3.5 Assessing Competitiveness Flashcards

Question

What are the pieces of Key Information in the Statement of Financial Position?

Answer 1

- Non-current Assets - Current Assets - Non-current Liabilities - Current Liabilities - Net Assets - Equity

Answer 2

- Goodwill --> This is a non-physical asset of a business, it is the amount the business is worth above the value of net assets. Goodwill exists if a company has built up a good reputation and its customers are likely to return - Other intangible assets --> e.g. brand names, copyrights, trademarks and patents - Property, plant and equipment --> These are the tangible assets that the business owns, - Investments --> These are the financial assets owned by the company e.g. the shares held in other companies. If investments are listed under non-current assets it means that they are not expect to be sold for at least 12 months

Answer 3

- Inventories --> This refers to stocks of raw materials and components, stocks of finished goods and work in progress - Trade and other receivables --> These are trade debtors, prepayments and any other amount owed to the business that are likely to be repaid within 12 months - Cash at bank and in hand --> This is the money held by a business on the premises or in bank accounts

Answer 4

- Borrowing --> Any short-term loans or bank overdrafts taken out by the business - Trade and Other Payables --> Trade creditors and other amounts owed by the business to suppliers or goods services and utilities - Dividends Payable --> When the balance sheet is prepared *(at the end of the financial year perhaps) it is possible that the company has decided how much it will pay the shareholders in dividends. However the money has not yet been paid so it appears in the balance sheet as dividends payable - Current Tax Liabilities --> Corporation tax, employees' income tax and any other tax owed by the business that must be repaid within 12 months

Answer 5

- Other loans and borrowings --> Money owed by the company that does not have to be repaid for at least 12 months e,g, bank loans and mortgages - Retirement Pension Obligations --> Companies need to show any money owed to past employees in the form of pension obligation - Provisions --> Provisions have to be made if a company is likely to incur expenditure in the future, such expenditure might arise as a result of agreements in contract or warranties.

Answer 6

- Net assets is simply the value of all assets minus the value of all liabilities - It will be the same value as shareholders' equity at the bottom of the balance sheet

Answer 7

- Share Capital --> The amount of money paid by shareholders for their shares when they were originally issued. It does not represent the current value of those shares on the stock market. Share capital is not usually repaid to the shareholders in the lifetime of a company - Share Premium Account --> this shows the difference between the value of new shares issued by the company and their nominal - Other reserves --> Refers to any amounts owing to the shareholders not covered by the other entries under equity - Retained Earnings --> The same as retained profit. It is the amount of profit retained by the business to be used in the future

Answer 8

- Shareholders - Managers and Directors - Suppliers - Others

Answer 9

- Shareholders might use the balance sheet to analyse the asset structure of the business - This shows how the funds raised by the business have been put to use - The balance sheet also shows the capital structure of the business, i.e. the different sources of funds used by the business - the balance sheet can also be used to assess the solvency of the business - A business is solvent if it has enough liquid assets to pay its bills - The value of working capital will help to assess solvency of the business - the value of a business is roughly equivalent to the value of net assets in the business - This means that shareholders can use the balance sheet to see if their investment is growing

Answer 10

- the balance sheet might be used by the management of a business e.g. it is important for senior managers to be aware of the firm;s financial position at any given point in time - It will need to monitor working capital levels to ensure that the business does not overspend - Also, if the business is considering raising some more finance, it will have consider the current capital structure before choosing a suitable source

Answer 11

- Suppliers will be most interested in the solvency of the business - Suppliers are not likely to offer trade credit to a business that only has a limited amount of working capital

Answer 12

- It is possible that employees might use the balance sheet to assess whether a business can afford a pay rise or whether their jobs are secure - The office for National Statistics (ONS) sheet to compile national statistics

Answer 13

Exploration of the capital structure of the business by comparing the proportions of capital raised by debt and equity.

Answer 14

Illustration of the relative profitability of a business.

Answer 15

A numerical approach to investigating accounts by comparing two related figures.

Answer 16

The profit of a business as a percentage of the total amount of money used to generate it.

Answer 17

The legal manipulation of accounts by a business to present a financial picture that is to its benefit.

Answer 18

Ratio analysis – a method of assessing a firm’s financial situation by comparing two sets of linked data. - Analysts use ratios to compare the relative performance of one company against another, or within a company, of departments against budgets.

