A2 BUSINESS - HR strategy

PED ( Price Elasticity of Demand )

% change in Quantity Demanded / % change in Price

YED (Income Elasticity of Demand)

% change in Quantity Demanded / % change in Income

AED ( Promotional Elasticity )

% change in Demand / % change in promotional spending

Gross Profit

Sales - Cost of Sales

Cost of Sales / COGS

Opening Inventory + Purchase - Closing Inventory

Opening inventory is the value of inventory (goods) at the start of the period

Purchases: the cost of any new goods bought for resale during the period

Closing inventory: the value of inventory remaining unsold at the end of the period

total cost of the goods that were actually sold during a period

Operating Profit

Gross Profit - Expenses or Overheads

Profit for the year

Operating profit - Interest - Tax

Working Capital

Current Assets - Current Liabilities

measures a company’s short term liquidity - essentially, how easily it can meet its short term obligations with its short term assets

Positive working capital: the company can cover its short term debts and still have some left over - a sign of good liquidity and operational efficiency

Negative working capital: the company may struggle to pay its short term obligations - a potential liquidity issue

Current liabilities

Trade payables + Bank Overdraft + Short term loans

• obligations a company’s must pay within one year

• accounts payables (creditors) is amounts owed to suppliers for purchases made on credit

Current Assets

Cash/Bank + Trade Recievables + Inventory

• resources a company’s short term expects to convert into cash or use up within one year

• accounts recievables - money owed by customers for sales on credit

• inventory(stock) - raw materials, work in progress, finished goods

Equity

Share Capital + Share Premium + Reserves ( may include retained profit )

• share capital: this is the original amount invested by shareholders when they purchase shares directly from the company

• share premium: this arises when shares are issued at a price higher than their nominal (par) value

• reserves: profits or funds set aside for specific or general purposes

• retained profit: portion of net profit kept ih the business instead of being paid out as dividends

Profit Ratios ( 3 ratios )

Gross Margin, Operating Margin, Return on capital employed

Comparison of the gross and operating profits of the business with sales revenue. In addition, the return on capital employed ratio is an important measure of the profit performance of a business

Gross Margin (Percentage)

Gross profit / Sales * 100

• profitability measure that shows how much of a company’s revenue is left after subtracting cost of goods sold

Operating Margin (Percentage)

Operating profit / sales * 100

Return on capital employed (Percentage)

Operating profit / Capital employed * 100

Capital employed represents the total amount of capital (money and resources) a company uses to run its operations and generate profts

It shows how much funding is invested in the business - from both owners (equity) and lenders (debt)

Capital employed = equity + non current liabilities

• measures the rate at which the capital of a business generates profit

• shows how efficiently the capital employed of a business is at generating profit

• can be an indicator to potential shareholders of returns

• the higher the ROCE rate, the greater the returns

• Stakeholder interest: Shareholders and potential investors, investors

Strategies to increase ROCE + limitation

1. Increase ROCE:

• increase operating profits without increasing capital employed ( raise prices, reduce variable costs per unit, reduce overheads, such as delayering or reducing promotion costs)

• reduce capital employed (sell assets that contribute nothing or little to sales/profit)

2. Limitations

• demand could be price elastic

• cheaper materials could cut back on quality

• may not be effective in increasing profit in the short run and may have drawbacks eg. less promotions could reduce sales

• assets may be needed in the future eg. for expansion of business

Liquidity Ratios ( 2 ratios )

Current ratio, Acid test

Liquidity ratios measures a company’s ability to meet its short term obligations - basically, how easily it can pay its bills when they’re due

These ratios compare current assets to current liabilities

Current ratio

Current Assets / Current Liabilities

Current ratio = 300,000 / 150,000 = 2.0

The company has 2 dollars in current assets for every 1 dollar owned

Quick ratio ( Acid test ratio )

Current Assets - Inventory / Current Liabilities

shows the ability to pay short term obligations without relying on inventory, since inventory may take time to sell

Financial Efficiency Ratios

Inventory Turnover, Days sale in trade recievables, Trade payables days

• how well a company uses what it has to make money

• an indicator of how efficiently a business is using its resources and collecting its debts

