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Business > Unit 7 - Section 2: Analysing The Financial Position Of A Business > Flashcards

Unit 7 - Section 2: Analysing The Financial Position Of A Business Flashcards

1
Q

Balance sheet

A

A statement of what a business owes and what it owns

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2
Q

Assets

A

Items a firm owns that are worth money

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3
Q

Liabilities

A

Financial commitments the firm has to pay

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4
Q

Consolidated balance sheet

A

This is a balance sheet that covers all of a firms operations put together

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5
Q

Inventories

A

Stock

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6
Q

Total equity

A

The total amount of money used in a firm made up of share capital and retained profit

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7
Q

Non-current assets

A

Items of value owned by the business in the long term

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8
Q

Current assets

A

Recourses owned who’s value changes daily. Likely to be cash or near cash. Their value will be realised in the short term

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9
Q

Intangible assets

A

Items of value without physical form such as goodwill from customers or staff or brand names

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10
Q

Current liabilities

A

Financial obligations the firm has payable within 12 months

Short term

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11
Q

Non-current liabilities

A

Long term financial obligations. These debts will take more than a year to pay back

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12
Q

Net current liabilities (working capital)

A

Current assets minus current liabilities.

if liabilities exceed assets this will be a minus figure - shown in brackets

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13
Q

Net assets

A

Total assets minus total liabilities

This figure will balance the equity in the firm

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14
Q

Depreciation

A

The fall in value of a non current liability over time

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15
Q

Mortgages

A

Long term loans, secured on property

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16
Q

Debentures

A

Loans with fixed interest usually long term and with a fixed repayment date

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17
Q

Ratio analysis

A

A technique for analysing a firms financial performance by comparing one of data with another

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18
Q

Profitability

A

A measure of the ability of the firm to earn revenues above the level of its costs

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19
Q

Liquidity

A

A measure of how easily the firm turns its assets into cash to pay its bills

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20
Q

Financial efficiency

A

How well the firm manages its money

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21
Q

Inventory turnover

A

A measure of the firms success in converting stock to sales

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22
Q

Receivable days

A

Measures the firms success in collecting money it is owed

Receivables (balance sheet) divided by revenue (income statement) x 356

Measures the amount of days it takes to turn debts into cash

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23
Q

Payables days

A

Measures the firms speed in paying its suppliers

Payables (balance sheet current liabilities) divides by cost of sales (income statement) x365

Number of dahs it takes the form to pay what it owes to it’s suppliers

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24
Q

Income statement

A

A record of how the firms trading activity for one year calculating profit and loss

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25
Q

Sales revenue

A

The value of goods and services sold

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26
Q

Cost of sales

A

The direct cos of making sales (Rae materials)

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27
Q

Gross profit

A

Sales revenue minus cost of sales

It is the raw profit the firm makes

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28
Q

Overheads

A

The indirect cost such as rent and mangers salaries

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29
Q

Operating profit

A

The profit from the normal operations of the business.

Gross profit minus overheads

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30
Q

Exceptional items

A

Amounts the firm has paid put or made that are unusually big. For example large overtime payments to staff

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31
Q

Financial expense

A

The cost of the firms finance

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32
Q

Finance income

A

Interest the firm has earned on savings or investments

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33
Q

Net profit before tax

A

The total amount of money that the firm has made in a year; the amount the firm will be taxed on

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34
Q

Corporation tax

A

The money paid to the government. It is a percentage of profits

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35
Q

Profit for the year

A

The amount the fit has made net of tax. It is the amount that is shared between rewarding the shareholders and retains for future expansion

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36
Q

Who looks at balance sheet and income statement (internally)

A

Mangers: to better control the firm and work on achieving objectives

Employees: to assess job security and pay

Shareholders: to see whether their investment is returning

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37
Q

Who looks at balance sheet and income statement (externally)

