3.5 Assessing competitiveness

Question 1

how do profit loss accounts help stakeholders evaluate performance

Answer 1

shareholders - more profit allowing for greater dividends and share price
suppliers - want success so they can continue supplying - levels of success determine amount of trade credit
community - want success to provide job stability in area

Question 2

what is liquidity

Answer 2

the ability of a business to meet its short-term commitments with its available assets

Question 3

non current assets

Answer 3

items that are owned by a business for the long term - capital/buildings

Question 4

current assets

Answer 4

items that are converted into cash quickly - usually within 12 months
cash, trade receivables and inventory

Question 5

current liabilities

Answer 5

money a business owes and is due to be settled within the next 12 months
trade payables, bank overdraft

Question 6

non current liabilities

Answer 6

money a business owes which does not need to be paid back within the next 12 months
bank loans, mortgages

Question 7

net assets

Answer 7

assets - liabilities

Question 8

what does the gearing ratio show

Answer 8

the balance of non-current liabilities (e.g. long-term loans) to shareholder capital used to fund a business
long term financial structure of a firm

Question 9

gearing ratio formula

Answer 9

NCL/CE x 100
CE = NCL + TE

Question 10

what does RoCE compare and measure

Answer 10

compares the profit made by a business to the amount of capital invested in the business
It is a measure of how effectively a business uses the capital invested in the business to generate profit

Question 11

RoCE formula

Answer 11

OP/CE x 100
CE = NCL + TE

Question 12

what does being highly geared mean and result in

Answer 12

more than 50 per cent of its capital employed are long-term loans.
results in more interest payments reducing dividends, retained profit and making the firm less likely to get more loans

Question 13

how to reduce gearing ratio

Answer 13

issue more ordinary shares
retain more profits to reduce amount needing to be borrowed
repay loans

Question 14

what is a low geared business and what does it mean for a firm

Answer 14

firms are low geared when less than 50% of its capital employed are long term loans
means firms may be missing out on accessing finance without diluting control
lenders more likely to accept loan requests
deters investors as firm may come across as risk averse

Question 15

how to increase gearing ratio

Answer 15

buying back ordinary shares reduce share capital in relation to borrowing
obtaining more loans

Question 16

what can RoCE be used for

Answer 16

to support strategic decisions to determine most profitable option giving level of capital employed
attract investors as it shows low risk growth is being achieved

Question 17

what RoCE % is a good sign a company is in a good financial position

Answer 17

20%

Question 18

how can firms increase RoCE level

Answer 18

increase the level of profit generated without introducing new capital into the business

maintain the level of profit generated whilst reducing the amount of capital in the business

Question 19

limitations of ratio analysis

Answer 19

makes comparisons - the nature of a business may change over time - firms may diversify into less competitve markets - increasing RoCE
low quality of financial accounts - finacial accounts could have been window dressed to make ratios look more appealing (writing off bad debts, revaluing property)
time period - ratios may only be calculated over a small period - not providing the full picture
disregard of qualitative information - other firms

Question 20

4 human resource metrics firms measure

Answer 20

labour productivity
labour turnover
labour retention
absenteeism

Question 21

what is labour productivity

Answer 21

output per employee over a given period of time
high productivity is desirable

Question 22

labour productivity formula

Answer 22

labour productivity = total output / average number of employees

Question 23

what is labour turnover

Answer 23

the proportion of employees leaving a business during a specific time period

Question 24

labour turnover formula

Answer 24

number of staff leaving / average number of staff x 100

Question 25

what internal human resource management problems can a rising labour turnover figure signal

Answer 25

Poor management, leading to workers losing commitment A poor recruitment and selection approach, leading to staff leaving soon after starting their job Low wage levels compared to those that could be earned elsewhere

Question 26

what external factors can lead to increased labour turnover

Answer 26

A buoyant local economy in which workers are attracted to employment opportunities elsewhere Improved transport links that provide an opportunity for workers to seek work across a wider geographical area

Question 27

consequences of high labour turnover

Answer 27

problems - increased recruitment ,selection and training costs reduced productivity as workers settle into new role opportunities - workers with existing skills can be hired - no need for training new ideas and creativity introduced new perspectives can improve business performance

Question 28

what is labour retention

Answer 28

the proportion of employees remaining with a business during a specific time period

Question 29

labour retention formula

Answer 29

number of staff remaining / average number of staff x 100 high level means few employees are leaving

Question 30

what is absenteeism

Answer 30

the proportion of staff who were absent from work during a specific period of time

Question 31

absenteeism rate formula

Answer 31

number of staff absent / number of staff employed x 100

Question 32

what problems can high absenteeism rates cause

Answer 32

sick pay and temporary staff increases costs and reduces productivity demotivation if colleagues are not present culture of absenteeism may grow reducing productivity

Question 33

strategies to improve employee performance

Answer 33

offering financial rewards - bonuses, performance related pay offering employees shares in the firm consultation - taking employee views into opinion empowerment - gives responsibility to make their own decisions increases emplyee commitment and welfare --- higher productivity and output -- staff are less likely to want to leave due to motivation provided