Inventory Turnover

Cost of Goods sold / Average Inventory

COGS: Opening Inventory + Purchase - Closing Inventory

Average Inventory: Opening Inventory + Closing Inventory / 2

Inventory turnover = 50,000/11,000 = 4.545

This means the company sold it’s average inventory 4.5 times this year

Inventory days = how many days on average, inventory sits before being sold

365 x Average Inventory / COGS

Trades Receivables Turnover in Days

365 * Trades Receivables / Credit Sales

365 = number of days in a year

trade receivables = money customers owe you

credit sales = total sales made on credit

• measures of the average no. of days that debtors take to pay back to the business

• shorter the time it takes to collect debts, the better

• the ratio varies from business to business

• stakeholders interest: management, customers, amd competitors

Trade payables in days

365 * trade payable / credit purchases

• how long on average a company takes to pay its suppliers

• longer times mean that creditors are paid back later

• may be deliberately kept high/low to attract suppliers or a lot of competition in suppliers

Shareholders ratios ( 3 ratios )

Dividend yield, dividend cover, price to earnings ratio

These ratios help investors understand how a company rewards its shareholders and how expensive or profitable its shares are

Dividend Yield

Dividend per share / Market price per share * 100

Dividend per share = Annual dividends / no. of shares

• shows how much dividend income investors get compared to share price

• dividend per share = 1$, share price = $20

• dividend yield = 5%

• investors earn 5% of the share price as dividends each year

Dividend Cover

Profit for the year / Annual Dividends

• shows how many times the company’s profit can cover the dividend

• profit for the year = net profit available for shareholders

• total dividends = all dividends the company plans to pay

• profit for the year = 100,000 , total dividends = 40,000

• dividend cover = 2.5

• the company earns 2.5 times what it pays in dividends, so the dividend is safe and sustainable

can also be calculated using

• EPS/Dividend per share

• EPS = profit for the year / no. of shares

Price to Earnings ratio

Market price per share/ EPS ( Earnings per share )

Shows how expensive a share is compared to it’s earnings

Gearing ratios

Examine the degree to which the business is relying on long term loans to finance its operations

USE OF RATIO ANALYSIS (Theory)

• Identify trends over time

• Compare rates with results from previous years

• Help with investment decisions

• Judges efficiency of resources

• Assesses the risk involved in borrowing

• Can be compared to other businesses in the same market/industry

Limitations of ratio analysis

• different accounting techniques might have been applied when producing the financial statements for earlier years

• different companies might be using different methods of calculation of items

• comparisons with compamies in a different industry are unlikely to be of value

• comparing the ratios of businesses of differing sizes can be misleading

• ratios are calculated based on published financial information which may be window dressed

• economic conditions could change rendering the results useless

• ratios ignore qualitative factors of business performance

Income Statement

also known as a profit and loss statement, a financial report that summarizes a company’s financial performance over a specific period of time. it shows the business’s revenues, expenses, gains and losses

Statement of Financial Positiom

also known as a balance sheets, is a financial report that provides a snapshot of an organisations assets, liabilities and equity on a specific date. The fundamental accounting equation is reflected in its structure: assets = liabiities + equity

Explain two reasons why it is important for a business to make a proft

1. To survive and grow: Profit is essential for a business to cover its costs and stay open. When a business makes a profit, it can reinvest the money to improve products, buy new equipment, or expand into new markets. Without profits the business may have to close down

2. To reward owners and investors: profit is the main return for the people who have invested money or time into the business. It motivates them to keep supporting the company and also attracts new investors. This helps the business raise more capital for future development

Impact of change on the statement of profit or loss

1. Increase in price (demand for product is inelastic) → revenue, gross profit, profit from operations, profit before tax, profit for the year and retained earnings will all increase

2. Increase in direct cost per unit → cost of sales will increase; gross profit, profit from operations, profit before tax and profit for the year will all fall

3. Increase in expenses: Profit from operations, profit before tax, profit for the year and retained earnings will all fall ( Overhead expenses rise so Operating profit fall )

4. Reduction in the rate of profit (corporation) tax → profit after tax and retained earnings will both increase

5. Directors decide to increase dividends → retained earnings will fall

Double Entry concept

• Every transaction undertaken by the business must be included twice in the account to balance

