Theme 3 - Assessing competitiveness

Question 1

Statement of comprehensive income (profit and loss account)

Answer 1

Shows if a business has made a profit or a loss during the year showing a firms revenue, costs and profit
* Part of the legal documents that must be published each year by LTD or PLC companies
* Indicates if a firm is profitable, profitable firms have a positive net profit

Question 2

Key information on SOCI

Answer 2

• Sales revenue = QS x SP
• Money into the business through ordinary training
• Cost of sales = the total expenses a business incurs to manufacture the products it sells
• Gross Profit = revenue - cost of sales
• Used by managers to judge which products or services are most profitable
• Expenses = costs to the business that has noting to do with stock or production process
• Operating profit = a true measure of how much profit/loss the business has made
• OP= GP - Other operating costs
• Used by investors to see how hard their money would work if it was invested into the business

Question 3

Shareholders interest in SOCI

Answer 3

• Want to see how profitable the business is, higher profitability the higher the dividends
• Look at final profit figure
• Trends in net profit overtime show how risky their investments are - how much is spent on dividends
• Good firms increase revenue without increasing costs too much

Question 4

Investors interests in SOCI

Answer 4

• Show how profitable the business is
• Is it worth investing

Question 5

Employees and managers

Interest in soci

Answer 5

• Interested in the revenue and expenses of the firm overtime to see if theyre changing - need to work out why there are changes
• SOCI for each department so managers compare between departments to help identify costs to be reduced
• Compare soci with competitors see where it is performing
• Employees are interested in the profitability

Question 6

Loan providers SOCI

interest in soci

Answer 6

• Operating profit where interest on loans is paid
• Unwilling to loan with a low op as business wont pay interest

Question 7

Suppliers SOCI

interest in soci

Answer 7

• Revenue in past is it enough to pay suppliers on time

Question 8

Statement of financial position ( balance sheet)

Answer 8

Shows the assets and liabilities of a firm on a particular day of the year
* Needs to be published by ltd and plc
* Comparing from same date allows firms to pick out trends and evaluate financial performance
* Shows how much a firm is worth

Question 9

Key information

Answer 9

• Current assets = items that the business owns that will pay the business in under 1 year
  *E.g. stock sold and turned into cash within a year, Debtors those who owe the business pay within a year
• Non current assets = items that the business owns that will pay the business back after 1 year
• Current liabilities = items business own that need to be paid by the business within a year e.g. trade payables
• Long-term liabilities = items that the business needs to pay but not due for more than 1 year e.g. a loan, mortgage

Question 10

Liqiuidity

Answer 10

the ability of a business to turn assets into cash

Question 11

Solvency

Answer 11

businesses ability to pay its debts (current assets larger than liabilities)

Question 12

Managers and owners interest in soci

Answer 12

Managers and owners look at firms solvency and liquidity to see if its going bankrupt and make changes to this happening

Question 13

Suppliers interest in soci

Answer 13

Suppliers look to see how liquid firms assets are as well as solvency better paying bills on time and whethet to offer credit

Question 14

Loan providers interest in soci

Answer 14

Loan providers will want to know firms ability to pay back loans and and interest and firms with assets larger than liabilities is less of a risk

Question 15

Governments interest in soci

Answer 15

Governments use sofp to calculate amount of tax (VAT or Corporation tax) that a company has to pay

Question 16

Shareholder interest in SOCI

Answer 16

Shareholders will analyse the accounts and decide whether their investment is being used effectively

Question 17

Potential investors interest in soci

Answer 17

Potential investors will analysie accounts to determine whether the company will make a good investment

Question 18

Creditors interest in soci

Answer 18

Creditors will use accounts to check companys ability to pay their bills

Question 19

More info on soci

Answer 19

• A= L+C
• A=ASSETS, L= LIABILITIES, C= CAPITAL
• Two sides must balance as money hasnt dissolved
• Comparing from same date allows stakeholders to pick out trends in a firms finance and evacuate its financial position
• Stakeholders can use sofp as indicator of whether firms profit is likley to increase or decrease
• Increase in reserves suggests an increase in profit

Question 20

Cost of Sales

SOCI

Answer 20

The total expenses a business incurs to manufacture the products it sells
The accumulated total of all costs used to create a product/service that has sold

Question 21

Gross profit

SOCI

Answer 21

GP =Revenue - Cos
Used by managers of business to judge which products or services are the most profitable

Question 22

Expenses

SOCI

Answer 22

Costs to the business that have nothing to do with stock or the making of the product
E.g. administration, advertisting, petrol and insurance

Question 23

Operating profit

SOCI

Answer 23

OP = GP-EXPENSES
A true measure of how much profit/loss the business has made iver the year before tax is deducted
Used by investors of the business to see how hard their money would work if it was invested into the business