Answer 19

If ratios are to be useful its important to use the right one. The following process allows for this: 1 - Identify the reason for the investigation 2 - Decide on relevant ratio(s) 3 - Gather the information required, then calculate the ratio 4 - Interpret the ratio 5 - Make the appropriate comparisons 6 - Take action based on results 7 - Repeat process again

Answer 20

Ratios are meaningless on their own, they need to be compared with other results: 1 - Inter-firm comparisons – comparisons between companies. A company compares itself against others in order to asses their relative performance. Ideally selecting the competitors with the most in common. 2 - Intra-firm comparisons – comparisons within the company. The efficiencies of different divisions or locations can be compared 3 - Comparisons to a standard – certain ratios are recognised as efficient within the business community 4 - Comparisons over time – comparing quarterly or annual data allows you to assess progress over time.

Answer 21

- The Gearing Ratio measures the levels of borrowing within a business ( the relationship between loans on which interest is paid and shareholder's equity on which dividends might be paid) in which . It is important for a business to measure the amount of debt as too much can impact on the ability of the business to service (pay) that debt. - If the company can’t meet the interest and capital repayments, it will impact on the company’s solvency.

Answer 22

GR = (Non-current Liabilities)/(Capital Employed) x 100 Capital Employed = (NCA + CA - CL)

Answer 23

- If the gearing ratio is greater than 50%, then the business is said to have a high capital gearing. - If the gearing ratio is less than 25%, then the business is said to have a low capital gearing. - Between 25% and 50% is said to be a normal level of capital gearing.

Answer 24

High capital gearing offers several benefits: - There are relatively few shareholders, so easier for existing shareholders to keep control - If interest rates are low, it can be a very cheap source of finance. - In times of high profits, interest payments would likely be lower than dividend expectations of shareholders, allowing the business to retain more profits for investment.

Answer 25

Low capital gearing also has advantages: - With more capital provided through shares, less opportunity for payables (creditors) to force business into liquidation. - Low geared companies avoid large interest repayments in times of high interest rates - The company avoids the pressure of having to repay all the debt at some stage in the future.

Answer 26

- Highly profitable businesses prefer high gearing to shareholder funds as a source of finance, as interest payments can be managed from profits, but little shareholders to take those profits as dividends - Lower gearing tends to suit businesses that are less profitable, where the ability to adapt to increased interest payments if rates change is limited.

Answer 27

- hlpe show how well a business is doing - They tend to focus on profit, capital, employed and revenue - the profit figure alone is not a useful performance indicator, it is necessary to look at the value of profit in relation to the value of revenue or the amount of money that has been invested in the business The two ratios are: - Return on Capital Employed (ROCE) - Profit Margins

Answer 28

- Return on capital employed shows the operating profit (before tax) as a percentage of capital employed. - Tax is ignored because it is determined by the government and is therefore outside the control of the company - Interest is excluded because it does not relate to the business's ordinary trading activities - Operating Profit is used as it only covers profits from trading, not exceptional items. - Capital employed is the total equity provided by shareholder funds (share capital and retained profit) plus non-current liabilities (long term loans + debentures)

Answer 29

ROCE = (OP before tax)/ (NCA + CA - CL) x 100

Answer 30

- The ROCE will vary between industries, but the general rule is, the higher the better. - It is effectively measuring the return made from an activity based on the capital being used. You could consider it as an investment appraisal method. - Much like a ARR calculation, you are comparing the return against other potential uses for the capital, the opportunity cost.

Answer 31

- The basis for comparison --> Comparison over time, Inter-firm comparisons and Other Differences - The quality of final account - Limitations of the balance sheet - Qualitative information is ignored - Window Dressing

Answer 32

- Care must be taken when comparing ratios from the same company over time - Many companies remain broadly in the same industrial sector overtime, but other can diversify and change very rapidly - Equally, some companies remain the same size over time, Other, grow rapidly or shrink quickly - Such factors can affect the way in which ratios can be used as a measure of performance

Answer 33

- Caution must also be used when comparing ratios between companies at a point in time - Comparing Ratios between comparing ratios between companies at a point in time - Comparing the ratios of two companies that make broadly the same product is likely to say something about their relative performance - But comparing the ratios of a supermarket chain with those of a cement manufacturer is unlikely to be helpful

Answer 34

- Even when companies are well matched in their activities and operating circumstances, there may be other difference between them that must be observed e.g. two similar companies may use different accounting techniques, different ends to the financial year etc.