• every transaction has two effects - one debit and one credit - which must be recorded to keep the accounts balanced. If a business buys a computer for cash, it increases (debits) the computer account and decreases (credits) the cash account. this keeps the accounting equation ( assets = capital + liabilities ) in balance

Realization concept

• All revenues and profits should be recorded in the account in the year they occur

• Profit is recorded only when it is earned, not when cash is recieved. If a business sells goods on credit, the sale is recorded when the goods are delivered - not when the customer pays later

Money measurement concept

• only items that can be measured in monetary terms are recorded

• a business can record the cost of a machine but not the skill or honesty of its workers, because these cannot be measured in money

Prudence concept

• record losses as soon as they are anticipated, profits when realised (received)

• if a business thinks a customer might not pay, it should record it as a possible loss now rather than wait. Record losses when expected, but record profits only when certain

Accruals concept

• unpaid expenses of the business for services already acquired

• income and expenses must be recorded in the period they relate to, not when the cash is recieved or paid

• if electricity is used in december but the bill is paid in january, the expense belongs to decembers accounts

Intangible assets

• Things a business owns that have value but cannot be touched or seen. Non physical assets that still help a business earn money eg. brand name, goodwill, patents, trademarks, copyrights, software or databases

• add value to a business

• help attract customers

• give a business a competitive advantage

Intangible Assets Examples

1. Goodwill

• the reputation and prestige of an existing business - the value of the business over and above the worth of its physical assets

• goodwill only appears in the accounts when the business has been bought for more than the worth of its assets

• the business is being prepared for sale

2. Patents

3. Copyrights

4. Brand

5. Research

Problems with Intangible Assets

• difficult to value them

• normal accounting rules do not usually record them

• for many companies they are the main source of future earnings eg. music companies, research based firms

• the market value of a company is increased with intangible assets

Revenue expenditure

• routine expenses to keep the business running

• used for day to day activities of a business

• recorded in the income statement

• benefits last for a short period (current year)

• does not increase earning capacity

• ex: wages, rent, electricity, repairs, fuel

Capital Expenditure

• long term investment in assets

• used for buying assets for the business

• recorded as non-current asset in SOFP with depreciation

• benefits last for many years

• increases earning capacity

• ex: machinery, building, vehicles

Depreciation

the decline in the estimated value of a non current asset over time due to:

1. wear and tear through usage

2. technology becoming obsolete

Straight Line Depreciation

• an equal amount of depreciation is charged every year over the useful life of an asset

• original cost of asset - expected residual value (scrap value) / expected useful life of asset

• same depreciation each year

• simple and easy to calculate

• suitable for assets used evenly (eg. buildings furniture)

• scrap value is the estimated amount an asset can be sold for at the end of its useful life

Limitations of Depreciatiom

• uses estimates for life and residual value - may be subject to error

• assets do not all depreciate at the same rate each year

• difficult to assess the impact of technological change

• maintenance and other costs are not included in- profits will ne misrepresented

• depreciation expense does not affect the cash flow of the business

Inventory

• unsold goods of the business. it includes raw materials, finished goods, spare parts and work in progress

• valuing inventory in SOFP is done based on two values:

1. purchase price

2. net realisable value (selling price - cost of selling)

• lowest is recorded

Investment Appraisal

• evaluating profitability or desirability of an investment project

• it requires initial capital cost of investment, estimated life expectancy, residual value of investment, forecasted net cash flows

Payback Period

• the time it takes for an investment to generate enough net cash inflow to recover its initial capital cost

• initial investment / annual net cash flow

• it is quick and easy to calculate, the results are understood by managers, can be used to eliminate or screen out projects that give returns too far into the future

• does not measure the oversll profitability of a project, ignores all of the cash flows after the payback period. it may be possible for an investment to give a really rapid return of capital, but then offer no other cash inflows, concentration on short term may lead businesses to reject very profitable investments js bcs they take some time to repay the capital

Accounting Rate of Return

• measures the annual profitability of investment as a percentage of the initial investmemt

• ARR = average annual profit / average investment x 100

• average investment = initial capital cost + residual capital value / 2

• Average annual profit is typically calculated by taking the total net profit generated over the life of the project and dividing it by the no, of years the project is supposed to last