A

Creditors: can the firm pay its bills

Government: can the firm pay its tax and will it continue

Competitors: for comparison

Potential investors: is the firm worth investing in

38
Q

How to improve financial situation

A

Reduce time from production to sale

Reduce terms of credit offered to customers

Increase credit taken from suppliers (depends on solidity if the relationship)

39
Q

Income statement benefits (what you can see)

A

Values of sales in a year

Value you do profit

The profit the firm have retained for further investment

Dividend payments

40
Q

Income statement problems

A

Only useful if you have comparison e.g data from other years, industry averages, data from similar firms

41
Q

Profit quality

A

High quality profit is that which is sustainable in the future - usually comes from the firms day to day activities

Low quality profit comes from one off source such as selling assets or short term investments in other businesses

42
Q

Profit utilisation

A

Describes how profit is being used

Retained profit is kept in the firm for future expansion

Dividends are paid to the shareholders usually every 6 months

43
Q

Gross profit margin

A

Gross profit (sales revenues - direct costs) divided by sales x 100

For every £1 of sales the firm makes, how much raw profit does it make

44
Q

Operating profit margin

A

Operating profit (gross profit- overheads) divides by sales x 100

Allows the firm to monitor its profitability year on year and compare it with other firms or the industry average

Generally if it is declining it indicates poor cost management

45
Q

Return on capital employed (ROCE)

A

Operating profit (gross profit - overheads) divides by total equity + non current liabilities x 100

Shows for every £1 invested in the firm the amount of profit being made

46
Q

Measuring liquidity

A

Current ratio:
Current assess divided by current liabilities

e.g 350000 divided by 250000 = 1.4:1

For every £1 of short term debt the firm has £1.40 of cash or near cash to pay it

47
Q

What is considered safe (liquidity)

A

Depends on the nature of the business

Supermarkets have very Low ratios as they operate with high levels of trade credit but they know they turnover their stock quickly

Safe level - 1.5 -2:1

Very high ratios could mean that the firm is failing to use their cash effectively

48
Q

Cause of liquidity problems

A

Over investment in non current assets often, as a firm expands
Solution: sell assets and rent or hire them back

Overtrading when the firm fails to secure sufficient long term finance and has high interest cost (businesses not being confident)
Solution: pay off short term borrowing with 1 long term loan

49
Q

Gearing

A

Examining the capital structure of a firm and so assessing the likelihood of its continuation financially

Gearing ration: non current liabilities divided by total equity + non current liability (capital employed) x 100

50
Q

Gearing interpretation

A

Shows the amount of money the firm has borrowed in the long term as a percentage of its overall worth

Shows the amount of money that is borrowed for every £1 that is earned

51
Q

High gearing (borrowed a lot of money)

A

If loans are equal to more than 50% of the firms worth it has borrowed a lot of money and is very dependent on the goodwill and support of its lenders and could put pressure in to repay loans if things aren’t going well

Could put investors off and limit the firm in borrowing more money

Borrowing will be expensive as if they could borrow more it would be high risk

High amounts of interest effects cash flow

52
Q

Benefits of high gearing

A

Fewer shareholders so closer control

Firms have taken advantages of cheap finance

Interest rates may be lower than dividends demand/expected by shareholders so loans can be used to relieve short termist shareholders pressure

Investment allows the business to expand and grow

53
Q

Low gearing

A

This is usually expected as being less than 25%

The company has a high percentage of its capital provided by shareholders

The firm will not be paying high levels of interest

That the firm has four shareholders seeking dividend

Control of the business more diluted

54
Q

Raising gearing

A

Buy back shareholders

Issue more debentures

Obtain more loans

In an economic climate where interest rates are low geared firm could be seen to be over cautious

If the bank or lender is owed more than a firm could pay back from the sale of its assets, it is in the banks interest to keep the firm trading rather than force it in to liquidation (argument)