Question 24

Non current fixed assets

Answer 24

Items that a business owns that will pay the business back after 1 year e.g. machinery, vechiles, property

Question 25

Current liabilities

Answer 25

Items a business owes that need to be paid by the business within 1 year e.g. trade payables - payment to suppliers

Question 26

Long term liabilities

Answer 26

Items that business needs to pay but is not due for 1 year Loan e.g. 10 year payments Retirement provision e.g. penision fund monthly payments

Question 27

Ratio analysis

Answer 27

Extracting information from financial accounts to assess business performance and answer questions including profitability, growth effciency etc

Question 28

Key info

Answer 28

Info extracted from the profit and loss account, revenue, cos , gp, op np and baalcne sheet ca cl, inventory, tarde recievables and payables lyl, capital and reserbes Ratio analysis supports evidence based decision making, as it provides measurable data that can be used to support judgements and compare performance against objectives SOCI - GPM, OPM, NP M SOFP - CR, ATR , GR, ROCE

Question 29

Gearing ratio

Answer 29

Shows the long term financial structure of a business, the baalnce of a firms finance that is from non current liabilities (e.g. ling term loans) rather than share capital or resevres equity Uses lower part of sofp and expressed as a % Non current liabilities/ capital employed x 100 Capital employed = non current liabilities +equity

Question 30

Formula for gearing ratio

Answer 30

NCL/Cap employed x 100

Question 31

What does it show? GR

Answer 31

A GR above 50% = over 1/2 of firms finance is from long term debt - a highly geared business GR BELOW 50% = less than half of finance is from long term debt Can show how vulnerable a business is to interest rate changes Amount of interest rate is dertermined by interest rates and changes in them Amount firm can borrow depends on profitablity and value of assets

Question 32

Rewards for a business of gearing ratio

Answer 32

* Extra funds for expansion by borrowing money, often loan invested projects of technology that increase profits by more than enough to pay off loan repayment * High gearing attractive during growth phase a firm with ambitions have expansion plans and has growing profits along with strong product portfolio borrow heavily in order to fund expansion and gain a competitive advantage increase a firms gearing * During times of growth surplus of profit high gearing is good for businessess * Might not be able to afford repayments not enough profit to repay the loan and interest * Risky as whhilst ir msy br low at start they can rise need to pay back * Higher amount borrowed = greater rise in gr * Firm with higher gearingr atio more lilleu to be affectrd by changes in interest rates than a low geared business * Borrow for diff reasons risks can vary * Lenders reward is getting paid interest shareholders reward is a share dividend can sell share as profifit if share price ricses * Gearing acts as risk assessment that investors use to help them to decide whether to invest if s firm (more borrwoed mroe inyerest may affect profit and return on investment) * High gearing can lead to high profits shareholders can see large dividends and big increase in share price more likleyt o invest * Risk of high gearing to share holders is that the business might fail if it cant afford to keep up with repayments - liquedation lenders will get what theyre owed but sh lose most/ all momey imbesyed * Investors will look at why business has invested

Question 33

Risks for a business

Question 34

Risk & Reward for investors

Question 35

Return on capital employed

Answer 35

Profitability ratio compares the profit made by a business to the amount of capital invested Measures how effectivelu a business uses the capital invested in the buisness to generate profit A key performance indicator that can be compared overtime and also with competitors and other potential capital investments Higher roce - more beneficial

Question 36

ROCE formula

Answer 36

ROCE= op/capital employed x 100

Question 37

Advantages of ROCE

Answer 37

Ads: * Useful in looking over a businessess performance over a period of time * Stakeholders can spot trends indetify financlial strengths and weaknesses of the business * Needs to take into account of variable factors that change overtime * Venture capitalists and other investros use ratio analysis to support whether they invest in a business or not * Banks and insurance providers will use ratios to determine thel level of risk a business presemys amd dery,omes yjr [dpicys oy ,au ne sioyed to * Used to make business decisions * Manages how to finance growth (already high geared may be better to raise capital to avoid increasing gearing with more loans * Shareholders compare the accounting ratios between firms to decide where to buy shares npm higher could include higher dividends compare with other firms

Question 38

Disadvantages of ROCE

Answer 38

Ignores any non-numerical factors so they dont provide an absoliye means of assessing a firms financial health e.g. if there is a collapse in competition will lead to a rise in profit and rev increase roc3 without any decisions being made * Quality of accounts = accounts may have been manipulated to present a particular financial picture, only provide a snapshot of their data on fiancnaes * Internal strengths of the business wont be in rations such as quality of staffs * External factors such as economic climate arent relflected in the figures will have to compare with competitors invested in them * Future changes arent considered tech or interest rates * Important for businesses to comapre, only signifcany where similarities exis