• ARR could be compared with projects, the minimum criterion rate, etc

Advantages of ARR

• It uses all of the cash flows, unlike the payback method

• focuses on profitability

• result is easily understood and easy to compare with other projects that may be competing for the limited investment funds available

• can be quickly assessed against the predetermined

Disadvantages of ARR

• ignores timing of the cash flows after: two projects could have similar ARR but one pays back quicker

• the time value of money is ignored as the cash flows have not been discounted

Advantages of Net Present Value

• it considers both the timing of cash flows and the size of them

• rate of discount can be varied to allow for different economic circumstances

• considers the time value of money

Disadvantages of NPV

• it is reasonably complex to calculate and to explain - especially to non - numerate managers

• expectations about interest rates can be wrong

• NPV can only be compared w other projects but only if the capital cost is the same. This is because the method does not provide a percentage rate of return on the investment

corporate plan

a high level strategic document outlining an organization’s purpose, goals and strategies for the future, usually covering a 3-5 year period

components of corporate plan

• overall objectives of the organisation

• strategy or strategies to be used to attempt to meet these objectives

• after implementing strategies, the results should be measured and evaluated

• the results are the compared with the original objectives

benefits of corporate plans

• clear focus and purpose: senior managers have a clear direction, allowing them to select the best strategies to achieve objectives

• effective communication: ensures that managers, employees and stakeholders understand the business’s goals, enhancing coordination and motivation

• control and review: helps compare actual outcomes with objectives to assess performance and make improvements

limitations of corporate plans

• vulnerability to change: rapid internal or external changes can make plans obsolete if they are not adaptable

• a rigid approach to long term plans can be harmful if business fails to respond to unforeseen events

• corporate planning must be dynamic and adaptable

power culture

• autocratic leadership

• swift decisions can be made as so few people are involved in making them

role culture

• bureaucratic organisations

• operate within rules and show little creativitiy

• structure is well defined and each individual has clear delegated authority

• power and influence come from a person’s position within the organisation

task culture

• groups are formed to solve problems

• similar to matrix structure

• team is empowered to take decisions

• team members are encouraged to be creative

person culture

• may be conflict between individual goals and those of the whole organisation

• most creative type of culture

entrepreneurial culture

• failure is not necessarily critised as it is considered an inevitable consequence of showing initiative and risk-taking

how to change corporate culture

• focus on strengthening positive aspects rather than just eliminating negatives

• senior managers must fully commit and not resist

• establish new objectives and a mission statement and communicate them clearly

• involve employees in discussions to ensure they understand the need for change

• provide training to help employees adopt new values and working methods

benefits of transformational leadership

• increases the chance of successful change within a business

• increases the flexibility and adaptability of a business to cope with frequent change

• focuses on leading change, not forcing it on employees with an autocratic style → encourages workers to accept change

• improves employee motivation → better performance → encourages workers to achieve above the normally expected level

transformational leadership

• greater focus on leading, rather than managing workers

• most effective during periods of significant change for the business

• transformational leader demonstrates the importance of: charisma in influencing, inspiring workers towards achieving the leader’s vision, stimulation in the working environment by offering new challenges for employees

• influence employees with their own behaviour and qualities

• demonstrate a genuine concern for the needs and feelings of employees

project champion

• appointed by senior management to help drive a programme of change through a business

• a champion will come from middle or senior management

• they are like cheerleaders for the project

• they remove as many obstacles as possible

• they will speak in support of the changes being suggested at meetings of senior managers

why do employees resist change?

• fear of the unknown, change means uncertainty and this is uncomfortable for some people

• fear of failure: may requires new skills and abilities that may be beyond a workers capabilities

• losing something of value: workers could lose job security

• inertia: reluctance to change and try to maintain the status quo

contingency planning

• disaster recovery planning

• can make it difficult or impossible to carry out normal everyday’s activities

• important customers could be lost or the business could cease operating completely

benefits of contingency planning

• reassures employees, customers and local residents that concerns for safety are a priority

• minimises the negative impact on customers and suppliers in the event of a major disaster

• PR response is much more likely to be speedy and appropriate, with senior managers explaining what the company intends to do, when and how

limitations of contingency planning

• it is costly and time consuming, including the need to train employees and have practice runs of what to do in the event of a fire

• it needs to be constantly updated as the number and range of potential disasters can change over time

