basket of goods + services
how does inflation effect businesses?(
- may decide to change prices
- trade unions will build wage demands
- may suffer falling sales
taxation
payment that has to be made to the gov or other authority by households, firms or other organisations
eg VAT, national insurance + corporation
how does taxation effect businesses?
- use specialist tax lawyers to help minimise tax in order to keep profit high
- may influence strategic decisions
- impact functional decisions eg many businesses have called for reduction in the amount of employers that have to pay national insurance
fiscal policy
the use of taxation + public expenditure to manage the level of economic activity
expansion fiscal policy
- increase the level of economic activity
cutting taxation and/or increasing gov expenditure on health, education, defence etc
results in: increased output + spending, less unemployment but possible increase inflationary pressure + more imports
contractionary fiscal policy
- reduce the level of economic activity
reducing gov expenditure or increasing taxation
results in: lowered output, spending + employment
monetary policy
controlling the amount of money and/or interest rates within the economy in order to achieve the desired level of economic activity
interest rates
the price of borrowed money
Used to help regulate the economy and meet economic economic policy objectives
what businesses are most susceptible to changing interest rates?
- small firms
- firms with high gearing
- firms that trade overseas
how does rising interest rates effect businesses?
- reduces consumer spending
- falling sales
- defer investments
- firms may reduce borrowings to lower costs
how does falling interest rates effect businesses?
- reducing levels of unemployment
- increasing rates of economic growth
- demand + sales likely to increase
protectionism
a gov policy which favours the use of measures intended to prevent the free entry of imports into a country
how does the gov protect its businesses from international comp?
- tariffs: tax on imports
- import quotas: limits on products
- subsidies: to help charge lower prices
- technical barriers to trade
how does protectionism provoke strategic decisions in businesses?
- use more expensive domestic suppliers if trade barriers prevent or restrict imports
- businesses w sufficient resources may establish production facilities within countries that impose import restrictions to avoid any such barriers
reasons for greater globalisation of business
- the support of many Govs + major businesses: offers growth + prosperity for all
- the falling cost of international transport + communications
- the growth of global trading blocs + reduction of barriers to trade
- the growth of multinational companies eg McDonalds
- increasing global incomes + growing demand for goods + services
importance of globalisation for businesses
- increased sales, revenues + profits
- cheaper resources
- economies of scale
- developing different products for different markets
an emerging market
a country with low incomes per head but one which is enjoying high rates of economic growth
importance of emerging economies
- enormous labour resources
- large markets
- rapid growth rates
- natural resources
when is a threat of substitute high?(not in paper 1)
- price of substitute product falls. making it more attractive to customers
- it is easy to switch
- customers are willing to switch
factors influencing investment decisions(not in paper 1)
- the rate of interest
- the level of profit
- alternative investments
non financial factors affecting investment decisions (not in paper 1)
- corporate image
- corporate aims + objectives
- environmental + ethical issues
why is difficult to forecast sales? not on paper 2
- time scale
- new markets
- competitors reactions
shareholder v stakeholder concept not on paper 2
maximise profits, increase in share price + higher dividend payments will satisfy shareholders. -> some risks eg encourages short termism, pressure to improve profitability has lead to falsifying accounts
obligations to society, considers the needs of all stakeholders not just share holders
short termism not on paper 2
pressure to deliver quick results to potential detriment of the longer term development of a company
culture not on paper 2
encompasses the values, attitudes and beliefs of those who work for a business
SWOT analysis not on paper 2
strategic analysis
- strengths eg strong brand name
- weaknesses eg large amounts of long term borrowing
- opportunities eg growth in major market
- threats eg change in tastes leading to fall in demand
balance sheet not on paper 2
financial statement recording the assets + liabilities of a business on a particular day at the end of an accounting period
assets not on paper 2
items owned by a business eg vehicles
non current - 1 yr or more
current - 1 yr or less
tangible - physical existence
intangible - not a physical form
liabilities not on paper 2
money owed by a business to individuals, suppliers etc
current - due in short time 1 yr or less
non current - do not need to pay back in one year eg mortgages
totat equity
net assets not on paper 2
assets - liabilities
working capital not on paper 2
current assets - current liabilities
depreciation
the reduction of value of an assets over a period
an income statement must disclose not on paper 2
- depreciation amounts
- directors earnings
- exceptional items
- extraordinary items - losses from events that were unusual
who is likely to have an interest in income statements? not on paper 2
- managers
- shareholders
- employees
- HM rev + customs
window dressing not on paper 2
preparation of financial statements to present the company’s performance in the best possible light
profitability ratios not on paper 2
fundamental measure of the success of the business ROCE GPM OPM PFYM
liquidity ratios not on paper 2
ability of the business to pay back immediate debts
current ratio
gearing (%) not on paper 2
long term liquidity - extent to which the business is based on borrowed money
NC liabilities / TE + NC liabilities
shows potential investors where a businesses finance has come from
efficiency ratios not on paper 2
how well managers have controlled the business
- inventory turnover
- payable days
- receivable days
what is liquidity not on paper 2
how easily an asset can be turned into cash + used to buy things, cash = very liquid, non current assets = not liquid
ROCE (%) = not on paper 2
operating profit/ total equity + NCL
- how much money is made compared to how much is put in
- can be improved by paying off debt to reduce NCL
inventory turnover = not on paper 2
cost of goods sold / avg inventories sold
payable days = not on paper 2
payables/ cost of sales x 365
-> no. of days the firm takes to pay for goods it buys on credit from suppliers
receivable days = not on paper 2
receivables / sales rev x 365
-> no. of days that the business has to wait to be paid for goods it supplies on credit
highly geared not on paper 2
above 50% hit hard by rise in interest rates most LT funds come from borrowing obvious firm is willing to take risks business has to keep up w loan repayments may be because it is growing
low geared not on paper 2
below 25%
most LT funds come from shareholders
could be risk adverse
bc it doesn’t have to spend on interest repayments, it can withstand a fall in profits
internal factors which affect objectives? not on paper 2
ownership - non profit or not profit, sole trades or limited companies (shareholders to answer to)
short terms - quick return on investment, doesn’t benefit in LT
internal environment - size, culture, views of leaders
strategy not on paper 2
medium to LT plan of action developed to achieve a business’s objectives
in larger firms, clearly defined bc it will influence plans of individual departments
tactics not on paper 2
ST plans for implementing strategy, more focused on day to day activities
value of ratio analysis not on paper 2
+ can spot trends + identify strengths + weaknesses
+ can help with decision making + also potential investors
- don’t provide non numerical factors
- don’t asses internal strengths, external factors or future change