Answer 35

- Ratios are based on financial accounts, such as as balance sheets and income statements - Consequently ratio analysis is only useful if the accounts are accurate - One factors that can affect the quality of accounting information is the change in monetary values cause by inflation - Rising prices can distort comparisons made between different time periods e.g. in times, of high inflation there might be no increase in real terms - There is also the possibility that the accounts have been window dressed

Answer 36

- Because the balance sheet is a 'snapshot of the business at the end of the financial year, it might not be representative of the business's circumstances throughout the whole of the year - For example, a business experiences its peak trading activity in the summer and it has its year end in January when trade is slow, figures for stock and debtors will be unrepresentative

Answer 37

- Ratios only use quantitative information - However, some important qualitative factors may affect the performance of a business that are ignored by ratio analysis - For example, in the service industry the quality of customer service may be an important performance indicator - However, ratio analysis cannot isolate the impact that good customer service might have on sales - Sales might be higher as a result of good customer service but there might be other factors that have helped to increase sales, such as advertising

Answer 38

- Account must represent a 'true and fair record' of the financial affairs of a business. - Legislation and financial reporting standards place limits on the different ways in which a business can present financial information - These limits are designed to prevent fraud and misrepresentation in the compilation and presentation of accounts - However, businesses ca manipulate their accounts legally to present different financial pictures - This is know as window dressing

Answer 39

- Managers of companies might want to put as good a financial picture forward as possible for shareholders and potential shareholders . Good financial results will attract praise and perhaps rewards. They might also prevent criticism from shareholders and the financial press - If a business wants to raise new capital from investors, then it will want its financial accounts to look as good as possible - Where a business has experienced severe difficulties during the accounting period, it may decide to take action that will make the financial position look even worse now, bur which will improve figures in the future - Making the financial picture look worse may be way of lowering the amount of tax that is paid - If the owners of a business want to sell it , the better the financial position shown on the accounts the higher the price they are likely to get

Answer 40

- a business may manipulate its sales by increasing the level of revenue recorded in the income statement - This will increase profit in that accounting period. It may be able to suppress costs by changing its accounting policies or choosing when to 'write off' unprofitable activities. - It can also 'write off' bad debts revalue property, boost liquidity through the sale and leaseback of assets, and manipulate current assets and current liabilities

Answer 41

Output per worker in a given time period.

Answer 42

The number of employees that remain in a business over a period of time.

Answer 43

The rate at which staff leave a business.

Answer 44

The number of staff who are absent as a percentage of the total workforce. This can be calculated for different periods of time.

Answer 45

- Productivity is an important measure is an important measure of the efficiency of a workforce. - If 2 identical teams, with the same equipment, worked for the same period of time, the group that makes the most would be deemed to be more productive. - However, it not so easy when comparing businesses. A company’s figures may be distorted if they have a large amount of robotics involved in their production as workforce would be lower, but the infrastructure costs would be far higher. - Increasing labour productivity can be seen as increasing competitiveness. This is because increased production will allow a business to drive down its unit cost. - This would allow them to either reduce prices and potentially gain more sales, or keep prices the same and increase the profit per unit.

Answer 46

Labour productivity is defined as the output produced per worker. - LP = Total output (per period of time)/ Average No. of employees (per period of time)

Answer 47

- Rivals may improve productivity even faster - New businesses may set up again, with lower wage costs, reducing cost per unit - Other factors – a business may produce a new, more attractive product, which customers prefer to buy

Answer 48

- Staff turnover can be another method of measuring a businesses effectiveness. - It measures the number of staff leaving a business, relative to the whole workforce over a period of time. Its calculated as follows: (No. of Staff Leaving (per period of time))/(Average No, of Staff (per period of time)) x 100

Answer 49

- Relatively low paid jobs mean employees leave for higher paid jobs - Little training or promotion opportunities may lead people to leave to further their careers - Poor working conditions, low job satisfaction, bullying or harassment in the workplace - Poor recruitment selection mean staff are not suited to the role - Economic cycles – in recession, people are afraid to leave their jobs in case they don’t get another. In a boom, more opportunities are created, which leads to greater turnover.

Answer 50

- Staff recruitment is costly - New staff need to become familiar with procedures and practices, this reduces productivity - Larger companies will usually provide corporate inductions, which increase costs further. - If internal appointment, training may be needed for a worker moving from a different role.