• employee training needs to increase if labour turnover is high

• avoiding disasters is still better than planning for what to do if they occur

hard HRM

• views employees as business resources, similar to equipment or raw materials

• minimising labour costs by hiring workers cheaply and using them efficiently

• often applied to peripheral workers who are seen as less important to business success

• similar to Theory X

• short term cost savings 😊

• high recuitment and training costs, low morale, reduced productivity and negative publicity 😓

soft HRM

• treats employees as valuable assets

• focuses on employee well-being, development and motivation

• applied to core workers, who are essential to business’s long term success

• training, job security → improves morale and retention → enhances productivity and business performance

benefits of permanent employment contracts

• help satisfy employee’s safety or security needs, as defined by Maslow

• employee loyalty to business → high

• labour turnover → low

• employers are more likely to finance training programmers as workers are more likely to stay with the business

disadvantages of permanent employment contracts

• labour costs become fixed costs → cannot be varied with output or demand → Whether the business sells 1,000 units or 100 units, the business must still pay the same total salary and benefits to permanent staff → During a downturn or seasonal low demand, these costs do not decrease. This raises the break-even point and reduces profit margins → If a competitor uses flexible labour, they can lower prices during slow periods or maintain profitability while a business with permanent staff may slide into losses

• contracts are inflexible → do not allow employers to vary the number of workers or number or hours they work ^→ An employer cannot simply send permanent staff home without pay when demand drops, nor can they easily ask staff to work double hours during a sudden surge without paying overtime → If demand rises sharply, permanent staff may be working at maximum capacity. The business cannot instantly increase headcount to meet demand, potentially losing sales and damaging customer service

temporary employment contracts

these contracts last for a fixed period and end when the term expires. businesses use them for short-term needs like seasonal work

• focuses on cost-cutting and flexibility rather than long-term employee development

• fixed labour costs reduced → employees cannot be required to work during less busy periods, saving costs

• efficiency of employees can be assessed before they are offered a full time contract

• there are more employees to manage than if they were all full-time

• effective communication will be difficult, impossible to hold meetings with all workers at one time, good IT communication needed

• motivation levels low → part-time workers feel less involved or commited

• difficult to establish teamwork culture

• part-time pay will be less than on a full-time contract

• not as many employment rights such as pensions or holiday entitlement

part-time employment contracts

employees work fewer hours than full-time staff, often with flexible schedules

• can be soft HRM if employees are valuable and trained

• can be hard HRM if used for cost-saving with little job security

• fixed labour costs reduced → part time staff cost less → useful for covering specific shifts without paying full-time premiums

• can schedule part time workers around demand peaks

• efficiency of employees can be assessed before they are offered a full time contract → reduces bad hiring decisions

• there are more employees to manage than if they were all full-time

• effective communication will be difficult, impossible to hold meetings with all workers at one time, good IT communication needed

• motivation levels low → part-time workers feel less involved or commited

• difficult to establish teamwork culture

• some workers prefer flexibility and some control over when to work

• two or more part time jobs may give a similar income to a full time one

• part-time pay will be less than on a full-time contract

• not as many employment rights such as pensions or holiday entitlement

zero-hour employment contracts

• do not guarantee a minimum number of working hours, giving businesses full flexibility while offering workers unstable income

• employees are treated as a flexible resource with minimal security

• fixed labour costs reduced → perfect alignment of labour with demand → zero waste from overstaffing

• more workers are available to be called upon should there be absenteeism

• zero-hour contracts mean there is no fixed cost element in a worker’s pay

• instant scaling up or down → no notice period or redundancy process → enables rapid response to demand surges or collapses

• there are more employees to manage than if they were all full-time

• effective communication will be difficult, impossible to hold meetings with all workers at one time, good IT communication needed

• motivation levels low → part-time workers feel less involved or commited

• difficult to establish teamwork culture

• security of employment with these contracts will be less → lower motivation

• not as many employment rights such as pensions or holiday entitlement

gig employment contracts

• workers are hired per task or project, as independent contractors

• hard HRM → gig workers lack long-term job security, training or benefits

• fixed labour costs reduced → employees cannot be required to work during less busy periods, saving costs → labour cost becomes 100% variable

• more workers are available to be called upon should there be absenteeism

• no equipment costs, gig workers usually supply their own tools → reduces maintenance costs