55
Q

Reducing gearing

A

Issue more shares

Buy back debentures

Retain more profit

Repay loans

56
Q

Financial efficiency ratios

A

They measure the effectiveness with which businesses control their internal operations

e.g how well the stock is managed, how well is credit controlled

57
Q

Inventory or stock turnover

A

It measures how quickly inventory is converted into sales

Cost of goods sold (income statement) divided by average inventories held (balance sheet) = inventory turnover

A value of four would mean that the firm sells its stock four times per year so it will on average take three months to convert stock to cash

58
Q

Factors influencing the rate of inventory turnover

A

The range of products sold will affect the amount of stock held

The production method

The efficiency of stock management systems

Whether or not the product is perishable, seasonal or times specific

The length of the product life-cycle

The quality of market research and sales forecasting

59
Q

Recession positives and negatives

A

Demand: +cheaper brands will see increase in demand
- decrease dramatically especially luxury products
Investment/stock levels: + shares cheaper,
Shareholders will want to invest,
Innovation room
- less investment, hold lower stock levels, slower speed of response, less flexibility
Employment: + more workers to chose from, less training needed, low wage cost
- makes selections long process, high skilled workers may not work for low wages
Start ups/ liquidations: + might help small businesses start up
- less money moving around businesses, less liquid

60
Q

Boom positives and negatives

A

Demand: + Demand will be up so you can increase prices
- Some businesses may not be able to meet high demand quality decrease
Investment/ stock levels: + Faster stock turnover, hold more stock, investment higher
- Could overtrade (growing without sufficient change), costs will increase
Employment: + quicker selection easier to gain, skilled workers with the money, higher motivation
-How did to keep staff, invest into training and rewards
Start ups/liquidations: + More start-ups lay liquidations , more jobs, more choice for consumers
- More competition

61
Q

Measures of economy performance

A

Employment

Incomes

Spending

Gross domestic product (GDP)

62
Q

Business cycle

A 
Periodic that a regular up-and-down movements in economic activity
Boom
Recession 
Slump 
Recovery
63
Q

Causes of cycle

A

Stock building and de stocking (confidence)

Patterns and expenditure and consumer durables

Confidence in the banking sector

64
Q

Surviving recessions

A

Focus on parts of market where businesses has advantage (core competencies)
Accurate up-to-date financial information
Tighter credit control
Realistic planning
Move into niche markets, less affected by income elasticity, gain and keep hide demand, more likely to survive
Move into international markets
Innovation

65
Q

What controls the value of the pound

A

Supply

Demand

Speculation - Foreign currency dealers will try to buy pounds when our currency is weak and sell them when it gets stronger

Government influence – I will given out will buy and sell to adjust the exchange rate

Interest rates

66
Q

Government objectives (economy)

A

Low unemployment

Positive balance of trade (exports seven imports)

Stable, low inflation (2%)

Rising steady GDP (2%)

Stable exchange rates

67
Q

Measuring inflation

A

Until 2003 RPI (X) what’s the measure
Retail price index this was usually shown as an index number with the base year being identified as a rate of 100 if inflation had gone up 8% more than the previous year the following year it would be shown as 108

Since 2005 it has been measured using CPI – consumer price index this measure excludes interest on loans and mortgage payments

68
Q

What causes inflation

A

Increase in transport costs

Cost of money goes up e.g week pound

Big increase in demand (short-term)

Peoples wages increase – you can charge more

Access to cheap imports is restricted

Minimum wage increase businesses charge more

69
Q

Falling inflation

A

This is not a fall in prices

If the percentage inflation next year is forecast to be lower than this year it is still an increase in prices unless it is a minus figure

70
Q

Deflation

A

A fall in the general price of goods and services (not happened since 1930s)

71
Q

Negative effects of high inflation on business

A

Increasing costs – all materials, components, wages and salaries. This reduces profits

Customer price sensitivity increases. They are less willing to pay for branded goods and will watch prices more carefully