Answer 51

- New staff bring fresh ideas and experience - Some old staff may need to leave – getting rid of ineffective staff will increase turnover, but may also increase productivity - If a business is shrinking, it will need to lay ff staff, this will increase turnover. - In low skilled jobs, it may be more effective to have a high turnover of low paid staff, than increase wages and working conditions

Answer 52

The opposite of labour turnover, labour retention measures how many people stay with an organisation over a period of time. It is calculated as follows: - (No. of staff staying (per period of time))/(Average No. of Staff (per period of time)) x 100

Answer 53

The benefits to a business of a high retention rate are the same as the advantages of a low staff turnover rate, such as lower recruitment and selection costs, more continuity and a stable workplace

Answer 54

Absenteeism is linked to the number of staff taking time of work through sickness or injury. This is a problem because: - If staff are off ill, the business needs to pay sick pay - If temporary staff are recruited to cover, this increases costs further. - Equally, permanent staff working overtime to catch up will increase wage costs - Output can fall if those replacements are not as effective as the original worker - There may be quality issues Can be a symptom of low morale and demotivated staff - The higher the absenteeism, the more people report as ill. It may lead to a culture of people taking “sick days” for holiday

Answer 55

(Number of staff absent on a day)/(total number of staff employed) x 100

Answer 56

Differences in rates can occur for different reasons: - Smaller businesses tend to have lower rates of absenteeism as there is much more teamwork and commitment. Workers in larger businesses will feel there’s less issue if they’re off. - Health & safety. Businesses with good H&S procedures tend to suffer less absenteeism. However, some jobs are inherently more dangerous than others. - Nature of the job can lead to increased absenteeism. Boring repetitive jobs can lead to low job satisfaction and motivation. - Workplace culture will have an impact. Overworked employees tend to suffer from work-related stress, which can lead to long term absence. - Stress related illness can also occur more frequently where staff are over-supervised and feel like they’re not trusted to do a job. - Poorly paid workers tend to have higher absenteeism as they feel undervalued.

Answer 57

- Financial Rewards - Share Ownership - Consultation - Empowerment

Answer 58

Differing theories on motivation have differing views on the value of financial rewards. - Frederick Taylor – individual should be paid by output (piece rate) as this would motivate them to work harder. - Abraham Maslow – pay will only motivate to the point of all physiological needs being met. After that, other influences will drive motivation - Some businesses pay a bonus to staff who have limited/no absences. - In 2013, it was estimated that the cost of absenteeism to businesses was nearly £29bn. Its little wonder people are willing to incentivise coming to work.

Answer 59

- What better way to encourage employees buying into the success of the business than by making them a shareholder, allowing them to share in the profits of the business. - Whilst for the most part, share option schemes are only offered to management, some businesses will allow all staff to participate. - Government statistics suggested that in 2012-13, over 1,000 companies offered share schemes to their employees

Answer 60

- Employees who are involved, or feel they are involved, in the business’ decision making will feel more motivated and as such, tend to be more productive. - Staff will feel demotivated if they are given tasks to do, or decisions are made, without consultation or explanation. - If staff are consulted when decisions are being made, they are more likely to accept it, even if the decision is contradictory to their own idea.

Answer 61

- Psuedo Consultation - Classical Consultation - Integrative Concultation

Answer 62

- Managers make decisions and workers are informed about it through representatives, such as unions. - Employees have no influence over the process - Some would say it more giving information than consultation

Answer 63

- Is a method that involves employees giving their views to a representative, who collates and reports those views to the management. - This allows the views of the employees to be heard and may influence management decisions

Answer 64

- The other methods do not directly involve the employees whereas this method is about a more open democratic process. - Whist every employee may not be directly consulted, management and representatives may consider solutions and then put it to the staff for consideration.

Answer 65

Empowerment is about allowing the employees to make the most of their knowledge, experience and creative talents. It is also a way of improving morale, which can have a positive effect on productivity. - Training - Providing Resources - Delegation - Inspire Confidence - Positive Feedback

Answer 66

It is not really possible to empower staff effectively without first equipping them with the skills needed to take on more advanced tasks - A business needs to identify any 'skills gap' - This is this difference between an employee's current skills and those required to undertake new tasks - This gap can be bridged by training

Answer 67

There is little point empowering staff if they are not given the resources and information needed to undertake more complex task - For example, if an employee is tasked with leading a small team to solve a problem, such as improving the response time to customer complaints, they will need a range of information and enough resources to make improvement

Answer 68

- Once employees have been empowered they must be confident they have complete authority to make decisions - The methods they choose and approaches they take must not be questioned - If employees are challenged or asked to explain themselves each time they make a decision, empowerment is not likely to work

Answer 69

If employees are being empowered it is important that they feel confident about their new role - A lack of confidence can lead to anxiety, hesitancy and mistakes - Senior managers can help to inspire confidence by emphasising the strengths that an individual has, showing trust, and by recognising and praising achievements

Answer 70

- At an appropriate time it will be necessary to provide positive feedback to empowered workers - Workers need to know how they have performed in their new roles - Feedback will help you guide them in the future and build more confidence

3.5 Assessing Competitiveness Flashcards

(94 cards)