• one-off gig contracts for a particular job removes all employment costs other than the payment for the job → reduces capital expenditure

• no employment rights → no sick pay, holiday pay, pension, or redundancy costs → dramatically lowers non-wage labour costs

• there are more employees to manage than if they were all full-time

• effective communication will be difficult, impossible to hold meetings with all workers at one time, good IT communication needed

• motivation levels low → part-time workers feel less involved or commited

• difficult to establish teamwork culture

• two or more part-time jobs may give a similar income to a full-time one

• security of employment with these contracts will be less → lower motivation

• not as many employment rights such as pensions or holiday entitlement

flexible employment contracts

1. Flexitime: a flexible working arrangement allowing employees to choose their start and finish times, provided they work agreed total hours and are present during mandatory core hours, holding meetings and communication becomes more difficult

2. Home working: an employee who performs their role from home, reduces business costs of accomodating all employees at one time, reduces time wasted in travel, difficult to assess employee performance, teamworking more difficult, less social contact

3. Annualised hours contract: employees commit to working a set total of hours over a 12-month period rather than a fixed weekly amount, workers can be called in at very short notice, if all hours are used up before end of the year, high-cost overtime rates have to be offered

4. Job sharing: where two or more employees voluntarily share the responsibilities, salary, and benefits of a single full-time position, workers may be more productive, can cover for each other, greater work-life balance, may be confusion on job roles and accountability, HR administration has to be provided for two workers rather than one

5. Compressed hours contracts: three day weekend, some people prefer to work in shorter bursts rather than long stretches

benefits of shift work

• increases output of the business

• ensures capital equipment is fully used, for example on a three shift system, equipment will be operating all day

• more flexible for business, if demand falls, one shift can be eliminated

• workers can switch shifts

limitations of shift work

• machine maintenance and repair schedules have to be built into the shift system

• night shift workers can get sleep disorders → reduce productivity → cause long-term, stress-related health issues

labour productivity

• output per worker

• indicator of employee performance

• can increase with improved motivation, capital equipment, better training, improved operational efficiency, increased worker involvement in problem solving

soft HRM strategies to improve employee performance

• regular performance appraisal against pre-set targets with two way discussion on how to improve performance

• additional training to challenge employees

• quality circles - small groups of workers encouraged to take responsibility for identifying and suggesting solutions to work-related problems

• financial incentives

MBO - Management by Objectives

where managers and employees jointly define, agree upon, and track specific, actionable goals to improve organizational performance. It aligns individual goals with company objectives

benefits of MBO

• each manager and subordinate will know exactly what they have to do → helps them prioritise time → increased productivity

• everyone works to the same overall target → avoid conflict → ensure a consistent and well-coordinated approach

limitations of MBO

• process of dividing corporate aim and objectives into divisional, departmental and individual targets can be very time-consuming

• objectives can become outdated very quickly and fixing targets and monitoring progress against them can be less useful if the economic or competitive environment has changed completely

• setting targets does not guarantee success, issues such as adequate resources and employee training must also be addressed

evaluation of IT/AI in HRM

• the use of IT frees up HRM times for more important strategic issues

• it can reduce social and personal contact between HRM and employees and make the HR managers seem remote

• the increased dependence on IT-based communication methods reduces the opportunity for two-way group discussions unless conferencing software is used

• risk of creating a sense of being watched and monitored at all times among employees

marketing strategy

a marketing strategy is a long-term essential plan designed to achieve a business’s marketing objectives. it involves identifying target customers, understanding their needs and developing a coordinated marketing mix to create a sustainable competitive advantage

contents of a marketing plan

• purpose and mission: gives information about the plan’s purpose

• situational analysis and market research: where is the business now? the current product portfolio, target market, competitor analysis, PEST, SWOT

• marketing objectives: where do we want to be? SMART objectives, monitored at regular intervals

• marketing strategy: how the business intends to achieve its marketing objectives, mass or niche marketing, price strategies, selling to existing markets, new markets

• marketing mix: product, price, promotion, place

• marketing budget: financial resources available to the marketing team

• reviewing the marketing plan: have objectives been reached? compare actual performance with objectives, overall success must be assessed and this information used to help develop the marketing strategy for the next time period.