There are costs associated with frequent price changes

Poor industrial relations – workers are less happy

72
Q

Positive effects of high inflation on businesses

A

It is an opportunity to conceal price increase

The outstanding capital amount of loans is reduced and it is easier to pay them off

The value of fixed assets rise – firms valuation rise easier to borrow

Consumers may spend now so their spending isn’t subject to price rises in the next period of time

This can result in the stimulation of short-term investment

73
Q

Government response to inflation

A 
By far the most significant effect of high inflation on firms is the impact of the actions the government may take to control it. The impact will depend on the course of action chosen:
Raise interest rates
Control bank Lending 
Increased taxes
Cut public spending

However only work on demand pull inflation

74
Q

Impact of government action

A

This will depend on:
The industry and location
Time lack of some political changes, the impact of changes in the April budget often don’t take affect until the following April
Type of action chosen
Time to election and therefore likelihood of the policy lasting
The gearing of the firm

75
Q

Low inflation

A

Increases the outstanding capital value of a loan making it harder to pay off
Customer price sensitivity decreases – this is good for the big brand owners but bad for budget retailers
Few price increases in general mean that firms putting up prices will be easily noticeable to consumers
There will be fewer wage claims and stability in wage rates – allowing better business planning
It may reduce unemployment and help stimulate economic growth

76
Q

Direct taxation

A

Levied on a person or organisation

Income tax

Corporation tax

Effects of changes are foreseeable

77
Q

Indirect taxation

A

Charged on goods and services

VAT

Customs and excise duty

Effects of changes hard to predict

78
Q

Deficit

A

In the UK, fiscal policy has centred around reducing the deficit recently

This is the difference between what the government raise from its tax and it’s spending in the economy

79
Q

Supply – side policy

A

A range of long-term measures to increase the amount of economic activity

Labour market measures: limiting benefits and providing training

Better education with a focus on enterprise skills

Privatisation

Competition regulation

80
Q

Competitive tender

A

Requires contractors to bid for the work for public sector organisations

Supplies compete

81
Q

Deregulation

A

Reduction of elimination of restrictions on industries often with the goal of making it easier to do business

82
Q

Financial deregulation

A

Reduction or elimination of Government power

Within an industry to create more competition

83
Q

Reasons for globalisation

A

Support of governments

Falling costs of transport – easier to do business

Growth of trade blocks e.g EU

Growth of multinational companies e.g starting in America, big place, bigger market

Increasing global incomes

Increasing global awareness (social media)

Specialisation

Communication

Containerisation

84
Q

Benefits of globalisation

A

Inward investment – bringing jobs and skills and creating demand for local products and services

Sharing of ideas and lifestyles creates new markets for products

Increases chances of maintaining place as countries have a better understanding of each other

Awareness of global issues like pollution increases

Businesses have to be more innovative to compete

85
Q

Problems of globalisation

A

People believe it’s mainly benefits the richer countries and leads to a huge businesses with too much

Transnational companies can drive local firms out of business due to their huge economies of scale

There are fewer laws in less-developed countries that big firms may exploit

86
Q

Importance of globalisation

A

Downward pressure on prices

New producers

Increased pressure for investment to develop products and processes

Threat of takeover

87
Q

Why target emerging markets

A

Enormous cheap labour resources

Large untapped market of consumers who are rapidly getting richer

88
Q

Benefits of emerging markets

A

Take advantage of natural resources

Cheap labour

Huge opportunity for sales, and standards of living

Ability to quickly establish brands in market that are developing

89
Q

Emerging markets Risks – economic

A

The growth can be very uncertain

More unemployed

Danger of over heating (growth too quickly supply can’t keep up to demand) – high inflation

90
Q

Emerging markets risk- political

A

E.g Russia’s actions in Ukraine have caused economic sanctions

91
Q

Emerging markets risk to firms brand or image

A

Suppliers of Apple fox con slave labour it in China (Apple didn’t know)

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