Question 39

Labour productivity

Answer 39

A measure of ouput per emplooyee ina atimer periods Measures the effciency of a workforce Businesses will seek to increase productivity to reduce the average costs per unit to produce Can be improved through kaizen, tqm lean production HR can positivily impacy on labour productivity by making sure all employees feel engages and motiavted and within the right roles If lab producitivty is increaisng reward employees with bonuses which will keep employees motivated If lab productiviyty is decreasing offer bigger incentives retrain staff or make redundancies Need to consult with staff before making a decision Higher productivity improves firms competitiveness

Question 40

Key info Lab productivity

Answer 40

Labour productivity = output per period/ number of employees

Question 41

Labour productivity formula

Answer 41

Output per period/ number of employees

Question 42

Labour turnover

Answer 42

The rate at which employees leave the business in a 1 year period A high turnover means staff arent happy within the business so they want to leave A high turnover means higher costs of recruiting and training new staff cost of losing experienced staff A high labour turnober can be due to poor management leading to workers losing committment Poor recruitment and selection approach - satff leave Lower wages Workers attratced to employment opportunitoes fpr wprlers to seek work around a wider geographical area Growth of locla firms Problems: Increased recruiment selection Increased induction and training Lower productivity levels as workers settle into new roles Opportunities Hire staff with exisiting skills not training new ideas and creativity into business New perspectives and approaches to problem solving Can improve business performance Reduce labour turnover by delegating, jon enrichemeny, higher wages better training Measure of perfomance Some industries habe naturally higher turnober Some downt want to reduce it new creative staff

Question 43

Key info labour turnover

Question 44

Labour turnover formula

Answer 44

Number of staff leaving/average number of staff employed x 100

Question 45

Reasons for high lab turnover

Question 46

Problems and opportunities with high labour turnover

Answer 46

*Problems: Increased recruiment selection Increased induction and training Lower productivity levels as workers settle into new roles Opportunities Hire staff with exisiting skills not training new ideas and creativity into business New perspectives and approaches to problem solving Can improve business performance Reduce labour turnover by delegating, jon enrichemeny, higher wages better training Measure of perfomance Some industries habe naturally higher turnober Some downt want to reduce it new creative staff

Question 47

Absenteeism

Answer 47

Absenteeism = the habitutal non prescence of an employee at work

Question 48

Causes of absenteeism

Answer 48

* Job dissatisfaction * Physical/mental illness * High levels of stress * Bullying in workplace * Using it to increase holidays - bad reputation can lose their job

Question 49

Problems with absenteeism

Answer 49

* Costly for business cover sick pay and temporary staff * Need to consider how to reduce to reduce costs * Output will be reduced * Consult with staff * Compare with competitors * Some is natural and temporary e.g. catching the flu

Question 50

Ways to reduce absenteeism

Answer 50

* Flexible workforce * Interesting and challenging jobs * Improving working conditions * Improving work relationships * Attendance bonuses

Question 51

Formula for absenteeism

Answer 51

Absenteeism = Number of staff absent in time period / No of staff employed x time period X 100

Question 52

Labour retention

Answer 52

Labour retention is a measure of a businesses ability to keep employees

Question 53

Key info labour retention

Answer 53

* Higher turnover, lower retention rate - keeps only small proportion fo employees * Increase retention by improving induction process * Highlight opportunities avaliable to all employees

Question 54

Formula labour retention

Answer 54

Labour retention = number of staff employed at start- number of leavers/ number of staff employed at start X 100

Question 55

Stratergies to improve HRA

Answer 55

Financial rewards Employee share bonus Consultation stratergies Empowerment stratergies

Question 56

Financial rewards

Answer 56

* Motivate employees to work harder to increase their profitability ubcrease staff retention * E.g. commision in sales rewards * Bonuses on salary * Piece rate pay * Bonuses for lack of absenteeism

Question 57

Employee share bonus

Answer 57

* Reward staff - SAYE schemes, can use sacings to buy company shares * Reduce staff turnover as they will lose right to obtain shares * Increases motivation and productivity

Question 58

Consultation stratergies

Answer 58

* Involve employees in the decision making process * Improve morale of staff as they feel more valued - reduce absenteeism and increase lab productivity and retention rates

Question 59

Empowerment stratergies

Answer 59

* Empower employees by giving them more control and responsibility * Giving employees more authority to make decisions and suggest improvements (quality circles) * Employee recognition of abilities and trustworthiness to motivate them * Managers who dislike employees will struggle with empowerment * Can be seen as an excuse to cut costs, delayer and make managers redundant